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I’m using my pension to clear my credit card debt.

Dipesh, 65, is single and lives in a council flat. He has a small defined contribution pension pot of £4,000 but owes £2,000 on credit cards. He currently receives his State Pension of £8,767.


What Dipesh wants

I’d love to get rid of my credit card debt as it would mean a much less stressful retirement.

Dipesh's idea

By taking my whole pension pot, I can clear my credit card debt and stop paying interest on it. I’ll then have some cash left over to do what I want with – and it’ll all be tax-free.

What Dipesh does

  1. Dipesh takes one quarter of his pension pot as a tax-free cash sum of £1,000

  2. He takes the remainder as a taxable lump sum of £3,000. As the total value is less than his personal allowance he pays no tax on this

  3. Dipesh uses some of this to pay off his debt and pay no more interest

  4. As Dipesh isn’t receiving a regular income, he’s still eligible for pension credit and housing benefits

What Dipesh gets

Tax-free cash £1,000
Taxable lump sum £3,000

See how we worked this out

  • State Pension age65
  • State Pension£8,767
  • Pension pot£4,000
  • Other incomeNone
  • Other savings / debt£-2,000 (credit card)
  • Other benefitsNone

Dipesh's calculation

Personal allowance (0% tax) Earnings from £0 to £12,500
State Pension £8,767 a year
Remaining personal allowance £3,733
Lump sum (without paying tax) £3,000

Important things to consider

  • Dipesh can withdraw his entire £4,000 lump sum without paying any tax

  • His benefits are unaffected, as the lump sum does not count as income

  • Once Dipesh has spent all the money from his pension pot he’ll have to rely on the State Pension and his benefits to fund his retirement, unless he has any other assets he can use to give him an income or is able to claim any additional state benefits

  • If Dipesh’s total savings go above £10,000, his pension credit and housing benefits may be reduced

  • 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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