My mother and I were talking yesterday about how she should take her pension (she's retired a couple of years before legal retirement age, which she's now coming up to).

We've more or less decided what we're going to do now but an interesting question arose which I couldn't seem to find a concrete answer to - so this is primarily hypothetical.

In the UK as I understand it we gradually pay into a pension pot during our career and then at retirement we can put the entire pot towards an annuity (in which case the whole annuity is taxed similar to income tax) or take a certain amount of the pot as a tax-free lump sum and put the rest towards an annuity (so, naturally, in this case you'd get less per month/year from the annuity). Apparently there's now a cap so that the maximum tax-free lump sum you can get is 25%, but if your pot was from before some date, the cap is higher (in my mum's case, it's more like 33%). There is also an option to transfer the pot from whatever company it's built up with to some other company and then buy an annuity with them, if the second company will give a better rate, though doing this will drop the tax-free cap back down to 25%. This "transfer" seems to mean that money is withdrawn from the company your pot was with, and then paid to the second company to "buy" the annuity.

The tax-free cap percentage isn't really relevant to the question, I just wanted to clarify I'm aware of this and not attract answers that focus on that.

So these are the questions:

  1. If you just happen to have, say, £25,000 in cash/bank/whatever, not in a pension pot, can you use that money to buy an annuity?
  2. If so, then if you have a pension pot of £100,000 and you take £25,000 tax-free (as you're allowed to do) and put the remaining £75,000 towards a (taxable) annuity in the normal way, can you then use that £25,000 that you took tax-free and use that money to buy a second (taxable) annuity?

My gut feel is that even if this is possible, it wouldn't be worth it because companies' admin costs would surely make the two annuities together give you less back than what you would have got just from putting the entire £100,000 towards a single annuity in the usual way. I also would guess that it's not legally allowed to do this, and that one natural person can only buy one annuity in their lifetime. However, it's possible to argue that a situation exists where for whatever reason, different companies using different estimates results in getting a larger sum back from splitting it up in this way, if that is actually allowed.

When I researched this I couldn't find anything indicating that this is a thing that is ever done, nor could find a name for this concept, which suggests it's not done or not allowed (or just so obviously not worth it that it's not mentioned)... but I also couldn't find anything actually concretely stating it's impossible/illegal, so I'd be really interested in any source that can confirm this either way, as well as any relevant law.

1 Answer 1


The term you're looking for is a "Purchased life annuity".

The only official page about them I can find is HMRC's page which is a bit technical and obscure, but you can get some idea about them from search results, e.g. this one.

Because it was bought with after-tax funds, part of the annuity payments are treated as just giving you back the money you used to buy it, and are not taxed. You just get taxed on the part of the annuity that represents interest/investment growth.

As they are less common than the standard fully taxed pension annuities, they tend to attract worse rates - 80-90% was suggested in one of the links I found - so you'd have to get some actual quotes to work out whether this is a worthwhile thing to do.

that one natural person can only buy one annuity in their lifetime

I am pretty certain that there is no such restriction.

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