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My pension will help me to secure a lifetime’s income.

Jeremy and his wife are 66, own their home and have three children. He has a defined contribution pension pot of £120,000 with a guaranteed annuity option. They have savings of £40,000 and both receive the full State Pension.


What Jeremy wants

My pension pot has a preferential rate, so I would very much like to use it to secure a lifetime income for both of us.

Jeremy's idea

I took out this pension scheme a long time ago. I’m going to take advantage of the guaranteed rate to provide us with a regular income for both of our lifetimes.

What Jeremy does

  1. Jeremy takes one quarter of his pension pot as a tax-free cash sum of £30,000 and uses the remaining £90,000 to purchase a lifetime annuity on a joint life basis

  2. Jeremy has a guaranteed annuity rate. Thanks to this, a 7.5% annuity rate is applied to his pension pot meaning Jeremy receives an annual income of £90,000 x 7.5% = £6,750. Without it, he would get a reduced annuity rate of around 4.35%

  3. If Jeremy 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% dependant's income

  4. Jeremy will pay 20% tax on a portion of each income payment

What Jeremy gets

Tax-free cash £30,000
Lifetime annuity £6,750 a year, subject to tax

See how we worked this out

  • State Pension age65
  • State Pension£8,767
  • Pension pot£120,000
  • Other incomeNone
  • Other savings£40,000
  • Property value£260,000

Jeremy'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
Remaining personal allowance £3,733
Lifetime annuity (taxed at 0%) £3,733 a year
Lifetime annuity (taxed at 20%) £3,017 a year

Important things to consider

  • Jeremy 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 to shop around

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

  • On the death of both Jeremy and his wife, no further payments will be made

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

  • If Jeremy 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 can't 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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