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Eric

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

Eric, 66, receives his full State Pension, has a defined contribution pension pot of £50,000 and final salary pension income of £27,500 a year. He and his wife have £60,000 of savings and own their home.

Eric

What Eric wants

We want to use my pension pot to reward ourselves and enjoy life. I’d like to avoid investment risk, and I’m keen to pay as little tax as possible.


Eric's idea

I’m going to spread what I take from my pot over five years. This is the shortest space of time in which I can withdraw it without having to pay 40% tax. I want a secure income with no investment risk.


What Eric does

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

  2. He uses the rest to buy a fixed term annuity, receiving 9,500 a year for four years

  3. His other income puts him in the basic rate tax band, and by  withdrawing his pot in stages, he remains in the same banding and pays £1,900 a year tax on the regular income


What Eric gets

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

See how we worked this out

  • State Pension age65
  • State Pension£8,546
  • Pension pot£50,000
  • Other income£27,500
  • Other savings£60,000
  • Property value£250,000

Eric'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 £27,500 a year
Remaining basic rate (taxed at 20%) £10,304
Fixed term annuity (taxed at 20%) £9,500 a year

Important things to consider

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

  • Better deals may be available so it’s important to shop around

  • Eric 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 four years, Eric’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

  • 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

  • Tax payable on the 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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