IPTM4330 | 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 purchased life annuity is one whose payments are linked to the value of the retail prices index. This may give rise to the situation where the exempt sum exceeds the annuity payments. In this case, the excess exempt amount is carried forward.

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 parts of a year

PM = the period in months, including parts 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 The Income Tax (Purchased Life Annuities) Regulations 2008 (SI 2008/562)

• 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 table, the value is to be determined and certified by the Government Actuary.