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Rebecca

I’m using my pension pot to improve our lifestyle.

Rebecca, 65, has built up a defined contribution pension pot of £44,000 and receives her full State Pension. Her husband has final salary pension income of £16,000 per year. They have a grown-up son. They paid off their mortgage a few years ago and have £30,000 of savings.

Rebecca

What Rebecca wants

We want to use my pension pot to pay for holidays and luxuries over the next few years. I don’t want any investment risk exposure and I want to minimise the tax that I pay.


Rebecca's idea

I’m going to take my pension pot in the most tax efficient way. If I spread it over a period of years, I’ll be able to take all of it without paying any tax.


What Rebecca does

  1. Rebecca takes one quarter of her pension pot as a tax-free cash sum of £11,000

  2. She uses the rest and buys a fixed term annuity over 11 years

  3. She'll receive £3,188 a year for 11 years

  4. By withdrawing this amount, added to her State Pension, Rebecca’s total income is still within her personal allowance, so isn’t taxed


What Rebecca gets

Tax-free cash £11,000
Fixed term annuity £3,188 a year

See how we worked this out

  • State Pension age63
  • State Pension£8,546
  • Pension pot£44,000
  • Other income£16,000 a year (spouse)
  • Other savings£30,000
  • Property value£205,000

Rebecca's calculation

Personal allowance (0% tax) Earnings from £0 to £11,850
State Pension £8,546 a year
Remaining personal allowance £3,304 a year
Fixed term annuity £3,188 a year

Important things to consider

  • Rebecca withdrew her pension pot in the shortest number of years possible whilst staying within her personal allowance and not paying tax on any of her pot

  • The income Rebecca receives from her fixed term annuity is a fixed amount for 11 years. As a result, the effect of inflation will reduce the buying power of her income over the term of the plan

  • Rebecca 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 11 years, Rebecca’s fixed term annuity will end. She’ll then have to rely on her State Pension, her husband’s final salary pension and State Pension and their savings for income for the rest of her retirement unless she has any other assets she can use to give her an income or is able to claim any state benefits

  • If Rebecca 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

  • 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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