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HMRC internal manual

Insurance Policyholder Taxation Manual

HM Revenue & Customs
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Purchased life annuities: partial exemption scheme: exempt sum formula

This formula applies where

  • the term of the annuity payments is solely dependent on the duration of human life, but
  • the amount of the annuity payments does depend on a non-life contingency.In this situation, the amount of the annuity payment may change in an unpredictable way, which, see

IPTM4310, makes actuarial techniques impractical. So the exempt part of each annuity payment is calculated as a constant sum.

A fairly common example of this type of annuity is one whose payments are linked to the value of the retail prices index. It is this type of annuity that may give rise to the situation where the exempt sum may in the early stages exceed the annuity payments, see IPTM4310.

In this case,

Exempt sum = PP x 1/TY x PM/12

where (

PP = purchase price of the annuity

TY = expected term of the annuity in years, including odd fractions of a year

PM = the period in months, including odd fractions of a month, in respect of which an annuity payment is made.

The expected term of the annuity is the period from the date the first payment starts to accrue to the date the last payment is expected to be payable. It is determined

  • by reference to prescribed tables of mortality, see SI2008/562, as amended by SI2008/1481
  • as at the date the first annuity payment starts to accrue
  • taking the age of the life in question in whole years at that date.If for any reason it is not possible to determine that actuarial value by reference to the prescribed tables, the value is to be determined and certified by the Government Actuary.

See IPTM4350 and IPTM4360 on how these calculations are performed in practice.

Further reference and feedback IPTM1013