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I want security and independence in my old age.

Ranji is 65 and has three adult children. She built up a defined contribution pension pot of £28,000 whilst working. When her husband died, several years ago, this left her mortgage-free, £25,000 of savings, and final salary pension income of £7,000 per year. She also receives her full State Pension.


What Ranji wants

I want to boost my income so I can enjoy my retirement, and I don’t want to become a financial burden on my children.

Ranji's idea

As I already receive an income from my late husband’s final salary pension and my State Pension, I can afford to take a small amount of income from my pension pot for now, before deciding what to do with the rest in a few years’ time.

What Ranji does

  1. Ranji 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 10 years

  3. She’ll receive £1,000 a year for 10 years, taxed at 20%, with an amount of £13,537 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

  5. As her other income puts her in the basic rate tax band, she pays £200 tax per year on the regular income from her fixed term annuity

What Ranji gets

Tax-free cash £7,000
Fixed term annuity £1,000 a year, subject to tax
Maturity value £13,537 after 10 years

See how we worked this out

  • State Pension age65
  • State Pension£8,767
  • Pension pot£28,000
  • Other income£7,000 a year
  • Other savings£25,000
  • Property value£155,000

Ranji's calculation

Personal allowance (0% tax) Earnings from £0 to £12,500
Basic rate (20% tax) Earnings from £12,501 to £50,000
State Pension £8,767 a year
Final salary pension £7,000 a year
Fixed term annuity income (subject to 20% tax) £1,000 a year
Total income (subject to tax) £16,767 a year

Important things to consider

  • The fixed term annuity is a fixed income for 10 years. As a result, the effect of inflation will mean the spending power of this income will be reduced over time

  • 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 £13,537 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 Ranji has taken all of her pension pot, she'll have to rely on her savings, State Pension 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

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

  • 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

  • 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

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