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I’m going to pay off my debt but keep my benefits safe.

Nick, 68, is single and owns his home outright but is £2,000 in debt. He has a defined contribution pension pot of £20,000 but no other source of income or savings except pension credit of £682 per year and his full State Pension.


What Nick wants

I want to sort out my debt, buy a car and make the most of what’s left. I don’t want to affect the amount of the pension credit I receive.

Nick's idea

I’m going to keep most of my money in my pension pot and stagger the withdrawals I make from it over time. I’ll pay off my debt with my first withdrawal, buy a car with the second and then take the rest out over the next few years. By doing it this way, I have enough for the things I need, without paying any tax and my benefits won’t be affected.

What Nick does

  1. Nick 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. Nick can take up to £4,977.33 (£1244.33 tax-free and £3,733 subject to tax) in year 1 without paying any income tax as this keeps him within his personal allowance

  4. As he only wants to clear his debt with the first withdrawal, he takes £2,000 (£500 tax-free cash and £1,500 subject to tax)

  5. As the withdrawal doesn't count as income for the purposes of calculating benefits, Nick remains eligible for the same level of benefits he currently receives

  6. The money in his pension pot remains invested in the funds that he has chosen. There is a risk that this could fall as well as rise

What Nick gets

Pension pot £20,000
Tax-free cash 25% of each withdrawal
Taxable lump sum £4,977.33 subject to tax

See how we worked this out

  • State Pension age65
  • Pension pot£20,000
  • State Pension£8,767 plus £682 credit
  • Other taxable incomeNone
  • Other savings / debt£-2,000
  • Property value£120,000

Nick's calculation

Personal allowance (0% tax) Earnings from £0 to £12,500
State Pension £8,767 a year
Remaining personal allowance £3,733 a year
Maximum withdrawal without paying tax £4,977.33
Tax-free part (25%) £1244.33
Taxable part (75%) £3,733

Important things to consider

  • Nick's pension stays invested in the funds he’s chosen. Depending on investment performance, the value of his pot may rise or fall

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

  • Not all products from all providers offer this flexibility, and better deals may be available so it’s important to shop around

  • His withdrawals do not count as income, so he continues to receive pension credit

  • If Nick’s total savings go above £10,000, his pension credit benefit may be reduced

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

  • 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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