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I’m using my pension to top up my income.

George is 66, divorced and has two adult children. He lives in a privately-rented flat and wants to work part time for the next five years with a salary of £11,000 per year. He has a defined contribution pension pot of £28,000, £4,500 in savings and is receiving his full State Pension.


What George wants

I don’t want to work full time anymore but I need to maintain a decent level of income to live on.

George's idea

I can’t afford to stop working completely, so I’ll reduce my hours and use my pension pot to supplement what I already receive from my State Pension and salary. In five years, when I retire fully, I’ll then decide what to do with the rest of my pension pot.

What George does

  1. George takes one quarter of his pension pot as a tax-free cash sum of £7,000

  2. He puts the rest in a fixed term annuity over 5 years

  3. He’ll get £1,980 per year taxed at 20% for 5 years, with an amount of £12,000 at the end of the term (known as the maturity value)

  4. As his other income puts him in the basic rate tax band, he pays £396.00 tax per year on the regular income from his fixed term annuity

What George gets

Tax-free cash £7,000
Fixed term annuity £1,980 a year, subject to tax
Maturity value £12,000

See how we worked this out

  • State Pension age65
  • State Pension£8,767
  • Pension pot£28,000
  • Other income£11,000 a year
  • Other savings£4,500
  • Other benefitsNone

George's calculation

Personal allowance (0% tax) Earnings from £0 to £12,500
Basic rate (20% tax) Earnings from £12,501 to £50,000
State Pension £8,767 a year
Salary payment £11,000 a year
Total income (subject to tax) £19,767 a year
Fixed term annuity income (subject to 20% tax) £1,980 a year
Fixed term annuity maturity value £12,000 (after 5 years)

Important things to consider

  • The income George gets from his fixed term annuity is a fixed amount for 5 years. As a result, the effect of inflation will reduce the buying power of his income over the 5 year term

  • 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 it's paid out

  • If the maturity value is used to buy another retirement product, it won’t be subject to tax although the income generated from the new retirement product will be

  • If George has chosen to guarantee his income payments for the 5 year term, and he dies before it finishes, his children, as named beneficiaries, will continue to receive the remaining income payments and will also receive the maturity value at the end of the term

  • The longer he lives, the further the £12,000 maturity value will have to stretch

  • 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

  • Once George has retired and exhausted his pension pot, he’ll have to rely on his savings and State Pension for income in retirement unless he has any other assets he can use to give him an income or is able to claim any additional state benefits

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

  • Tax payable on the income will be taken off before it's 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

  • If you live in Scotland or Wales you may have a different income tax rate or band

  • 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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