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  • A bit about Yousuf

    Yousuf is 65.

    He has a defined benefit (DB) pension (promising a set level of pension based on salary and how long he built up benefits) and State Pension. Together these pay around £20,000 a year.

     

    He also has a defined contribution (DC) pension pot, based on contributions and investments, of around £60,000.

  • Background

    If Yousuf bought a guaranteed income (an 'annuity') with his DC pension pot, it would be around £2,400 a year or £200 a month. He doesn’t think that would make much difference to his lifestyle.

  • Yousuf's idea

    He wants to take the whole £60,000 as cash to use for things like holidays and entertainment.

  • Our advice

    Our financial planner finds Yousuf’s tax bill for taking all his pot as cash would be around £12,000, as it would push him into a higher tax bracket for the year. Here’s how it would work.

    Yousuf can take tax-free cash of £15,000 (one-quarter of his pension pot).

    He pays tax on the remaining £45,000 (£30,000 at 20% basic rate, £15,000 at 40% higher rate).

    So, his total tax bill is £12,000.

    And his total cash, including the tax-free amount, is £48,000.

    Tax rates and bands based on 2021/22 tax year.

  • A better way

    Our financial planner recommends Yousuf could spread his cash over two tax years by taking half of it in March near the end of the tax year (on 5 April) and the rest after the start of the new tax year (on 6 April). This means he doesn’t go into a higher tax bracket, reducing his tax bill by £3,000. Here’s how it would work.

    Yousuf can take tax-free cash of £15,000. £7,500 in year 1 and £7,500 in year 2. 

    He pays tax on the remaining £45,000. £22,500 in year 1 and £22,500 in year 2 (both at 20% basic rate).

    So his total tax bill is £9,000.

    And his total cash, including the tax-free amount, is £51,000.

    Tax rates and bands based on 2021/22 and 2022/23 tax year.

  • Fees

    Yousuf pays a one-off fee for our financial advice.

    He’s very happy about the amount of tax he’s saved.

The result

Thanks to our help, Yousuf gets his cash and saves £3,000 in tax he doesn’t need to pay.

This is a real-life example, but the name and details have been changed.

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