Taking money from your pension can have an impact on how much tax you pay, and the tax relief that you get.
Usually, 25% of your pension is paid to you tax-free. The remainder will be subject to tax. This 25% tax-free figure is often known as a pension lump sum and can be used to pay debt if you decide that is right for you.
But cashing in your pension to pay off debt might leave you with a large tax bill that you weren’t expecting, and the amount of tax you pay reduces what you’ll get from your pension pot.
If you take money out of a defined contribution pension pot above the 25% tax-free part, you could also be affected by the Money Purchase Annual Allowance (MPAA).
If you are affected by the MPAA, this means that the amount that you (and your employer, in a workplace pension) can contribute to your pension pots with tax relief applying is limited to £4,000 each year.
If you’re not limited by the MPAA, you might be able to get tax relief on pension contributions on the lower of 100% of your earnings and £40,000 each year (the Annual Allowance).