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Charles

I’m boosting my income for five years and also taking a lifetime annuity.

Charles, 65, is divorced and has grown-up children. He has £150,000 of savings, a defined contribution pension pot of £450,000, owns his home and receives his full State Pension.

Charles

What Charles wants

I have no other income for retirement other than my State Pension, so I want to use part of my pension pot to secure an income for life. It would be great to use the rest to spend as I wish.


Charles's idea

Buying a secure guaranteed income seems to be the best way to safely cover my living expenses. I can then use the rest to provide for holidays and so on – plus it will boost my income for the next five years, which is the quickest period over which I can withdraw it without paying 40% tax.


What Charles does

  1. Charles takes one quarter of his pension pot as a tax-free cash sum of £112,500 and uses £237,500 to purchase a lifetime annuity to guarantee his income

  2. This annuity will continue to pay an annual income of £11,900 guaranteed for the rest of his life

  3. He uses the remaining £100,000 to buy a fixed term annuity over five years, receiving £20,700 per year for five years

  4. As Charles’ only other income is his State Pension, he is within his personal allowance, therefore the first £3,304 is free from tax


What Charles gets

Tax-free cash £112,500
Fixed term annuity £20,700 a year, subject to tax
Lifetime annuity £11,900 a year, subject to tax

See how we worked this out

  • State Pension age65
  • State Pension£8,546
  • Pension pot£450,000
  • Other incomeNone
  • Other savings£150,000
  • Property value£355,000

Charles' calculation - Year 1

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
Lifetime annuity £11,900 a year
Fixed term annuity £20,700 a year
Total income (subject to tax) £41,146 a year
Tax free lump sum £112,500

Years 2 - 5

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
Lifetime annuity £11,900 a year
Fixed term annuity £20,700 a year
Total income (subject to tax) £41,146 a year

Year 6 onwards

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
Lifetime annuity £11,900 a year
Total income (subject to tax) £20,446 a year

Important things to consider

  • Charles has opted for a fixed income from his lifetime annuity and fixed term annuity, which won’t increase in value. As a result, the effect of inflation will reduce the buying power of the income over time

  • As Charles withdraws his pot in stages, he remains within the basic rate tax band, paying 20% tax on the majority of the income

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

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

  • These examples are 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

  • If Charles lives beyond 20 years of taking out the lifetime annuity, he will receive more money than his pot was originally worth. If he dies before then, he would not have received the full value of his pot

  • If Charles had any medical conditions or lifestyle health risks he could have received a higher income. This could then reduce the number of years it would take before he would receive more money than his pot was originally worth

  • 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

  • Charles has chosen to guarantee the income from his fixed term annuity. This means that if he dies before the end of his fixed term, his children, as beneficiaries, will continue to receive the income until the end of the term

  • After five years, Charles’ fixed term annuity will end. He will then have to rely on his State Pension and lifetime annuity income in retirement unless he has any other assets he can use to generate an income or is entitled to claim any state benefits

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

  • 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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