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Joanna

I’m using my pension to invest in property and have income when I want.

Joanna, 65, has a defined contribution pension pot of £1,000,000 and receives her full State Pension. She and her husband own their home and have a rental property which is in her husband’s name.

Joanna

What Joanna wants

I’d like to use part of my pension pot to buy another property for us to let. The rest of it will provide an income for us to use when we want it.


Joanna's idea

Buying another property to let will boost my income during retirement, so I’m going to use some of my pension pot to do this. I know I’ll pay tax on the money that I take out of my pension pot. The balance can stay invested and we can withdraw some more when it’s needed.


What Joanna does

  1. Joanna takes one quarter of her pot as a tax-free cash sum of £250,000

  2. She takes a further £90,000 immediately as a taxable lump sum

  3. Joanna’s only income is from her State Pension so she has not used up all of her personal allowance. Therefore, some of the £90,000 will be taxed at 0%, 20% and 40%. She pays £27,778.40 tax on the lump sum and receives £62,221.60

  4. In total Joanna receives £312,221.60 which she uses to help pay for the buy­-to-­let property

  5. She puts the remaining pot into flexible drawdown to use when she wants. Any withdrawals from this will be taxed at her marginal tax rate

  6. She leaves this alone for the rest of the tax year as she would pay tax of at least 40% on any further withdrawal. The money in her flexible drawdown remains invested in the funds that she has chosen, so her money has the potential to grow. Joanna regularly reviews her investments to make sure that their performance meets her retirement aims and attitude to risk.

  7. Joanna may have to pay tax on the rental income she receives and this additional income could increase her marginal rate of tax


What Joanna gets

Tax-free cash £250,000
Taxable lump sum £90,000 (£27,778.40 tax leaving £62,221.60)
Total received £312,221.60
Remaining pot £660,000

See how we worked this out

  • State Pension age63
  • State Pension£8,546
  • Pension pot£1,000,000
  • Other incomeNone
  • Other savings£200,000
  • Property value£300,000

Joanna'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 (40% tax) Earnings from £46,351 to £150,000
State Pension £8,546 a year
Remaining personal allowance £3,304
Lump sum (taxed at 0%) £3,304
Lump sum (taxed at 20%) £34,500 (£6,900 tax payable)
Lump sum (taxed at 40%) £52,196 (£20,878.40 tax payable)

Important things to consider

  • Joanna’s pension pot remains invested in the funds she’s chosen - the value can fall as well as rise, and is not guaranteed. If the value of the pot falls, any withdrawals Joanna makes will exhaust the pot more quickly

  • Joanna may be able to pace her withdrawals to manage the amount of income tax she pays. She will need to consider her other forms of income, such as the rental income from her buy-to-let property when making these calculations

  • By taking income from her flexible drawdown pot Joanna will trigger the Money Purchase Annual Allowance of £4,000. This means the amount of money she can contribute to a money purchase pension scheme, and still receive tax relief, will reduce from £40,000 to £4,000.  In addition, as she has allocated all of her pension pot to flexible drawdown, she cannot make any further contributions to this particular pension pot

  • If she dies before age 75, her husband, as her nominated pension beneficiary,  will inherit the remaining money free of inheritance tax and any withdrawals will be exempt from income tax

  • If she dies after age 75, any income her husband takes from the pot will be subject to income tax at his marginal rate

  • Flexible drawdown may cost more to set up and administer than other retirement income options available. Joanna should shop around for her retirement income and consider the impact of ongoing charges on her pension income

  • Tax payable on the income from her flexible drawdown will be taken off before it is paid out

  • When Joanna and her husband die, the property or any proceeds from it will form part of their estate and could be subject to inheritance tax. If the money had been left in the pension pot, it could have been passed on to a named beneficiary free of inheritance tax

  • This example is based on current law and tax rates. These may change in the future and any tax due 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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