What to do about 6 small pension pots

northernlass1

Hello everyone,

I am a newbie here and hope someone can steer me in the right direction please.

I am a 61 year old lady who has half a dozen small pensions that were set up 30+ years ago. I stopped paying into them when I stopped work to raise a family. They total £40,000, the largest being £30,000.

I don't have an IFA and plan to try and do everything myself to gain access to the money. The first pension company I called recommended I get professional advice but I am scared of frittering away hard earned money on advice I can work out myself. They also said I could have the money but it would be taxed at 40% and taken at source by them.

I am not a tax payer as I no longer work or receive any income.

Please could anyone point me at or offer advice as to how I should proceed and alay my worries about the tax owed on them?

thank you so much,

NorthernLass1

Linton

Are they all DC pensions where you hold a pension pot of money rather than DB ("final salary" or similar)?


Assuming that they are all DC pensions and there are no special features such as guaranteed annuity rates it would be straightforward to transfer them all into one modern pension. You may need to do this anyway if you want to access all the money as cash. The process is like that with ISAs - you set up the receiving pension and then ask the provider to transfer-in your small pensions.



Regarding the 40% tax concern there are two separate issues:

- You can take up to 3 DC pensions under £10K as cash. However all pension income is taxed under PAYE in the same way as earned income. So you run the risk of raising your income into the higher rate band.
- PAYE does not work well for large one-off payments. This has the effect that the first ever payment from a pension company is taxed as if you were to receive that income every month for a whole year. This would be likely to incorrectly put you into a high tax band for that lump sum. HMRC will return the excess tax after the end of the tax year or it can be claimed back more quickly using the appropriate form.

OldMusicGuy

First, you need to be clear about what type of pensions these are. Are they defined contribution (DC) or defined benefit (DB)? If they are DC pensions, you have many options. The DC pensions may support flexible drawdown which means you can take as much or as little out as you want. 25% will be tax free but the rest is taxable income, thus it would probably not make much sense to take it all out in one go as you would pay tax on 75% of it. As you are not receiving SP yet you can withdraw up to your personal allowance and get 25% tax free on top using what is called UFPLS.

To find out more about this, set up an appointment with Pensionwise if you have not done so already and they will talk you through all these options (it's free).

If your DC pensions are very old, they may not support flexible drawdown. You can transfer them to a pension that does (for little or no fee). I have done this for 6 pensions.

If you DC pensions are old there may be some guarantees associated with them that could impact your decision to transfer them. You need to get all the scheme details and find out exactly what you have.

If your pensions are DB pensions then you cannot access them in the same way and you should probably not think about cashing them in. The rules for transferring DB pensions are different and I know less about them (as I don't have any!). Others will comment on those.

The Pensionwise website is a good place to start reading: https://www.pensionwise.gov.uk/en

xylophone

These are all DC pensions?

You could seek an appointment with Pension Wise to discuss your options.

https://www.pensionwise.gov.uk/en

You might consider transferring all the pensions into one modern pension plan and proceeding from there on a drawdown basis.

Would you wish to keep the money in cash for around the 2.5 tax years it would take to remove (potentially) on a tax free basis?

You might look at the information provided here

https://www.hl.co.uk/partners/search/sipp?theSource=PCHLS&Override=0&adg=G+HLBS+HLS&gclid=EAIaIQobChMIp_XBjITu4AIVbb7tCh1QwA09EAAYASAAEgLe2vD_BwE

In 2019-20, you could take the 25% tax free lump sum and then as much of the balance as would fit within your tax allowance for the year - this would potentially liberate over half of the pension - you could take the balance within your personal allowance over the next couple of years.

It is likely that you would be overtaxed on the withdrawals but you could apply to HMRC for the tax to be rebated.

Have you obtained a new state pension statement to help with future planning?

https://www.gov.uk/check-state-pension

northernlass1

Linton, thank you so much for taking the time to explain things to me. They are DC pensions, Lord knows why the IFA I dealt with got me to set so many up. At the time you don't think about retirement do you and it's only when you come to need the money that you start to understand the subject.

northernlass1

thank you for this invaluable information oldmusicguy. I did have a meeting with pension wise last year but didn't really grasp everything. I have booked another appointment and will go through things I have learnt through you and the other people who responded to my request for help

northernlass1

thank you xylophone. I have had one pension wise appointment and have booked another. Also got a statement as you suggested, so I seem to be doing the right things. I like your ideas about spreading the tax burden across the years.

Dazed_and_confused

Are you married and if so have you applied for Marriage Allowance?

The 40% tax comment is nothing to be concerned about.

Even if you were Scottish resident for tax purposes you have nowhere near enough in the pensions to have to ultimately pay 40% tax. Unless you start to receive new sources of income in the same tax year.

You might pay some 40% tax when taking income out of the pensions as Linton mentioned but HMRC will refund any tax which is more than you actually need to pay for the tax year in question.

jamesrobins

It is worth looking at PensionBee. Can be used online or as an app on a smart phone. Not the cheapest platform but not too bad either. It makes the transfer process painless and you just have to provide basic details.

You can always use them to get it all in one pot then transfer that pot into a cheaper SIPP later on.