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My old pension will give me and my wife an income for our lifetime.

Jaswinder and his wife are both 66. They have two children, own their home and receive their full State Pension. He has final salary pension income of £15,000 per year and a defined contribution pension pot of £26,000, with a guaranteed annuity option. His wife has final salary pension income of £9,000 per year and they have savings of £50,000.


What Jaswinder wants

I want to use my pension pot to provide an income for both of us for the rest of our lives. The annuity option comes with a guaranteed rate, so we should be able to get a good return from it.

Jaswinder's idea

I took out this scheme a long time ago. I’m going to take advantage of the guaranteed annuity rate to buy a lifetime annuity.

What Jaswinder does

  1. Jaswinder takes one quarter of his pension pot as a tax-free cash sum of £6,500 and uses the other £19,500 to purchase a joint life lifetime annuity

  2. He has a guaranteed annuity rate so a 7.5% annuity rate is applied to his pension pot and Jaswinder receives an annual income of £19,500 x 7.5% = £1,462.50. Without it, he would get an annuity rate of around 4.2%

  3. If he dies before his wife, the annuity income will begin to be paid to his wife for her lifetime as he chose to include a 100% dependants income

  4. Jaswinder, as a basic rate tax payer, pays £292.50 per year tax on the income

What Jaswinder gets

Tax-free cash £6,500
Lifetime annuity £1,462.50 per year, subject to tax

See how we worked this out

  • State Pension age65
  • State Pension£8,767
  • Pension pot£26,000
  • Other income£15,000
  • Other savings£50,000
  • Property value£215,000

Jaswinder'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
Final salary pension £15,000 a year
Total income (subject to tax) £23,767 a year
Lifetime annuity £1,462.50 a year

Important things to consider

  • Jaswinder has opted for 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

  • By exercising his guaranteed annuity option, he received a higher annuity rate than is typically available in the market place

  • Different defined contribution schemes will offer different rates under their guaranteed annuity options

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

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

  • By purchasing a joint life annuity, he has ensured his wife will begin to receive the payments if he dies before her

  • If Jaswinder dies before age 75, his wife will begin to receive the annuity income, tax-free

  • If Jaswinder and his wife live beyond 13 and a half years of taking out the lifetime annuity, they'll receive more money than his pot was originally worth

  • If Jaswinder and his wife die early they 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 cannot 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

  • 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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