What to do with a small pension pot?
Discussion
I'm 61. I'm currently receiving pension payments from 2 company schemes (final salary), and I'm self-employed.
When I reach state retirement age, my total pension income will be about £18k pa, which is about what I'm currently living on. I can also carry on with my self-employment for as long as my eyesight holds up if I want to. No problem there.
For 8 years I've had a part time supermarket job. I was paying just under £30 a month into their pension scheme. I quit that job last month, and have received a pension statement from Legal & General today. The total pot is just under £7500. At current rates I believe that this would provide an annuity of around £20 a month. Obviously rates may be different in 5 years, but it's not really going to make much difference to my lifestyle in retirement.
I know that I can take 25% as a tax free lump sum, but are there any other options apart from leaving it where it is or moving it to a "riskier" fund?
When I reach state retirement age, my total pension income will be about £18k pa, which is about what I'm currently living on. I can also carry on with my self-employment for as long as my eyesight holds up if I want to. No problem there.
For 8 years I've had a part time supermarket job. I was paying just under £30 a month into their pension scheme. I quit that job last month, and have received a pension statement from Legal & General today. The total pot is just under £7500. At current rates I believe that this would provide an annuity of around £20 a month. Obviously rates may be different in 5 years, but it's not really going to make much difference to my lifestyle in retirement.
I know that I can take 25% as a tax free lump sum, but are there any other options apart from leaving it where it is or moving it to a "riskier" fund?
^^^ That's your simple answer, nothing else to add other than to say just call L&G and tell them you want to withdraw the lot. They will deduct the basic rate of tax from the 75% taxable part and pay this to HMRC and forward you the balance together with the tax free element. Tax should be around £1,125.
clockworks said:
I know that I can take 25% as a tax free lump sum, but are there any other options apart from leaving it where it is or moving it to a "riskier" fund?
Impossible to say without knowing your circumstances. For instance, and in the extreme, drawing it from your pension loses you certain rights *and* exposes your pot to IHT. I concede, that might not be relevant to you, but rather than solely and overly relying on the wisdom of crowds, perhaps you could call TPAS in the New Year before you do anything else? It’s free for you to use. www.pensionsadvisoryservice.org.uk
I don't qualify for any benefits at all, and my estate is too small to be affected by IHT, so I don't think cashing in this small pot will have any impact.
Having said that, it would make sense for me to wait until April. If I cash it in this tax year I would have to start repaying my 24+ student loan. As I will be earning a fair bit less next year (no PAYE job now), my total income including the money from the pension pot will be under the repayment threshold.
Having said that, it would make sense for me to wait until April. If I cash it in this tax year I would have to start repaying my 24+ student loan. As I will be earning a fair bit less next year (no PAYE job now), my total income including the money from the pension pot will be under the repayment threshold.
clockworks said:
I don't qualify for any benefits at all, and my estate is too small to be affected by IHT, so I don't think cashing in this small pot will have any impact.
Having said that, it would make sense for me to wait until April. If I cash it in this tax year I would have to start repaying my 24+ student loan. As I will be earning a fair bit less next year (no PAYE job now), my total income including the money from the pension pot will be under the repayment threshold.
Or take the tax free cash now and then the taxable amount in April. Were you on Plan 1 or Plan 2, this makes a big difference?Having said that, it would make sense for me to wait until April. If I cash it in this tax year I would have to start repaying my 24+ student loan. As I will be earning a fair bit less next year (no PAYE job now), my total income including the money from the pension pot will be under the repayment threshold.
clockworks said:
I don't qualify for any benefits at all, and my estate is too small to be affected by IHT, so I don't think cashing in this small pot will have any impact.
Having said that, it would make sense for me to wait until April. If I cash it in this tax year I would have to start repaying my 24+ student loan. As I will be earning a fair bit less next year (no PAYE job now), my total income including the money from the pension pot will be under the repayment threshold.
There you go. As Julian implies, you could erode the tax free cash over time, too? Everyone is different. TPAS will also look at it from the other perspective and may discuss you making use of any surplus savings which could be better served with a final-hurrah one off pension contribution before you retire and lose relevant income. Having said that, it would make sense for me to wait until April. If I cash it in this tax year I would have to start repaying my 24+ student loan. As I will be earning a fair bit less next year (no PAYE job now), my total income including the money from the pension pot will be under the repayment threshold.
My student loan was taken out in 2 stages, 4 and 3 years ago, to do a couple of courses for personal development (cheaper than paying for therapy!). Total loan was a shade over £3k. A quick google suggests it will be a Plan 2 loan?
Splitting it to take the tax free sum this tax year and the rest next year would work for me.
Thing is, I don't actually need the money as a lump sum right now anyway, I just don't see the point of using it to buy an annuity when the time comes - unless the rates go up significantly.
Maybe I'd be better off just leaving it alone until I actually need the cash? Unless Brexit messes it up, my plan is to retire abroad. If I take the cash now, I'd probably end up spending it on a car.
