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Jessica

I’m keeping my options open to make sure I enjoy my retirement.

Jessica is 65 and has three children. She’s built up a defined contribution pension pot of £60,000 and receives her full State Pension. Her husband died several years ago, which left her mortgage-free, £25,000 of savings and final salary pension income of £7,000 per year.

Jessica

What Jessica wants

I want to boost my income now to start enjoying my retirement, before I decide the best way to remain independent and not rely on my children as I get older.


Jessica's idea

The income I receive from my late husband’s final salary pension and my State Pension means I can afford to take just a small level of income for the next ten years from my pension pot before deciding what to do with the rest after that.


What Jessica does

  1. Jessica takes one quarter of her pension pot fund as a tax-free cash sum of £15,000

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

  3. She’ll receive £2,418 a year, taxed at 20% for 10 years, with an amount of £25,000 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 her other income puts her in the basic rate tax band, she pays £484 tax a year on the regular income from her fixed term annuity


What Jessica gets

Tax-free cash £15,000
Fixed term annuity £2,418 a year, subject to tax
Maturity value £25,000 after 10 years

See how we worked this out

  • State Pension age63
  • State Pension£8,546
  • Pension pot£60,000
  • Other income£7,000 a year
  • Other savings£25,000
  • Property value£155,000

Jessica'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 £7,000 a year
Fixed term annuity income £2,418 a year
Total regular income (subject to tax) £17,964 a year
Fixed term annuity maturity value £25,000 (after 10 years)

Important things to consider

  • The income from the fixed term annuity is fixed for the 10 years. As a result, the effect of inflation means 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 payment

  • If the maturity value is used to buy another retirement product, it won’t be subject to tax although any 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

  • 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

  • The longer she lives, the further the £25,000 maturity value will have to stretch

  • Once Jessica has exhausted her pension pot, she'll be reliant on her savings, State Pension and her late husband’s final salary pension for income 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 Jessica 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

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

  • 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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