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I’m using my pension to clear my credit card debt.

Colin, 65, lives with his wife and has a defined contribution pension pot of £16,000. He also has final salary pension income of £9,500 a year receives his full State Pension. They owe £5,000 on credit cards.


What Colin wants

We want to use my pension pot to pay off our debt as soon as possible. The balance we can then use for extras.

Colin's idea

I’ll clear the majority of my credit card debt with the tax-free lump sum from my pension pot and I’ll take the rest over the next few years to pay for our holidays and luxuries.

What Colin does

  1. Colin takes one quarter of his pension pot as a tax-free cash sum of £4,000

  2. He uses the rest to buy a fixed term annuity over 10 years

  3. He'll receive £1,270 per year for 10 years taxed at 20%

  4. As his other income puts him in the basic rate tax band, he pays £254 per year tax on the regular income from his fixed term annuity

  5. Colin is able to use the tax-free cash of £4,000 and the first years income payment of £1,270 to clear his credit card debt completely if he chooses

What Colin gets

Tax-free cash £4,000
Fixed term annuity £1,270 a year, subject to tax

See how we worked this out

  • State Pension age65
  • State Pension£8,767
  • Pension pot£16,000
  • Other income£9,500 a year
  • Other savings / debt£-5,000 (credit card)
  • Other benefitsNone

Colin's calculation

Personal allowance (0% tax) Earnings from £0 to £12,500
State Pension £8,767 a year
Other income £9,500 a year
Regular income (subject to tax) £18,267 a year
Fixed term annuity income £1,270 a year (£254 tax payable)

Important things to consider

  • The income Colin gets from his fixed term annuity is a fixed amount for 10 years. As a result, the effect of inflation will reduce the buying power of his income over the 10 year term

  • 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

  • Colin has chosen to guarantee the income from his fixed term annuity. This means that if Colin dies before the end of the fixed term, his wife, as named beneficiary, will continue to receive the income until the end of the term

  • After 10 years, Colin’s fixed term annuity will end. He’ll then have to rely on his final salary pension and State Pension for income in retirement unless he has any other assets he can use to give him an income or is able to claim any additional state benefits

  • 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.

  • 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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