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I’m using my pension pot to pay my household bills.

Joe, 61, is divorced and has recently been made redundant. He owns his own home and used his redundancy money to pay off his mortgage. He has a defined contribution pension pot of £20,000. He also has a final salary pension, which he doesn’t want to take until he is 65 due to the penalties applied for claiming it early.


What Joe wants

I’ve never been in debt and don’t want to start now. I want to use my pension pot to cover my household bills and expenses while I look for a part time job.

Joe's idea

I’m going to withdraw my pension pot over the next 4 years which should see me through until I can take my final salary pension. This will ensure I have enough money to pay my bills and avoid going into debt.

What Joe does

  1. Joe leaves his pension pot invested in the funds he’s chosen, which allows him to withdraw money as and when he wants

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

  3. As Joe has no other income, he could withdraw up to £16,666.67 a year (£4,166.67 tax-free cash and £12,500 subject to tax) and stay within his personal allowance

  4. As Joe wants his pot to see him through the next 4 years, he makes annual withdrawals of £5,000.

What Joe gets from his pension pot

Pension pot which remains invested £20,000
Withdrawals £5,000 a year

See how we worked this out

  • State Pension age66
  • State PensionNot eligible yet
  • Pension pot£20,000
  • Other incomeNone
  • Other savingsNone
  • Property value£175,000

Joe's Calculation

Personal allowance (0% tax) Earnings from £0 to £12,500
Maximum withdrawal without paying tax:


25% which is tax free  £3,125
75% which is taxable if over the personal allowance threshold £12,500

Important things to consider

  • Joe is able to make withdrawals from his pot as and when he wants to whilst also managing the tax impact

  • Depending on investment performance, the value of his pot may rise or fall and is not guaranteed

  • If Joe takes £16,666.67 each year from his pot, it will be exhausted in less than two years (assuming no investment returns)

  • He can adjust his withdrawal to minimise the amount of tax he pays especially if he is able to secure another job.

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

  • If he dies before age 75, his named beneficiaries will inherit any remaining money from the pension pot, free of inheritance and income tax

  • If he dies after age 75, any income taken from the pot by his named beneficiaries will be subject to income tax

  • Once Joe has taken all the money from his pension pot he’ll have to rely on his final salary and State Pension (when he is eligible to receive it) 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 Joe 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

  • 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.

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