Case studies

Here are your results based on these filters.

  • Defined contribution pension pot of
  • Other retirement income of
  • Savings (excluding pensions) of
  • Examples of
Back to results

Aston

I’m using my pension to help us enjoy our retirement.

Aston is 61 and due to severe arthritis has decided to stop work giving up a salary of £40,000 per year. He will receive income from his final salary pension and State Pension in five years’ time but for now depends on his rental income of £30,000 per year. He has a defined contribution pension pot of £50,000. He and his wife have £60,000 of savings and own their home.

Aston

What Aston wants

We want extra income for the next five years so we can enjoy life while I’m still active and I’m keen to pay as little tax as possible.


Aston's idea

I’m going to use my pension pot to supplement the income from my rental properties over the next five years which will see us through to when I can draw on my final salary pension. By spreading the payments, it will also ensure that I don’t have to pay 40% tax on any of the income.


What Aston does

  1. Aston takes one quarter of his pension pot as a tax-free cash sum of £12,500

  2. He uses the rest to buy a fixed term annuity over five years

  3. He'll receive £7,760 a year for five years

  4. His other income puts him in the basic rate tax band, and by withdrawing his pot in stages, he remains in the same banding and pays £1,552 a year on the regular income from his fixed term annuity


What Aston gets

Tax-free cash £12,500
Fixed term annuity £7,760 a year, subject to tax

See how we worked this out

  • State Pension age66
  • State PensionNot eligible yet
  • Pension pot£50,000
  • Rental income£30,000 a year
  • Other savings£60,000
  • Property value£390,000

Aston's calculation

Personal allowance (0% tax) Earnings from £0 to £12,500
Basic rate (20% tax) Earnings from £12,501 to £50,000
Rental income £30,000 a year
Fixed term annuity £7,760 a year
Total regular income (subject to tax) £37,760 a year

Important things to consider

  • The income Aston receives from his fixed term annuity is a fixed amount for five years. As a result, the effect of inflation will reduce the buying power of his income over the term of the plan

  • As he withdraws his pension pot in stages, he does not enter the 40% tax band

  • If Aston dies before the end of the five year term, his wife, as named beneficiary, will continue to receive the income until the end of the term

  • After five years, Aston’s fixed term annuity will end. He’ll then have to rely on his savings, final salary pension, State Pension and rental income in retirement unless he has any other assets he can use to give him an income or is able to claim any state benefits

  • If Aston needs extra money he could think about releasing equity from his property, for example with a lifetime mortgage. A lifetime mortgage is a loan secured against his property which could give him a tax-free lump sum. There may be cheaper ways to borrow money. Interest is charged on the loan amount plus any interest already added. The amount owed grows quickly and reduces the equity left in the property.

  • 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

  • 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

  • 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

Back to results