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I’m using a guaranteed annuity to secure an income for me and my wife.

Asif and his wife are both 66. They have three children and own their home. Along with his full State Pension he has a defined contribution pension pot of £120,000 with a guaranteed annuity option. They also have savings of £150,000.


What Asif wants

Pensions will be our only source of income in retirement. Luckily, my pension pot has a preferential rate, giving us additional income which will work well for us.

Asif's idea

The annuity rate being offered is good enough to give us both a guaranteed income. I got this deal years ago and I’m glad I hung on to it.

What Asif does

  1. Asif 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 joint life lifetime annuity

  2. Asif has a guaranteed annuity rate. Thanks to this, a 7.5% annuity rate is applied to his pension pot meaning that Asif 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 Asif dies before his wife, the annuity income will begin to be paid to her for her lifetime as he chose to include a 100% dependant's income

  4. Asif will pay no tax on part of each payment and 20% tax on the remainder, as his only other income is his State Pension meaning he still has some of his personal allowance that has not been used. Overall, Asif will pay £689.20 per year in tax

What Asif 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£8,5767
  • Pension pot£120,000
  • Other incomeNone
  • Other savings£150,000
  • Property value£260,000

Asif's calculation

Personal allowance (0% tax) Earnings from £0 to £12,500
State Pension £8,767
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

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

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

  • If Asif 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 Asif and his wife die early they may not receive the full value of his pot

  • If Asif wanted to take further advantage of the guaranteed rate, he could have chosen not to take any tax-free cash or a reduced amount and received a higher income

  • 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 depends 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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