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Rachel

I’m using my pension to help my son without affecting my benefits.

Rachel, 65, is divorced and lives in a privately rented flat. She has one grown up son and receives housing benefit. She has a defined contribution pension pot of £8,000, £4,500 in savings and receives a £1,895 maintenance payment from her former spouse. She also receives her full State Pension.





Rachel

What Rachel wants

My son is getting married, so I'd love to give him some money to help pay for the wedding. I want to be able to spend the rest when I choose to, but not so it affects my benefits.






Rachel's idea

I’m going to use the first withdrawal from my pension pot to help my son. I could withdraw my whole pot in one lump sum but if I did that I’d pay tax, plus my total savings would go above £10,000 which might affect my benefits, so instead I’ll stagger it.


What Rachel does

  1. Rachel leaves her pension pot invested, which allows her to withdraw money as and when she wants

  2. Each time she makes a withdrawal, the first 25% of any sum is tax-free and the remaining 75% is subject to income tax

  3. Rachel can take up to £1,879 (£470 tax-free and £1,409 subject to tax in year one) without paying any income tax as this keeps her within her personal allowance


What Rachel gets

Pension pot £8,000
Tax-free cash 25% of each withdrawal
Maximum withdrawal £1,879 in tax year

See how we worked this out

  • State Pension age65
  • Pension pot£8,000
  • State Pension£8,546
  • Other income£1,895
  • Other savings / investments£4,500
  • Other benefits£5,000

Rachel's calculation

Personal allowance (0% tax) Earnings from £0 to £11,850
State Pension £8,546 a year
Taxable maintenance payment £1,895 a year
Total regular income (subject to tax) £10,441 a year
Remaining personal allowance £1,409 a year
Maximum withdrawal without paying tax
(subject to available funds)
£1,879 a year

Important things to consider

  • Rachel is able to make withdrawals from her pot as and when she wants to whilst also managing the tax impact

  • If Rachel took her pot in one go, she would pay tax of £918.20

  • As the withdrawal is not regular, it is classed as capital and doesn't affect her housing benefit

  • If Rachel’s total savings go above £10,000, her housing benefit may be reduced

  • The money in her pension pot will stay invested in the funds she's chosen. Depending on investment performance, the value of her pot may rise or fall

  • Not all pension schemes or providers offer this flexibility, and better deals may be available so it’s important to shop around

  • Once Rachel has taken all the money from her pension pot she’ll have to rely on her savings, benefits and State Pension, unless she has any other assets she can use to give her an income or is able to claim any additional state benefits

  • Rachel's maintenance payment is classed as taxable income as it is legally paid by court order. Voluntary contributions from a spouse would not be taxable.

  • This example is based on current law and tax rates. These may change in the future and income tax will depend on individual circumstances

  • The income tax rates and bands for Scottish residents may be different

  • 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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