Take it all in cash


Jill’s story – 65 years old

Jill is looking to take her pension pot as a cash lump sum and use it to help clear her debts. She knows 75% of it is taxable, but thinks this is a better option than paying interest on her debts.

Jill’s full story

a year and . She has significant debt and is keen to pay it off before she stops work.

She’s planning to take all . She’ll get 25% tax-free and despite the tax she’ll have to pay on the other £30,000, it will still leave her with enough to pay off her debts. Although Jill knows this will leave her without any pension income from this pot, she thinks this is a better option for her than paying the interest on her debt.

How we calculated Jill’s tax liability

Jill earns around £10,000 a year and her Personal Allowance is £11,850. She also has state pension benefits of £8,546.20 (weekly state pension of (£164.35 for 2018/2019) which makes her income this year £18,546.20.

Jill wants to take all of her £40,000 pension pot in cash. Up front Jill will get 25% of this as a tax-free lump sum of £10,000, the remaining £30,000 will be taxed.

The calculations are based on UK income tax bands. If you are a Scottish taxpayer income tax bands may be different.

Initial tax calculation

  • Personal Allowance £987.50/£11,850
  • To be taxed at rate 20%: £2,875 (Tax due £575)
  • To be taxed at rate 40%: £9,625 (Tax due £3,850)
  • To be taxed at rate 45% £16,512.50 (Tax due £7,430.62)
  • Total Tax due £11,855.62

This means that initially Jill will get a lump sum of £28,144.38. However, Jill may have paid too much or too little tax at this stage. To make sure she pays the right tax, Jill must contact her local tax office (or HMRC) and let them know she has taken her pension pot all in cash. If Jill had other money purchase pension plans she contributed too, any future contributions that receive tax relief will be limited to Money Purchase Annual Allowance (MPAA) – currently £4,000 p.a. If, MPAA applied, she would need to notify the providers of any other money purchase pension plans within 91 days of receiving the cash payment.

End of year tax position

Jill's total income for the year is £58,546.20. This is made up of the £40,000 lump sum from her pension pot, her income of £10,000 and her state pension benefits of £8,546.20.

Her tax liability for the year, taking into account her total income, should be £7,778.48. When Jill cashed in the pension pot, tax of £11,855.62 was deducted and she paid income tax of £1,339.24 on the £10,000 she earned and so has paid tax of £13,194.86. This means she has overpaid tax in 2018/2019 and is due a refund of £5,416.38.

Please click here to read the assumptions we’ve made

Scroll down to see Jill's figures

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