Sally is 60 and still works part-time. She's not old enough to receive her state pension, but would like to access her pension pot to fund some urgent house repairs and a holiday with her husband to celebrate her 60th birthday. They have decided that £8,500 will cover their costs.
She has£50,000in her pension pot. There are a number of ways to access the cash in her pension but Sally decides she wants to take the money as a cash lump sum for the holiday;
Sally takes£10,000 as a cash lump sum
The first 25% is tax-free, which is £2,500
The other £7,500 is added to any other income Sally has in this tax year and taxed accordingly. This means it could move her into a higher tax bracket. However, in this example Sally pays tax at 20%, so she pays £1,500 in tax (£7,500 x 20%).
Total received by Sally is £8,500