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Tony

I’m using my pension to go on holiday each year.

Tony and his wife are both aged 66. He has a defined contribution pension pot of £24,000, receives his full State Pension and also has final salary income of £15,000 per year. His wife also has final salary income of £2,500 per year.

Tony

What Tony wants

We’re comfortable knowing that our State and final salary pensions cover our day to day living expenses and want to use my pension pot to have a nice holiday each year.


Tony's idea

I’ll buy a secure guaranteed income and we can use this to pay for our annual holiday as we’re happy that our living costs are already taken care of.


What Tony does

  1. Tony takes one quarter of his pension pot as a tax-free lump sum of £6,000

  2. He uses the other £18,000 to purchase a single life lifetime annuity which will continue to pay the same level of guaranteed income for the rest of his life

  3. Tony receives an annual income of £875. As he pays basic rate tax, he will pay £175 a year tax on this income


What Tony gets

Tax-free cash £6,000
Lifetime annuity £875 a year, subject to tax

See how we worked this out

  • State Pension age65
  • State Pension£8,546
  • Pension pot£24,000
  • Other income£15,000 a year
  • Other savingsNone
  • Property value£185,000

Tony'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 £8,546 a year
Final salary pension £15,000 a year
Total regular income (subject to tax) 23,546 a year
Lifetime annuity (taxed at 20%)  £875 a year

Important things to consider

  • Tony has chosen a fixed income from his 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 Tony dies before the end of any selected guarantee period, his wife will continue to receive any outstanding payments up to the end of the guarantee period. After this, she will receive no further income

  • If Tony lives beyond 20 years of taking out the lifetime annuity, he will receive more money than his pot was originally worth

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

  • If Tony dies early, he may not receive the full value of his pot

  • If Tony dies before his wife and he hasn’t selected any guarantee period, she will have to rely on her own final salary pension and State Pension unless she has any other assets she can use to generate an income or is entitled to claim any additional State benefits. She may also receive a portion (for example 50%) of his final salary pension

  • 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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