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Derek

I want to top up my part time income.

Derek, 66, lives with his wife and has a defined contribution pension pot of £25,000. Derek is receiving his full State Pension and his wife has final salary pension income of £5,000 per year. Derek continues to work part time.



Derek

What Derek wants

I love my job and I’m not ready to fully retire just yet. I want to ease into retirement by winding down over the next few years whilst keeping a reduced part time income of £12,000 per year initially. I want to withdraw money from my pension pot when I need it, to help bridge the gap from my previous full time earnings of £22,000 per year, if I find myself running short.


Derek's idea

I’m going to leave my defined contribution pension pot where it is. This means I can withdraw money when I want – I’ll have the option to increase what I take as my earnings from work decrease.


What Derek does

  1. Derek leaves his pension pot invested in the funds he’s chosen

  2. The first 25% of any withdrawal is tax-free and the remaining 75% is subject to income tax

  3. Derek’s total income is £20,546 per year before tax (part time salary and State Pension). He could make a withdrawal of £1,454 (£363.50 tax-free cash & £1,090.50 subject to tax) to take him back up to £22,000 per year (total earnings before he reduced his hours)

  4. Derek can increase the amount he withdraws as his work income decreases

  5. Once Derek stops work completely, and is only receiving his State Pension, he can withdraw £4,405 a year from his pension pot (£3,304 subject to tax plus £1,101 tax-free cash) and pay no tax as he’ll still be within his personal allowance


What Derek gets

Pension pot £25,000 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£8,546
  • Pension pot£25,000
  • Other income£12,000 a year
  • Other savings / investments£5,000
  • Property value£165,000

Derek's calculation - working part time

Personal allowance (0% tax) Earnings from £0 to £11,850
State Pension £8,546 a year
Salary from part-time job £12,000 a year
Total regular income £20,546 a year
Potential withdrawal from pension pot to increase income £1,454 (£363.50 tax-free and £1,090.50 subject to tax)

Derek's calculation - no longer working

Personal allowance (0% tax) Earnings from £0 to £11,850
State pension £8,546 a year
Remaining personal allowance £3,304 a year
Potential withdrawal from pension pot within personal allowance £4,405 each year (£1,101 tax-free and £3,304 subject to tax)

Important things to consider

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

  • Once Derek has exhausted his pension pot, he'll have to rely on his State Pension and his wife’s final salary pension for income in retirement unless he has any other assets he can use to give him an income or is entitled to claim any additional state benefits

  • If Derek dies before age 75, his wife, as his named beneficiary, will inherit the remaining money, free of inheritance tax, and any withdrawals she makes will be exempt from 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

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

  • This example is based on current law and tax rates. These may change in the future and income tax will depend on your 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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