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National insurance contributions for annuities.
All retirement annuities are taxed through PAYE, (Pay as you earn), just like company or personal pensions. This change took place from the 6th April 2007. Your annuity provider will send you tax codes which will dictate how much tax will be deducted before you receive your income. This code is based upon information about your age and overall income. One thing to remember is that even after retirement you will still have to pay tax, no matter how old you are. However, you will not have to pay National Insurance contributions if you work past state pension age.
At the end of each year you will receive a P60 end of year certificate, showing the amount of your annuity, and the tax that has been taken off. The tax year runs from April to April.
State Pension Entitlement
Once you retire you will no longer have to pay National Insurance Contributions, as the contributions you have made during your working life will determine how much State pension you are entitled to. If you retire before the state pension age you may want to think about making some top up contributions either to boost the amount of your State pension or to make sure that you will get bereavement payments for widows and widowers or bereaved partners.
If you have a purchased annuity and you are being taxed at the basic tax rate but do not think you should be paying tax on it and think you should be paying less tax because you are on a low income you can attempt to claim a refund. You may be paying income tax when you don’t need to and can register to get the income tax free and can claim a refund on any tax you have overpaid.
Purchased Life Annuity
If you have a purchased life annuity, 20 per cent tax will be automatically deducted from the income element you receive from it. Yet if your overall level of income means you are not a 20% rate taxpayer you can ask to receive purchased life annuity income tax free and you can make this claim by filling out a R86 application.
There are different factors that your tax free allowance depends on, firstly, your age, your income and nearly everyone gets a tax free allowance of £6,475 in the tax year ending on the 5th April 2010, and this is the amount you can receive without having to pay any tax.
Higher Tax Free Allowance
If you are 65 or over you can receive a higher tax free allowance, these being subject to an income limit of £22,900 for 2009-10.
If you do not have enough income to use up all of your tax free allowance you cannot give up the surplus to someone else. The amount of tax you pay will depend on factors such as which country you pay it in, where the income comes from and how much time you spend abroad.
Furthermore, if you are a non UK resident, you can receive your annuity without tax being taken off if you do not have enough UK income to pay off the tax.
If you have any concerns regarding your own tax situation you should invest some time researching the subject and may want to consult and IFA regarding your retirement plans.
Thinking of Retiring Soon? Have a look at our Annuity Comparison Table
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