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Richard

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

Richard, 66, has a defined contribution pension pot of £35,000, receives his full State Pension and also has final salary income of £12,000 per year. He owns his own home and has two grown up children.

Richard

What Richard wants

I‘m comfortable knowing that my State and final salary pensions will cover my household expenses and want to use my defined contribution pension pot to pay for a holiday each year.


Richard's idea

I’m going to buy a secure guaranteed income and I can use this to pay for my annual holiday as I’m happy that my living costs are already taken care of.


What Richard does

  1. Richard takes one quarter of his pension pot  as a tax-free lump sum of £8,750

  2. He uses the other £26,250 to purchase a lifetime annuity which will continue to pay the same level of guaranteed income for the rest of his life

  3. Richard receives an annual income of £1,350. As he pays basic rate tax, he will pay £270 per year tax on this income


What Richard gets

Tax-free cash £8,750
Lifetime annuity £1,350 a year, subject to tax

See how we worked this out

  • State Pension age65
  • State Pension£8,546
  • Pension pot£35,000
  • Other income£12,000 a year
  • Other savings / investmentsNone
  • Property value£175,000

Richard'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 £12,000 a year
Lifetime annuity £1,350 a year
Total regular income (subject to tax) £21,896 a year

Important things to consider

  • Richard 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 is important to shop around

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

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

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

  • 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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