Is the pot likely to increase at a rate that keeps up with inflation, or at least do better than sticking it into a savings account?
I guess I could use some of the money to "buy back" my contracted out state pension years? I've done the full 30 years, but my projected state pension is about £20 a week lower than the maximum because of contracting out with my first company pension. Can you buy back contracted out years, or just missed years?
The more I think about it, the more complicated it becomes. TPAS may be the way forward
Splitting it to take the tax free sum this tax year and the rest next year would work for me.
Thing is, I don't actually need the money as a lump sum right now anyway, I just don't see the point of using it to buy an annuity when the time comes - unless the rates go up significantly.
Maybe I'd be better off just leaving it alone until I actually need the cash? Unless Brexit messes it up, my plan is to retire abroad. If I take the cash now, I'd probably end up spending it on a car.
Is the pot likely to increase at a rate that keeps up with inflation, or at least do better than sticking it into a savings account?
I guess I could use some of the money to "buy back" my contracted out state pension years? I've done the full 30 years, but my projected state pension is about £20 a week lower than the maximum because of contracting out with my first company pension. Can you buy back contracted out years, or just missed years?
The more I think about it, the more complicated it becomes. TPAS may be the way forward
If you don’t need the cash, you’re probably better off asking TPAS about holding onto it. After all, what would you do with it - stick it in the bank where inflation would erode it, and you’d only be selling fund units now, when they’re probably a lot lower than when they were six months ago. No promises that they couldn’t drip further mind! I think TPAS is taking bookings a few weeks ahead at the moment. A one-to-one chat with someone there is definitely worth an hour or so of your time. Especially too, if you’re thinking about emigrating.
Absolutely not. And it never would. It merely informs.
Having said that, I know that TPAS staff go as close to the wire as any organisation can and does. And it does that and does it safely, because it is so well regarded and trusted. It’s a shame that, as yet, it looks like it may lose more than its identity in the move to the Single Financial Guidance Body.
Having said that, I know that TPAS staff go as close to the wire as any organisation can and does. And it does that and does it safely, because it is so well regarded and trusted. It’s a shame that, as yet, it looks like it may lose more than its identity in the move to the Single Financial Guidance Body.
I actually don't think this is complicated at all, but is being made so.
Assuming you don't want to make future pension contributions over £4,000 a year, you effectively have c. £7,500 sat within a pension that you are not going to be using for the purpose a pension is designed for. The pension 'wrapper' is now redundant.
After tax you could withdraw c. £6,375 and place this into a low cost global equity and bond ISA and just sit on it until you need it.
Alternatively you could place the money into a fixed term deposit account that should keep it in line with inflation. The choice is yours.
The time will never come when you have to buy an annuity BTW. This has not been a requirement for pension for many years now. So you also could just leave it where it is as your original concern was unfounded.
If you are in a Plan 2 Student Loan then you need to be earning £25,000 a year before you have to make any repayments. For Plan 1 the threshold is £18,330. This should therefore not be an issue.
Finally, assuming you this money is superfluous to your retirement planning and you have a sufficient nest egg set aside if the boiler needs replacing, etc. then there is nothing wrong with using the money to buy a car!
Assuming you don't want to make future pension contributions over £4,000 a year, you effectively have c. £7,500 sat within a pension that you are not going to be using for the purpose a pension is designed for. The pension 'wrapper' is now redundant.
After tax you could withdraw c. £6,375 and place this into a low cost global equity and bond ISA and just sit on it until you need it.
Alternatively you could place the money into a fixed term deposit account that should keep it in line with inflation. The choice is yours.
The time will never come when you have to buy an annuity BTW. This has not been a requirement for pension for many years now. So you also could just leave it where it is as your original concern was unfounded.
If you are in a Plan 2 Student Loan then you need to be earning £25,000 a year before you have to make any repayments. For Plan 1 the threshold is £18,330. This should therefore not be an issue.
Finally, assuming you this money is superfluous to your retirement planning and you have a sufficient nest egg set aside if the boiler needs replacing, etc. then there is nothing wrong with using the money to buy a car!
I currently have around £28k in savings (ISA and several current accounts that pay interest at reasonable rates) and and make monthly payments into an account for annual bills like heating oil and car insurance/RFL/servicing etc. My total outgoings (including the regular savings transfer and holiday fund) are less than £900 a month.
Current pension income covers all bills. Self-employment covers savings/holidays/home improvements and pocket money. My total income is at least £500 a month more than I need to spend, sometimes a lot more.
No mortgage, house worth about £280k.
2 cars, both paid for. Probably worth £25k.
Collection of watches and clocks worth about £40k.
I am financially secure, so this pension pot is an unexpected bonus. I've just checked the letter again, and it's actually £8748, so about £7435 after tax.
I'll hold on until the outcome of brexit is decided. If moving to Spain becomes impractical (reciprocal healthcare, pensions, etc.), I'll probably blow the money on replacing my runabout car.
