Withdrawing income from pensions tax-free

Background

Colin and Jean were about to retire and wanted to know the best way to take income from their pensions. Ideally, they wanted a household income of £40,000 per year.

Neither Colin nor Jean would receive their full State Pensions for another couple of years due to the recent changes in pension age legislation. Colin was nevertheless about to receive £4,000 per annum from an occupational Final Salary pension.

The couple had £1 million in pensions and savings; they wanted their income to be as structured and as tax-efficient as possible.

What did we do?

We discovered that is was possible to withdraw £15,800 each per year from their pension, tax-free. If they withdrew the rest of their required income from investment bonds and ISAs, all their £40,000 of required income per year would be tax-free.

We then ran some cash flow projections and were able to show Colin and Jean that if they reduced their income withdrawals by the same amount they will receive from their State pensions, they will run out of money at age 100; after which point, they will be solely reliant on State Benefits. Given the current mortality rates, there is a 17% chance that they will still be alive.

We explained that the projections built in a 2% rise in income each year, in order to offset the effects of inflation. We also discussed the couple’s requirements for long-term care and the costs which may or may not arise in later life.

The results

Colin and Jean were happy with our findings and the suggestions made; they did not believe that they would be spending anything like the income assumptions projected in later life.

They now have a plan in place that ensures they have the funds they need to enjoy their desired lifestyle in retirement.

As an additional part of the planning process, Colin and Jean also wanted to know what would happen to their income should they pass away early in retirement; we arranged their pensions so that any remaining funds would be inherited. We suggested they nominate each other as the beneficiary, and their children as well.