Advice on drawing from pension pots

Blackcats

Good evening wise people.
I'm enquiring for a friend - honestly! I'm a boring (but lucky) public sector pension person so I don't have too much complexity to worry about.
Background
My friend is 61 and does not work or have any other source of income.
They do however have a full state pension to look forward to (all checked and confirmed)
Because of this site they have paid the £2000 ish into a SIPP with Hargreaves Lansdown to get HMRC contribution and now have around £10,000 in there,
Again, because of reading posts on here, they have tracked down two long forgotten pension pots. They are with different providers and one has approx £20,000 in and the other £70,000. So grateful that they took the trouble to trace old pensions.
The question is to ask for help to work out the most tax efficient way to get the money out of the pots before state pension kicks in. Their day to day living costs are covered by their OH.
I hope that's enough information. Thanks in advance for any suggestions.

El_Torro

The most tax efficient way to withdraw the cash is to take enough to fill their Personal Allowance. Don't forget they can also either take 25% of the whole pot straight away tax free, or 25% of what they take will be non taxable each year.

So, assuming they have no other income then they can take £15,625 per year (£12,500 for the personal allowance, plus 25%). Keep note of what the personal allowance is each year, it tends to increase every year.

Doing that should mean that the whole pot is taken tax free, and the pot should be empty in about 6 years time.

Of course once they start claiming State Pension this will also eat into the Personal Allowance.

MrsFingersCrossed

We've been doing this for the last five years. Your friend has roughly 5 years to do the same. I think the best way is to take the 25% tax-free cash from each pot. Then from one pot at a time, withdraw up to their annual personal allowance. They will be taxed but they can claim that back straight away - no need to wait till the end of the tax year.

I haven't done the sums but if there's any left by the time your friend draws a state pension then they could top up whatever is left of their annual allowance from the what remains in their pot. I would get rid of one pot at a time so there's less room for confusion.

NedS

Blackcats wrote: »

Because of this site they have paid the £2000 ish into a SIPP with Hargreaves Lansdown to get HMRC contribution and now have around £10,000 in there,

And in the meantime, don't forget to keep paying in £2880 every year to keep getting the £720 top up from HMRC

green_man

El_Torro wrote: »

So, assuming they have no other income then they can take £15,625 per year (£12,500 for the personal allowance, plus 25%). Keep note of what the personal allowance is each year, it tends to increase every year.
.

isnt it £16,666 that they can take? 25% of this would be tax exempt which is £4166 leaving £12500 as taxable, so if this is your only income then no tax to pay.

Albermarle

The above advice is correct ( and yes £16,666 is the max you can take tax free each year)
However normally you need a relatively modern pension to have the ability to withdraw money in a flexible way . An old pension may be very restrictive in what toy can do.
So the first move is to transfer the old ones into the HL one .
Then make sure the £100K is invested in suitable funds within the HL SIPP for their situation ( avoid any HL recommendations which always have high charges )
Then they can discuss options with HL for withdrawing the money in a tax efficient way along the lines discussed above .

LHW99

Of course once they start claiming State Pension this will also eat into the Personal Allowance.

Although if the pot lasts until after SPA, then they can defer their SP, and get (around 5.8%) increase per year deferred. Increase builds up per 9 weeks deferred I believe.

GunJack

At 61 and no income source, why aren't they claiming benefits or getting a job when they have such a small pension pot? Even £70-odd JSA/UC a week would be better than nowt

Not having a dig, just wondering...

MrsFingersCrossed

"At 61 and no income source, why aren't they claiming benefits or getting a job when they have such a small pension pot? Even £70-odd JSA/UC a week would be better than nowt"

We're in a similar position (retired early after redundancy, living off small pots & equity from downsizing) and could claim JSA but don't want the hassle. You have to attend every week which is an unpleasant experience and prove that you are applying for jobs, and then all the stress and travel costs of attending interviews for jobs we don't want. We would both have to look for work in a different field to our earlier professional working lives, probably in retail or something, which would mean starting at the bottom probably on minimum wage.

If we were desperate for money with outstanding debt we'd do it but I think we're on track to manage fine so overall for us it's not worth the hassle and I imagine other people might feel the same.

We don't want paid employment, we're busy renovating our house. The money would be very handy, and the NI payments towards state pension would be extremely welcome but overall we prefer not to.

Blackcats

Thank you all so much for your replies. I shared with my friend and they were amazed at the generous and thoughtful help provided.

El Torro, Mrs Fingerscrossed and Greenman - thanks for clarifying the figures and for giving some options on a strategy. It's really helped formulate a plan.

NedS - indeed they will continue with the £2880. Without this site my friend wouldn't have had the 3 x £700 ish payments they have received so far.

LHW99 - I didn't know about deferring state pension - I'll do more research on that. Can you get the %increase for deferring even if you are eligible for full pension payment?

Gun jack - a good question. Their OH works in a quite well paid job and has good pension provision so my friend is a stay at home person by choice. We have talked about claiming benefits but like Mrs Fingerscrossed it just didn't seem appropriate to do so.

Mrs Fingerscrossed - are you enjoying retirement? Sounds like you have built yourselves a good way of life.

Thanks again

GunJack

Blackcats wrote: »

Gun jack - a good question. Their OH works in a quite well paid job and has good pension provision so my friend is a stay at home person by choice. We have talked about claiming benefits but like Mrs Fingerscrossed it just didn't seem appropriate to do so.

Thanks, that makes much more sense now...in isolation it seemed like a strange position to be in