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Victor

I’m using my pension pot to help us to buy another property.

Victor is 58, working full time earning income of £50,000 per year and has a defined contribution pension pot of £26,000. His wife is also working, receiving income of £35,000 per year. They have no children and own their own home, plus two buy-to-let properties.

Victor

What Victor wants

We’re really keen to buy another property to let out as this, with the income from our other properties will fund our retirement. I want to use all of my pension pot to help pay for it.


Victor's idea

Taking my pension pot in one go feels like the right thing to do. I’m already a higher-rate tax payer so I can’t escape paying 40% tax.


What Victor does

  1. Victor takes one quarter of his pension pot as a tax-free cash sum of £6,500

  2. He takes the remaining £19,500 as a taxable lump sum

  3. As his other income puts him in the higher-rate tax band, he pays £7,800 tax on the lump sum and receives £11,700

  4. In total Victor receives £18,200 to use towards the buy-to-let property


What Victor gets

Tax-free cash £6,500
Taxable lump sum £19,500 (£7,800 tax leaving £11,700)
Total £18,200

See how we worked this out

  • State Pension age66
  • State PensionNot eligible yet
  • Pension pot£26,000
  • Salary income£50,000 a year
  • Rental income£18,600
  • Property value£250,000

Victor's calculation

Personal allowance (0% tax) Earnings from £0 to £11,850
Basic rate (20% tax) Earnings from £11,851 to £46,350
Higher rate tax (40%) Earnings from £46,351 to £150,000
Salary income £50,000 a year
Rental income £18,600 a year
Total income (subject to tax) £68,600 a year
Lump sum (taxed at 40%) £19,500

Important things to consider

  • As Victor was already in the 40% tax band due to his income, he paid tax at that rate

  • Cashing in his pension in one go, was not without cost. Victor paid £7,800 in tax in order for him to put money towards another buy-to-let property

  • Once Victor has spent all of the money he receives from his pension pot and stops working, he’ll have to rely on their rental income and State Pension, unless he has any other assets he can use to give him an income or is able to claim any state benefits

  • If Victor needs extra money he could think about releasing equity from his property, for example with a lifetime mortgage. A lifetime mortgage is a loan secured against his property which could give him 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 Victor had left the money in his pension pot untouched, the value may have risen, allowing him to withdraw a larger amount at a later date, or his wife, as named beneficiary, to inherit it tax free when he died

  • If he had left it invested, he would have also had the risk that it could fall as the value 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

  • The income tax rates and bands for Scottish residents may be different

  • If Victor 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.

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