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We’re using my pension to go on the holiday of a lifetime.

Laura, 65, has a defined contribution pension pot of £16,000. Her husband has a final salary pension income of £16,000 per year. They paid off their mortgage a few years ago and have £30,000 of savings. She receives her full State Pension.


What Laura and her husband want

We want to use the money from my defined contribution pension pot to pay for the holiday we’ve always dreamed of.

Laura's idea

I don’t currently pay tax and I know that if I took out everything from my pension pot in one go I’ll have to pay some. I’d prefer to avoid that so I’m going to spread the payments over a few years. That way, I should keep within my personal allowance whilst receiving a regular income.

What Laura does

  1. Laura takes one quarter of her pension pot as a tax-free cash sum of £4,000

  2. She uses the rest to buy a fixed term annuity over 4 years

  3. She'll receive £3,045 per year for 4 years, payable monthly in arrears

  4. Added to her State Pension, Laura’s total income is within her personal allowance, so isn’t taxed

  5. Laura's able to use the tax-free cash of £4,000 towards her holiday and will receive £3,045 a year from her fixed term annuity

What Laura gets

Tax-free cash £4,000
Fixed term annuity £3,045 a year

See how we worked this out

  • State Pension age65
  • State Pension£8,767
  • Pension pot£16,000
  • Other savings£30,000
  • Other income£16,000 a year (spouse)
  • Property value£200,000

Laura's calculation

Personal allowance (0% tax) Earnings from £0 to £12,500
State Pension £8,767 a year
Remaining personal allowance £3,733 a year
Fixed term annuity income £3,045 a year

Important things to consider

  • The income Laura receives from her fixed term annuity is a fixed amount for 4 years. As a result, the effect of inflation will reduce the buying power of her income over the term of the plan

  • Laura has chosen to guarantee the income from her fixed term annuity. This means that if she dies before the end of the fixed term, her husband, as her named beneficiary, will continue to receive the income until the end of the plan term

  • After 4 years, Laura’s fixed term annuity will end. She'll then have to rely solely on her State Pension and her husband’s pension for income unless she has any other assets she can use to give her an income or is able to claim any state benefits

  • If her husband dies before her, she may still receive a portion (for example 50%) of his final salary pension

  • 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

  • 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

  • If you live in Scotland or Wales you may have a different income tax rate or band

  • 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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