Drawing Down a small pension pot

astrata

I have one pension pot (final salary scheme ) and my employer has offered the chance to also join a Defined Contributions scheme.

My question is that the pot of money I am likely to build up would be small probably £5k-ish. So can I draw it down to (eventually) nil?

I know I could drawdown 25% tax free & an annual amount maybe around £300p/yr (subject to tax) basically can I do this until all the funds are gone?

I think there is little point buying an annuity to pay £20 or so per month.

As background I am 51 and plan to leave work at 58, to live on my savings for 2 yrs & draw my DB pension at 60 (which is my normal retirement date). I am happy that my DB pension of around £16k would be enough to live on.

My employer in the past has introduced a ‘Pensionable Salary’ which is what my pension will be calculated on - basically when I recd a pay rise say 3% my pay went up 3% but my Pensionable salary went up by RPI eg 2.5%. So there is a gap between my actual pay and the figure used to calculate my pension.

For the last few years I have only had 1% or no pay rises, the company say that pay rises will be back to normal (this year 2.8%) but from now on the Pensionable Salary will only ever increase by 1% per year.

But I can now join an additional DC to pay a contribution on the gap amount only – currently £1k – they will make an initial £2k contribution and if I pay 8% they will pay 12% - so basically I pay £80 they will pay £120. I can pay more than 8% but the max my employer will pay is 12% of the gap between my actually pay & my Pensionable Salary.



I think its worthwhile taking advantage of the offer but want to be sure I will (subject to how the money is invested) get back the £2k on offer plus my contributions.


Any help would be gratefully received.

mania112

So if we use £5,000 as a maturity sum.

£2k of it would be the employers initial contribution
£1,200 would be your contributions
£1,800 would be your employers contributions.

When you retire, you can withdraw 25% tax free - £1,250.

Already in profit. And that's before you consider investment growth (you can assume 5% pa) and you can draw an income on it thereafter.

Linton

The only way of being sure that you can reduce a £5K pot to nil is to use flexible drawdown which will permit you to take out as much as you like taxed as income (after the 25% tax free). BUT your £5K pension pot can only become eligible for flexible drawdown when your income from other guaranteed sources in a tax year (eg annuity/FSpension and State Pension) exceeds £20K annually. So under current rules you should be OK but not until you reach SP age or the year after.

The other downside for flexible drawdown of small pots is that the charges are fixed amounts - perhaps £200 per year.

PS some providers may have a minimum threshhold for Flex Drawdiwn,

kidmugsy

If ever your crystallised drawdown pot sinks below £2k you could take the lot out as taxable income, being a trivial commutation under the "stranded pots provisions" as long as you are 60 or older.

Or at least so I assume: I know that the cut-off is £2k for uncrystallised pots; is it similarly £2k for crystallised residues?

zagfles

Are the two schemes not linked? I've got a deferred DB scheme with a linked DC scheme, and I will be able to withdraw the entire amount in the DC scheme tax free provided it is 25% or less than the value of the DB plus DC parts.

Linton

kidmugsy wrote: »

If ever your crystallised drawdown pot sinks below £2k you could take the lot out as taxable income, being a trivial commutation under the "stranded pots provisions" as long as you are 60 or older.

Or at least so I assume: I know that the cut-off is £2k for uncrystallised pots; is it similarly £2k for crystallised residues?

I must admit I had assumed that triviality was only for uncrystalised pensions, but I cant find anywhere that says so. Which implies that if you can get your capped drawdown pot down to £2K you can take the rest out in one go. However I guess its not that much use unless you are very close to the £2K limit as the capping would slow you down quite a bit.

astrata

Thank you all for your speedy replies, they are really helpful.

My thoughts were with you Mania112, it'd pretty much be in profit from the inital 25% withdrawal.

I could wait as Linton suggests til I reach state retirement age and have over £20k p/yr pensions and go for a flexible drawdown.

I have received confirmation the two schemes are entirely separate so as I plan to leave work at 58 & live on savings for 2 yrs - I could claim the funds from the DC and at 60 (NRD) draw my DB pension at normal rate.

I hadn't factored in admin fees - generally do they apply to all drawdowns or only to flexible ones?

kidmugsy

Linton wrote: »

I must admit I had assumed that triviality was only for uncrystalised pensions

Me too, until a commenter on a thread here said "no". But what his evidence was I'm not sure.

kidmugsy

astrata wrote: »

I hadn't factored in admin fees - generally do they apply to all drawdowns or only to flexible ones?

Here's a link to Hargreaves Lansdown's new charges, which are an example from one good firm. Scroll down to "Drawdown charges".
http://www.hl.co.uk/lowcharges/tariff

zagfles

astrata wrote: »

Thank you all for your speedy replies, they are really helpful.

My thoughts were with you Mania112, it'd pretty much be in profit from the inital 25% withdrawal.

I could wait as Linton suggests til I reach state retirement age and have over £20k p/yr pensions and go for a flexible drawdown.

I have received confirmation the two schemes are entirely separate so as I plan to leave work at 58 & live on savings for 2 yrs - I could claim the funds from the DC and at 60 (NRD) draw my DB pension at normal rate.

I hadn't factored in admin fees - generally do they apply to all drawdowns or only to flexible ones?

Generally all drawdowns. I presume your company won't offer drawdown so you'd probably have to transfer it to a platform.

As an example, HL would charge £75+VAT for each GAD calculation (think this is every 3 years till you're 75 then every year), and £10+VAT to change the payment amount, so maybe £100 every 3 years. Most others are more expensive. Fidelity claim to be free but apparently they insist you get financial advice!

astrata

Thank you for your latest replies... I know after 12 months of none-contributions the fund will automatically transfer to their chosen (unnamed) provider.

I will need to check that I will be able to choose my own provider, who their nominated provider is and their current charges (although they are likely to be different in 7 years time!!)

The other option is that I could still claim my £2k from my employer and pay less - the minimum they have stipulated is 3% but the matched amount would be much less than 12% (I will need to check - it is poss 3%).

This would result in a much smaller pot & if the £2k limt uncrystalised limit increases at some future date I could draw it in full (a gamble I know)