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I’m using my pension to make up the shortfall in my salary.

James is 55 and has recently had his working week reduced by his employer from five to four days. His salary has dropped from £37,500 to £30,000 per year as a result.  He has a final salary pension but doesn’t want to touch this until he is 65. He also has a defined contribution pension pot of £60,000 and £20,000 of savings. He rents his flat and has two children.


What James wants

I want to use my pension pot to help make up the loss in my income.

James's idea

I’m going to take income as and when I want, making sure I don’t pay extra tax. I’m happy to leave my pot invested with growth potential as I can always rely on my savings if I need to.

What James does

  1. James 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. James could take up to £25,000 in this tax year from his pot before entering the higher rate tax band

  4. As James only wants to make up the shortfall in his income, he takes a lower withdrawal amount of £7,500 this year (£1,875 tax-free cash and £5,625 subject to income tax)

What James gets

Pension pot £60,000 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 age67
  • State PensionNot eligible yet
  • Pension pot£60,000
  • Other income£30,000 a year
  • Other savings£20,000
  • Rental costs£7,000 a year

James' 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
Maximum withdrawal while staying in basic rate band £25,000 a year
Tax free part (25%) £5,000
Taxable part (75%) £20,000

Important things to consider

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

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

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

  • His pension pot stays invested in the funds he’s chosen. Depending on investment performance, the value of his pot may rise or fall and is not guaranteed

  • 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

  • If James 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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