VERY simple question re my pension 'pot'

redwinger

Hello - Does a pension 'pot' reduce by the amount paid to me monthly ? - for example If I had a pension pot (CETV) of £100,000 and I get a monthly pension payment of (say) £400 - does the pension 'pot' reduce to £99,600, then reduce to £99,200 the next month ? (and so on).

Cheers, redwinger

Lokolo

If you take drawdown then yes.

If you took an annuity then no. An annuity you purchase income for life with the whole of the pension. (like you bought a £100k car, but instead of a car, you get income for life)


--- edit

Please note CETV is transfer value of a DB scheme, not a DC scheme as I originally thought, please see response #10 below

redwinger

Cheers for the very prompt reply lokolo - greatly appreciated !!!

Lokolo

I missed out the fact you can take up to a 25% lump sum before purchasing an annuity. (so that £100k could be £25k lump sum tax free and then £75k to purchase an annuity)

kidmugsy

Is it a final salary pension? If so this link may help
http://www.sharingpensions.co.uk/valuations.htm

ognum

Lokolo wrote: »

If you take drawdown then yes.

If you took an annuity then no. An annuity you purchase income for life with the whole of the pension. (like you bought a £100k car, but instead of a car, you get income for life)

Except surely you would expect in drawdown to be producing a gain from the assets within the pension so the pot may actually go up or down?

Lokolo

ognum wrote: »

Except surely you would expect in drawdown to be producing a gain from the assets within the pension so the pot may actually go up or down?

Not neccessarily (it could all be in cash at 0%). But yes, they could. I was just trying to keep the simple question with a simple answer so the OP gets the gist of it.

System

Whether the pot goes up or down depends on the relative size of its income and the amount you take from it.

If you buy an annuity you don't have a pot any more. You have given it away to someone else, who in return pays you a guaranteed income for life.

Archergirl

Lets all hope we live long enough to benefit from it...............

jamesd

redwinger wrote: »

Does a pension 'pot' reduce by the amount paid to me monthly ? - for example If I had a pension pot (CETV) of £100,000 and I get a monthly pension payment of (say) £400 - does the pension 'pot' reduce to £99,600, then reduce to £99,200 the next month ? (and so on).

No, not for any pension pot with a CETV. A Cash Equivalent Transfer Value is used only for defined benefit pensions like final salary or average salary types. These do not have individual pots for each person but instead one large pot for everyone, with current pension deductions from pay and employer contributions going in and pension payments coming out. A CETV is an attempt to work out what portion of the whole pot an individual's benefits would be worth. Some of these combined pots are growing, some decreasing, depending on the balance between still working and retired people in the scheme, and investment gains or losses. An employer is liable for any shortfalls in funding, including shortfalls that might arise only due to anticipated payments decades from now. The Pension Protection Fund protects the payments of these pots, guaranteeing 90% of more, up to a cap that is likely to be exceeded only by those who earn enough to pay higher rate income tax for many years.

CETVs are mainly used for divorce or the relatively uncommon cases where it makes sense for an individual to transfer out, perhaps because they have a much shorter life expectancy than usual or are dying and they and their families would receive no or low payments on death if the money was left in the defined benefit scheme. It's usually very important to the family of anyone diagnosed with a fatal illness with a DB scheme to check death benefits and it can often be best to transfer out into a personal pension. Not always, just often.

A personal pension or a workplace defined contribution scheme does have an individual pot for each employee. Whether a pot decreases based on income is taken depends on how the income is taken. If one or more annuities is purchased that purchase price is deducted from the pot at time of purchase and ten future income from the annuities is completely unrelated to the remaining balance in the pot. If income drawdown is used, the money does come directly from the pot, so £400 out reduces the pot by £400. The pot would also vary up and down with investment performance and this variation is likely to be larger than just the value of the amounts being taken out, with four to eight times the annual payments in up and down movements being normal if the whole pot was invested in shares, though it typically wouldn't be all in shares. Because these pots are independent of the employer there is no employer-related risk once the monthly contributions have been paid by the employer. In the fatal illness case there is no need to do urgent transfer-related work because the family would get the whole remaining pot anyway, generally 100% into a pension pot of a spouse or after a 55% tax charge to anyone, outside a pension. No tax charge for anyone if no lump sum or income has been taken from the pot and the dying person is under 75.

Lokolo

jamesd wrote: »

No, not for any pension pot with a CETV. A Cash Equivalent Transfer Value is used only for defined benefit pensions like final salary or average salary types.

Well thats what it means! I googled and googled and couldn't see anything so assumed that was the company the OP worked for!