Current pension income covers all bills. Self-employment covers savings/holidays/home improvements and pocket money. My total income is at least £500 a month more than I need to spend, sometimes a lot more.
No mortgage, house worth about £280k.
2 cars, both paid for. Probably worth £25k.
Collection of watches and clocks worth about £40k.
I am financially secure, so this pension pot is an unexpected bonus. I've just checked the letter again, and it's actually £8748, so about £7435 after tax.
I'll hold on until the outcome of brexit is decided. If moving to Spain becomes impractical (reciprocal healthcare, pensions, etc.), I'll probably blow the money on replacing my runabout car.
JulianPH said:
I actually don't think this is complicated at all, but is being made so.
Assuming you don't want to make future pension contributions over £4,000 a year, you effectively have c. £7,500 sat within a pension that you are not going to be using for the purpose a pension is designed for. The pension 'wrapper' is now redundant.
After tax you could withdraw c. £6,375 and place this into a low cost global equity and bond ISA and just sit on it until you need it.
Alternatively you could place the money into a fixed term deposit account that should keep it in line with inflation. The choice is yours.
The time will never come when you have to buy an annuity BTW. This has not been a requirement for pension for many years now. So you also could just leave it where it is as your original concern was unfounded.
If you are in a Plan 2 Student Loan then you need to be earning £25,000 a year before you have to make any repayments. For Plan 1 the threshold is £18,330. This should therefore not be an issue.
Finally, assuming you this money is superfluous to your retirement planning and you have a sufficient nest egg set aside if the boiler needs replacing, etc. then there is nothing wrong with using the money to buy a car!
I don’t understand why MPAA of £4,000 would apply in this instance? As long as the fund holder is over 55, you can degrade three trivial pots of up to £10,000 without incurring the £4,000 limit. Assuming you don't want to make future pension contributions over £4,000 a year, you effectively have c. £7,500 sat within a pension that you are not going to be using for the purpose a pension is designed for. The pension 'wrapper' is now redundant.
After tax you could withdraw c. £6,375 and place this into a low cost global equity and bond ISA and just sit on it until you need it.
Alternatively you could place the money into a fixed term deposit account that should keep it in line with inflation. The choice is yours.
The time will never come when you have to buy an annuity BTW. This has not been a requirement for pension for many years now. So you also could just leave it where it is as your original concern was unfounded.
If you are in a Plan 2 Student Loan then you need to be earning £25,000 a year before you have to make any repayments. For Plan 1 the threshold is £18,330. This should therefore not be an issue.
Finally, assuming you this money is superfluous to your retirement planning and you have a sufficient nest egg set aside if the boiler needs replacing, etc. then there is nothing wrong with using the money to buy a car!
Why would anyone take a tax hit after a fund withdrawal, based on them not needing the money within the pension wrapper, only to then reinvest it outside the pension wrapper where it will equally accessible/inaccessible, given the OPs age.
You can, of course, still gain some tax relief and then use the enlarged tax free cash facility to help buy a car. I don’t think the final solution will be complicated, but I think clarity is needed before getting there.
Edit - Re MPAA, PM got there first!
Edited by Ginge R on Saturday 22 December 12:16
clockworks said:
I currently have around £28k in savings (ISA and several current accounts that pay interest at reasonable rates) and and make monthly payments into an account for annual bills like heating oil and car insurance/RFL/servicing etc. My total outgoings (including the regular savings transfer and holiday fund) are less than £900 a month.
Current pension income covers all bills. Self-employment covers savings/holidays/home improvements and pocket money. My total income is at least £500 a month more than I need to spend, sometimes a lot more.
No mortgage, house worth about £280k.
2 cars, both paid for. Probably worth £25k.
Collection of watches and clocks worth about £40k.
I am financially secure, so this pension pot is an unexpected bonus. I've just checked the letter again, and it's actually £8748, so about £7435 after tax.
I'll hold on until the outcome of brexit is decided. If moving to Spain becomes impractical (reciprocal healthcare, pensions, etc.), I'll probably blow the money on replacing my runabout car.
I wouldn’t ever presume to advise you without knowing your full circumstances, but if I were doing so, I’d explore the possibility of using your relevant income to create a suitably sized single second pension/contribution before you retire. TPAS is your friend. Current pension income covers all bills. Self-employment covers savings/holidays/home improvements and pocket money. My total income is at least £500 a month more than I need to spend, sometimes a lot more.
No mortgage, house worth about £280k.
2 cars, both paid for. Probably worth £25k.
Collection of watches and clocks worth about £40k.
I am financially secure, so this pension pot is an unexpected bonus. I've just checked the letter again, and it's actually £8748, so about £7435 after tax.
I'll hold on until the outcome of brexit is decided. If moving to Spain becomes impractical (reciprocal healthcare, pensions, etc.), I'll probably blow the money on replacing my runabout car.
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