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Nisha

I want to be secure in my old age.

Nisha is 60, and has three children. She has a defined contribution pension pot of £28,000 but is not eligible to claim her State Pension yet. Her husband died a few years ago, which left her mortgage free, £7,000 of savings and final salary pension income of £6,000 per year.



Nisha

What Nisha wants

I want to be comfortable in my retirement now – but I don’t want to be a financial burden to my children when I am older.




Nisha's idea

As well as having an immediate lump sum to play with, I’d like a small amount of regular income to supplement what I already receive from my late husband’s final salary pension, before deciding what to do with the rest of my pension pot in a few years’ time when I can also take my State Pension.


What Nisha does

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

  2. She puts the rest into a fixed term annuity over 6 years

  3. She’ll receive £1,500 per year, taxed at 20% for 6 years, with an amount of £13,200 at the end of the term (known as the maturity value)

  4. She can then decide how to use that maturity value, depending on her needs at the time


What Nisha gets

Tax-free cash £7,000
Fixed term annuity £1,500 a year, subject to tax
Maturity value £13,200 after 6 years

See how we worked this out

  • State Pension age66
  • State PensionNot eligible yet
  • Pension pot£28,000
  • Other income£6,000 a year
  • Other savings£7,000
  • Property value£155,000

Nisha's calculation

Personal allowance (0% tax) Earnings from £0 to £11,850
Final salary pension £6,000 a year
Fixed-Term annuity income £1,500 a year
Total income (subject to tax) £7,500 a year
Fixed-Term annuity maturity value £13,200 (after 6 years)

Important things to consider

  • The income Nisha receives from her fixed term annuity is a fixed amount for 6 years. As a result, the effect of inflation will reduce the buying power of her income over the term

  • If the maturity value at the end of the term is taken as a lump sum, this will be taxable and any tax payable will be taken off before it's paid out

  • If the maturity value is used to buy another retirement product, it won’t be subject to tax although the income generated from the new retirement product will be

  • If she's opted to guarantee her income payments for the term of the plan, and she dies before it finishes, her children, as named beneficiaries,will continue to receive the remaining payments and will also receive the maturity value at the end of the term

  • The longer she lives, the further the £13,200 maturity value will have to stretch

  • Once a fixed term annuity is set up and the cancellation period has expired, she may not be able to cancel or change her options

  • Once Nisha has taken all the money from her pension pot, she'll have to rely on her savings, State Pension (when eligible) and her late husband’s final salary pension for income in retirement unless she has any other assets she can use to give her an income or is able to claim any additional state benefits

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

  • 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

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