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I’m using my pension to pay for my holidays.

Ian, 66, is divorced and has two grown up children. He has final salary pension income of £25,000 per year and a defined contribution pension pot of £40,000. He rents his flat, has savings of £65,000 and receives his full State Pension.


What Ian wants

I want to use my pension pot to pay for holidays and other luxuries without straying into the higher 40% income tax bracket.

Ian's idea

I’m going to take income as and when I want, whilst making sure I don’t pay extra tax. I’m happy to leave my pension pot invested, as I have my savings to fall back on for emergencies.

What Ian does

  1. Ian leaves his pension pot invested, 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. Ian can take up to £21,644 in this tax year (£5,411 tax-free and £16,233 taxable) from his pot before entering the higher rate tax bracket

  4. The money in his pension pot remains invested in the funds that he has chosen. There is the risk that it could fall as well as rise

What Ian gets

Pension pot £40,000 which remains invested
Tax-free cash 25% of each withdrawal
Taxable lump sum 75% of each withdrawal

See how we worked this out

  • State Pension age65
  • State Pension£8,767
  • Pension pot£40,000
  • Other income£25,000 a year
  • Other savings£65,000
  • Rental cost£9,500

Ian's calculation

Personal allowance (0% tax) Earnings from £0 to £12,500
Basic rate allowance (20% tax) Earnings from £12,501 to £50,000
State Pension £8,767 a year
Final salary pension £25,000 a year
Total income (subject to tax) £33,767 a year
Remaining basic rate allowance £16,233 a year

Potential withdrawal

Remaining basic rate tax band £16,233 a year
Maximum withdrawal within basic rate tax band £21,644
Tax free part (25%) £5,411
Taxable part (75%) £16,233
(£3,246.60 tax payable at 20%)

Important things to consider

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

  • Tax payable on the income will be taken off before it is paid out

  • The money in his pension pot remains invested in the funds he's chosen. Depending on investment performance, the value of his pot may rise or fall and is not guaranteed

  • If Ian takes £21,644 each year from his pot, it'll be exhausted in under two years (assuming no investment returns)

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

  • If Ian dies after age 75, any income his children take from the pension pot will be subject to income tax

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

  • 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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