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Indira

I’m helping my daughter with a deposit for her first home.

Indira, 65, has final salary pension income of £6,000 per year, a defined contribution pension pot of £12,000 and receives her full State Pension. Her husband has final salary pension income of £20,000 per year. They own their own home, and have £60,000 in savings.

Indira

What Indira wants

I’d love to use my pension pot to help my daughter buy her first home.


Indira's idea

I’m already a basic rate tax payer and taking the lump sum all in one go won’t cost a lot in tax and it will be a contribution to my daughter’s future.


What Indira does

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

  2. She takes the remainder as a taxable lump sum of £9,000

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

  4. In total Indira receives £10,200 which she uses to help her daughter buy her house


What Indira 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 age63
  • State Pension£8,546
  • Pension pot£12,000
  • Other income£6,000 a year
  • Other savings£60,000
  • Property value£175,000

Indira's calculation

Personal allowance (0% tax) Earnings from £0 to £11,850
State Pension £8,546 a year
Final salary pension £6,000 a year
Total regular income £14,546 a year
Lump sum (taxed at 20%) £9,000

Important things to consider

  • As Indira was already in the 20% tax band due to her income, she paid tax at that rate

  • Once Indira has spent all of the money from her pension pot she will have to rely upon her savings, her and her husband’s final salary pensions and State Pension, unless she has any other assets she can use to give her an income or is able to claim any state benefits

  • If Indira needs extra money she could think about releasing equity from her property, for example with a lifetime mortgage. A lifetime mortgage is a loan secured against her property which could give her 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.

  • If she'd left the money in the pension pot untouched, the value may have risen over time, allowing her to withdraw a larger amount at a later date. Or her husband or daughter could have inherited it when she died

  • If she’d left the money invested it could also have fallen in value

  • 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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