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Brenda

I’m using my pension pot for security and independence now and in my old age.

Brenda is 59, has two grown-up daughters and stopped working when her husband died a year ago. She has a defined contribution pension pot of £28,000 and is receiving £7,000 a year from her late husband’s final salary pension. She is mortgage free and has £40,000 of savings.

Brenda

What Brenda wants

I want to boost my income before I start receiving my State Pension so I can live comfortably in retirement.


Brenda's idea

I’m worried about running out of money so I don’t want to use my savings. It would be good to have some extra income now so that I don’t have to watch every penny I spend before deciding what to do with the rest of my pension pot in a few years’ time.


What Brenda does

  1. Brenda takes one quarter of her pension pot as a tax-free cash sum of £7,000 to spend on enjoying herself now

  2. She puts the rest into a fixed term annuity over 10 years

  3. She will receive £1,140 a year for 10 years, with an amount of £12,000 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 Brenda is a non-tax payer, and she still has £5,500 of her personal allowance unused, she pays no tax on the income she receives from her fixed term annuity


What Brenda gets

Tax-free cash £7,000
Fixed term annuity £1,140 a year
Maturity value £12,000 after 10 years

See how we worked this out

  • State Pension age66
  • State PensionNot eligible yet
  • Pension pot£28,000
  • Other income£7,000 a year
  • Other savings£40,000
  • Property value£185,000

Brenda's calculation

Personal allowance (0% tax) Earnings from £0 to £12,500
Final salary pension £7,000 a year
Remaining personal allowance £5,500
Fixed term annuity £1,140 a year
Fixed term annuity maturity value (after 10 years) £12,000

Important things to consider

  • The income from the fixed term annuity is fixed for the 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 is paid out

  • If the maturity value is used to buy another retirement product, it will not be subject to tax although any subsequent income generated from the new retirement product will be treated as taxable income

  • If she has 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 £12,000 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 Brenda has exhausted her pension pot, she’ll have to rely on her savings, her late husband’s final salary pension and her State Pension in retirement, unless she has any other assets she can use to give her an income or is able to claim any state benefits

  • If Brenda needs extra money she could think about releasing equity from her property, for example with a lifetime mortgage. A lifetime mortgage is a loan secured against her property which could give her a tax-free lump sum. There may be cheaper ways to borrow money. Interest is charged on the loan amount plus any interest already added. The amount owed grows quickly and reduces the equity left in the property

  • 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

  • If Brenda wants to make further pension savings in the future, she will be restricted to a maximum savings limit of £4,000 a year, as she has flexibly accessed her pension savings. This is known as the Money Purchase Annual Allowance.

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