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I’m using my pension pot to help buy my home.

Brian, 55, is divorced and still working earning £30,000 per year. He has a final salary pension which he will take when he is 65 and has a defined contribution pension pot of £12,000. He is currently renting and has £80,000 in savings that he was left by his father.


What Brian wants

I want to use my inheritance and my pension pot to help buy my home so I don’t have to pay rent anymore.

Brian's idea

Given that it’s a modest amount and I’m already a basic rate tax payer, taking my pension pot in one go feels like the right thing to do. It will make a useful contribution towards my home.

What Brian does

  1. Brian takes one quarter of his pension pot as a tax-free cash sum of £3,000

  2. He takes the remaining £9,000 as a taxable lump sum

  3. As his other income puts him in the basic rate tax band, he pays £1,800 tax on the lump sum and receives £7,200

  4. In total Brian receives £10,200 which he uses to towards his house purchase

What Brian gets

Tax-free cash £3,000
Taxable lump sum £9,000 (£1,800 tax leaving £7,200)
Total £10,200

See how we worked this out

  • State Pension age67
  • State PensionNot eligible yet
  • Pension pot£12,000
  • Other income£30,000 a year
  • Other savings£80,000
  • Property value of house he is buying£90,000

Brian's calculation

Personal allowance (0% tax) Earnings from £0 to £12,500
Basic rate (20% tax) Earnings from £12,501 to £50,000
Total regular income (subject to tax) £30,000
Remaining basic rate tax band £20,000
Lump sum (taxed at 20%) £9,000

Important things to consider

  • As Brian was already in the 20% tax band due to his income, he paid tax at that rate

  • Once Brian has spent all of the money he receives from his pension pot and stops working, he will have to rely on his final salary and State Pension 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 Brian had left the money in the pension scheme untouched, the value of the fund may have risen, allowing him to withdraw a larger amount at a later date, or his estate to inherit it tax free if he died before age 75

  • If he’d left it invested, he would also have had the risk that it could fall as the value is not guaranteed

  • If Brian wants to make further pension savings in the future, he will be restricted to a maximum savings limit of £4,000 a year, as he has flexibly accessed his pension savings. This is known as the Money Purchase Annual Allowance.

  • 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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