Should I top up my pension pot?

usignuolo

I have three small pension pots all with different schemes, accumulated over the years, which mature later this year. One (taken out before July 1988 may have a GAR, I don't know and will inquire, one is a separate self employed pot and the third is a small pot from around 4 years employment in a firm).

They are worth around £11k, 24k and 10k respectively, so not a lot. None of the companies is in business any more. The third one, from employment, is now owned by an insurance company. I recently received a letter about it saying I had a fund of £10,600 Ordinary Rights Value. It did not quote a pension, or indicate that I could take a lump sum, merely enclosed a booklet from the Money Advice Service called Your pension it's time to choose.

So I have some questions, I assume I cannot cash in any individual pension as the total pot because it is more than £18,000. I assume I can still take the 25% lump sums from the individual schemes?

I do have another pension from some years working in the public sector and am not destitute but I am dependent now on my husband for a decent standard of living so it might be wise to add another pension to that. I am in good health with no debts.

If I do take any of the 25% lump sums from the individual pots I will leave scarcely enough in the overall pot to buy a pension from anyone. Alternatively annuity quotes are pitiful for the whole fund. Is it worth topping up the whole fund myself and can I do this legally? I have some savings I could use.

gadgetmind

I do think this is a case where seeing an IFA would be of benefit. He/she can sort out which to take an annuity from directly (likely in the case of GAR) and for the others what combination of 25% lump sums and annuities to use.

They can also advise regards top-ups (max of £3600 gross or your earned income per annum) and shopping around for annuities.

gadgetmind

Oh, and you don't need to take an annuity now even if you do choose to take the lump sums, but the inheritance treatment of the pensions changes when you take the lump sum.

jamesd

The lump sums from some older schemes can be more than 25%. Or less occasionally. First thing to do is find out the benefits of each then the ongoing costs of keeping the money invested if you want to do that. The providers won't be able to give you any advice but should be able to give you factual information about their products.

Using income drawdown currently looks better than buying an annuity for people who are of lower ages than state pension age. But this may well not apply to any pension where there's a guaranteed annuity rate.

You can top up or create a pension with up to £3600 gross a year if you're not working.

It probably doesn't make sense to top up a pension unless you've already used all of your stocks and shares ISA allowance and expect to continue to do so for the foreseeable future. Investments within the ISA pay out with no tax added and it's likely that your work and state pensions and any possible annuity or drawdown income will use your personal income tax allowance. You should really get a state pension forecast to see what the state pension may be. Pensions are better for income up to the point where you start paying tax. Even beyond that to a lesser extent.

Don't get hung up on the pension word. It's just a way of producing income. You can do that with funds inside a stocks and shares ISA as well as with the same funds in a pension or by buying an annuity. You can get 5-6% income plus a decent chance of growing at least with inflation from such investments without much difficulty. Start out by looking at funds like Invesco Perpetual Monthly Income Plus, Newton Higher Income and Invesco perpetual High Income if you're unfamiliar with this sort of investment. Yield is the amount of income that they pay, normally expressed as a percentage of the capital amount.

If you were to buy an annuity your spouse would get whatever death benefits it provides after your death. If using income drawdown they would inherit 100% of the pension pot into a pension in their own name. If the pot wasn't passed on to a spouse in a pension there'd be a 55% tax charge to pay after benefits (lump sum or income) have been taken, none before then.