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I’m taking cash from my pension when I need it.

Murray is 66 and is married. He has final salary pension income of £25,000 per year, a defined contribution pension pot of £40,000 and receives the full State Pension. He owns his own flat and has savings of £40,000.


What Murray wants

My day-to-day living costs are covered by my final salary pension and State Pension, so I’d like to use my pension pot for extra money when I need it. But I want to avoid straying into the higher rate tax band.

Murray's idea

I’m going to leave my pension pot invested and take cash from it when I want to, while managing the tax I pay. I’ve also got my savings to fall back on if I need them for emergencies.

What Murray does

  1. Murray 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 tax

  3. Murray can take up to £21,644 in this tax year (£5,411 tax-free and £16,233 taxable) from his pension pot to keep him within the 20% tax band

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

What Murray 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£40,000
  • Property value£210,000

Murray's calculation - Tax band

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

Withdrawal amount

Maximum withdrawal in basic rate tax band £21,644
Tax free part (25%) £5,411
Taxable part (75%) £16,233

Important things to consider

  • Murray is able to make withdrawals from his pension 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

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

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

  • If he dies after age 75, any income his wife takes 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

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

  • 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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