Question

I retired three years ago, with half my income coming from my company pension fund and the other half from interest from investments. I am paying tax at a rate of 41%. Is there anything that I can do to reduce this amount?

Answer

There are a number of potential solutions for you and I will go through the pros and cons of each one.  You can check your current pension fund offers 100% spouses benefit.  This will result in your initial pension being smaller but it will give you peace of mind.

If you cannot get the right solution from your current pension fund, then you can look at buying the pension from another provider. Your pension fund benefit statement should give you the transfer value at retirement of your pension fund. You can then get quotes on solutions from other providers. I would suggest you consider the following:

Living Annuity

A living annuity works on the basis that you have a capital amount and make monthly withdrawals from it. These monthly withdrawals should ideally not exceed 5% of the capital value over the course of a year.

The advantage here is that should you pass away, your spouse will continue to receive the full pension.

The downside is that you do carry the risk of your investments not delivering a return of at least 5% plus costs. If that happens, you will start using up some of your capital.

Insider tip:

You can currently get a long bond that will give you a return of around 8.5% a year.  If you use this as the investment vehicle for your annuity, you will have no worries about the investment delivering less than 5% plus costs till the bond expires

Life annuity

You can buy a life annuity from an insurance company and get a spouse’s pension of 75% or 100% of what you get. 

Insured annuity

Some companies offer an insured annuity. This product will give you a monthly pension and should you die, it will pay your spouse the full value of what you invested.  She can then use this to provide a pension for herself.

I find this type of solution is worth considering if your spouse is more than five years younger than you.  It is also something to consider if it is likely that your spouse will need some form of assisted care which is likely to be costly.

As you can see, there are a number of solutions open to you and you should get your financial advisor to provide you with a range of quotes to help you make the right choice.