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Paula

I’m using my pension to pay off my debt in one go.

Paula, 65, is divorced and owns her own flat. She has final salary pension income of £3,000 per year, a defined contribution pension pot of £6,000 and receives her full State Pension. She has £4,000 of credit card debt, which she doesn’t want to carry into retirement.




Paula

What Paula wants

I don’t want to go into retirement owing money. I’m going to clear my debt as soon as possible – even if it means paying some tax on my pension.




Paula's idea

I’m going to take out a lump sum and get rid of the credit card debt in one go. I’ll pay tax to do it, but I won’t have to pay any interest on the debt and I’ll have peace of mind.


What Paula does

  1. Paula takes one quarter of her pension pot as a tax-free cash sum of £1,500

  2. She takes the rest, £4,500, as a taxable lump sum - paying £439.80 in tax and receiving £4,060.20

  3. In total Paula receives £5,560.20 to pay off her debts and leave her with some extra to spend or save


What Paula gets

Tax-free cash £1,500
Taxable lump sum £4,500 subject to tax
Total £5,560.20

See how we worked this out

  • State Pension age62
  • State Pension£6,549
  • Pension pot£6,000
  • Other income£3,000 a year
  • Other savings / debt£-4,000 (credit card)
  • Property value£145,000

Paula's calculation

Personal allowance (0% tax) Earnings from £0 to £11,850
State Pension £6,549 a year
Final salary pension £3,000 a year
Total regular income £9,549 a year
Remaining personal allowance £2,301
Lump sum (without paying tax) £2,301
Lump sum (taxed at 20%) £2,199

Important things to consider

  • Once Paula has spent all the money she received from her defined contribution pension pot, she’ll have to rely on her final salary pension and the 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

  • She could reduce or pay no income tax if she withdrew her lump sum from her pension pot over a number of years. She would still have to manage her debt repayment costs if she took this option

  • 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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