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Martha

I want to be secure in my old age.

Martha, 66, has a defined contribution pension pot of £28,000 and also receives her full State Pension. She was left final salary pension income of £6,000 per year from her late husband who died several years ago. She wants to enjoy her retirement and doesn’t want to be a burden to her children.

Martha

What Martha wants

I’ve never been good with managing money so if I took my pension pot in one go I wouldn’t trust myself not to spend it too quickly. I need to know that I’ll have enough money to cover my day to day living expenses as I don’t want to have to rely on my children.


Martha's idea

It’s important to know that I will have regular amounts being paid to me until I die so I’ll use my pension pot to buy a secure guaranteed income.


What Martha does

  1. Martha takes one quarter of her pension pot as a tax-free cash sum of £7,000

  2. She uses the other £21,000 to purchase a lifetime annuity which will continue to pay the same level of guaranteed income for the rest of her life

  3. Martha receives an annual income of £1,050. As she pays basic rate tax, she will pay £210 a year tax on this income.


What Martha gets

Tax-free cash £7,000
Lifetime annuity £1,050 a year, subject to tax

See how we worked this out

  • State Pension age62
  • State Pension£6,549
  • Pension pot£28,000
  • Other income£6,000 a year
  • Other savingsNone
  • Property value£165,000

Martha's calculation

Personal allowance (0% tax) Earnings from £0 to £11,850
Basic rate (20% tax) Earnings from £11,851 to £46,350
State Pension £6,549 a year
Final salary pension £6,000 a year
Total regular income (subject to tax) £12,549 a year
Lifetime annuity (taxed at 20%) £1,050 a year

Important things to consider

  • Martha has opted for a fixed income from her lifetime annuity, which won’t increase in value. As a result, the effect of inflation will reduce the buying power of the income over time

  • Better deals may be available so it’s important to shop around

  • If Martha lives beyond 20 years of taking out the lifetime annuity, she will receive more money than her pension pot was originally worth

  • If Martha had any medical conditions or lifestyle health risks she could have received a higher income

  • If Martha dies early, she may not receive the full value of her pot

  • Tax payable on the income will be taken off before it is paid out

  • Buying a lifetime annuity is a once and for all decision. Once an annuity is set up and the cancellation period has expired, it can't be changed

  • This example is based on current law and tax rates. These may change in the future and income tax will depend on individual circumstances

  • The income tax rates and bands for Scottish residents may be different

  • The State Pension amount shown here is the current maximum and is only an example. The amount you get depends on your National Insurance contributions’ record and your individual circumstances. You can get a State Pension forecast by visiting View - Check your State Pension 

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