A bit about YousufYousuf 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.
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.
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.