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Jeff

I’m using my money to help us enjoy our retirement.

Jeff is 66, receives his full State Pension, has final salary pension income of £27,000 per year and a defined contribution pension pot of £50,000. He and his wife have £20,000 in savings, they rent their home and have one son.

Jeff

What Jeff wants

I want to use my defined contribution pension pot to pay for luxuries and holidays. We can use my final salary and State Pension for day-to-day living costs. I want to minimise our investment risk and pay as little tax as possible.


Jeff's idea

I don’t want to pay 40% tax on any of my pension pot, so I’m going to spread the payments over four years and stay in the basic rate tax band. I want a secure income with no exposure to investment risk.


What Jeff does

  1. Jeff takes one quarter of his pension pot as a tax-free cash sum of £12,500

  2. He uses the rest and buys a fixed term annuity, receiving £9,500 a year for 4 years

  3. As his other income puts him in the basic rate tax band, he pays £1,900 a year tax on the regular income


What Jeff gets

Tax-free cash £12,500
Fixed term annuity £9,500 a year, subject to tax

See how we worked this out

  • State Pension age65
  • State Pension£8,546
  • Pension pot£50,000
  • Other income£27,000 a year
  • Other savings£20,000
  • Rental cost£7,500

Jeff'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 £27,000 a year
Total regular income (subject to tax) £35,546 a year
Fixed term annuity (taxed at 20%) £9,500 a year

Important things to consider

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

  • As he takes income from his pension pot out in stages, he does not enter the higher rate tax band and does not pay 40% tax on any of the money

  • Jeff has chosen to guarantee the income from his fixed term annuity. This means that if he dies before the end of the fixed term, his wife, as his named beneficiary, will continue to receive the income until the end of the plan term

  • After 4 years, Jeff’s fixed term annuity will end. He’ll then have to rely on his savings, final salary pension and State Pension in retirement unless he has any other assets he can use to give him an income or is able to claim any state benefits

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

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

  • 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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