The small pots regime

SarahB16

I would like to better understand the small pots regime if anybody could kindly explain this rule to me please or perhaps post a link that I can read.  I have tried to look up how it can be applied but I’m still not sure.  I should add that @Marcon has recently very helpfully replied to somebody’s post and my understanding is much better but if I could post my questions and share my retirement forecasts. 

My forecast retirement income:

DB scheme 1 (from previous employer) - intend to take as 100% pension (i.e. not take the tax free lump sum)

DC scheme (the subject of my query and currently worth c.£12k and I am no longer paying into it) (from another previous employer and did not work there very long) - this is continuing to grow each year (not received the performance for this year yet though!)

DB scheme 2 (current employer) - contributing to and intend to take as 100% pension

LGPS AVC contributions via salary sacrifice (current employer) - I have only just begun contributing to this but will continue throughout the rest of my career whilst working for this employer and intend to ensure I never pay 40% tax. 

I have created a spreadsheet and I forecast and monitor the size of my AVC contributions pot and I also include 20 x the forecast DB schemes to ensure I am never forecast to exceed the lifetime allowance (unlikely but you never know what the future holds). 

This brings me to my question.  Would I be able to take the pot of money I have in the DC scheme via the small pots regime so that it does not count towards my lifetime allowance? 

I believe I can take three amounts each of £10k or less (including taking them in the same year) and this will not count towards my lifetime allowance and this will not trigger a crystallisation.  Is that correct?  

Am I also correct in thinking I would not pay tax on this money if taken via the small pots regime?  

The amount is relatively small at currently only £12k but with another 12 to 14 years until I am likely to retire it will hopefully continue to grow.

For the purpose of helping me to understand the small pots regime let’s say my understanding is correct and you can take three pots of £10k each what are you allowed to do with what is remaining. Say for example, my DC pot is worth £45k and I take £10k out on three separate occasions there will be £15k left.  Then only the remaining £15k would count towards my LTA and I presume could be taken as a small pension or 25% tax free lump sum with the rest as a pension? 

Thank you for your help. 

MoneySavingGerbil

SarahB16 said:

This brings me to my question.  Would I be able to take the pot of money I have in the DC scheme via the small pots regime so that it does not count towards my lifetime allowance? 

I believe I can take three amounts each of £10k or less (including taking them in the same year) and this will not count towards my lifetime allowance and this will not trigger a crystallisation.  Is that correct?  

Am I also correct in thinking I would not pay tax on this money if taken via the small pots regime?  

The amount is relatively small at currently only £12k but with another 12 to 14 years until I am likely to retire it will hopefully continue to grow.

For the purpose of helping me to understand the small pots regime let’s say my understanding is correct and you can take three pots of £10k each what are you allowed to do with what is remaining. Say for example, my DC pot is worth £45k and I take £10k out on three separate occasions there will be £15k left.  Then only the remaining £15k would count towards my LTA and I presume could be taken as a small pension or 25% tax free lump sum with the rest as a pension? 

Thank you for your help. 

Each small pot of £10K that you carve out would give you £2.5K tax free and £7.5K taxable income. Whether you pay tax on that £7.5K will depend on whether you've got other income coming in and exceed your personal allowance. So if you do all three small pots in the same year for the maximum of £10K each you'd get a total of £7.5K tax free and £22.5K taxable income in that year. Small pots don't get you round the 55 pension age access restriction though, so with 12 to 14 years before you plan on retiring are you definitely over 55? (cheeky question I know)

SarahB16

MoneySavingGerbil said:

SarahB16 said:

This brings me to my question.  Would I be able to take the pot of money I have in the DC scheme via the small pots regime so that it does not count towards my lifetime allowance? 

I believe I can take three amounts each of £10k or less (including taking them in the same year) and this will not count towards my lifetime allowance and this will not trigger a crystallisation.  Is that correct?  

Am I also correct in thinking I would not pay tax on this money if taken via the small pots regime?  

The amount is relatively small at currently only £12k but with another 12 to 14 years until I am likely to retire it will hopefully continue to grow.

For the purpose of helping me to understand the small pots regime let’s say my understanding is correct and you can take three pots of £10k each what are you allowed to do with what is remaining. Say for example, my DC pot is worth £45k and I take £10k out on three separate occasions there will be £15k left.  Then only the remaining £15k would count towards my LTA and I presume could be taken as a small pension or 25% tax free lump sum with the rest as a pension? 

Thank you for your help. 

Each small pot of £10K that you carve out would give you £2.5K tax free and £7.5K taxable income. Whether you pay tax on that £7.5K will depend on whether you've got other income coming in and exceed your personal allowance. So if you do all three small pots in the same year for the maximum of £10K each you'd get a total of £7.5K tax free and £22.5K taxable income in that year. Small pots don't get you round the 55 pension age access restriction though, so with 12 to 14 years before you plan on retiring are you definitely over 55? (cheeky question I know)

Thank you that's really helpful.

I'm not needing to take 'a small pot' at the moment it was more from a retirement planning perspective that I was asking question.  I'm 50 and my current thinking is that I'll probably be able to retire at some time between the age of 62 to 64.  

Secret2ndAccount

Bear in mind that legislation, and the willingness of providers to split off small pots for you, can change over that period of time. No harm in fully understanding the current rules though.
To be eligible, a pot must be a DC pension, not previously drawn upon, worth less than or equal to 10k, and taken in its entirety.
Pensions cashed in under the small pots rule do not count against the LTA.
Whatever is left in your pot after the small pots are sliced off is just a pension that you haven't started taking, so all usual rules apply.
You haven't asked about MPAA, but for info: if you start to draw down from the DC pensions, this limits your annual total pension contributions to £4,000 (that's you + your employer + inflation increase in DB pensions). However, taking a small pot, or a DB pension, or just the tax free part from a DC pot does not trigger this rule, so your current annual limit is 40k.

Marcon

Secret2ndAccount said:

You haven't asked about MPAA, but for info: if you start to draw down from the DC pensions, this limits your annual total pension contributions to £4,000 (that's you + your employer + inflation increase in DB pensions). However, taking a small pot, or a DB pension, or just the tax free part from a DC pot does not trigger this rule, so your current annual limit is 40k.

To complete the picture - if you use your DC pot to buy an annuity, that doesn't trigger the MPAA either.

The £40K limit may in practice be much lower depending on your earned income.

Albermarle

Bear in mind that legislation, and the willingness of providers to split off small pots for you, can change over that period of time

AFAIK, the only retail pension provider, who is willing to split off three small pots from a bigger pot is HL. I understand that some providers used by financial advisors will also do this.

It is not surprising others are not interested, as it must be a lot of admin for almost zero reward.

Some providers will not even let you even withdraw one small pot under the 'small pots rule' and just treat it as a normal UFPLS payment. Vanguard is one I think. 

SarahB16

Albermarle said:

Bear in mind that legislation, and the willingness of providers to split off small pots for you, can change over that period of time

AFAIK, the only retail pension provider, who is willing to split off three small pots from a bigger pot is HL. I understand that some providers used by financial advisors will also do this.

It is not surprising others are not interested, as it must be a lot of admin for almost zero reward.

Some providers will not even let you even withdraw one small pot under the 'small pots rule' and just treat it as a normal UFPLS payment. Vanguard is one I think. 

The DC scheme I have is an old work pension scheme run by Standard Life.  I don't suppose you know if Standard Life would do this?  

MoneySavingGerbil

I suspect it's unlikely that Standard Life would do it. A couple of years ago we realised my wife was likely to be over the LTA. We transferred her Standard Life DC workplace scheme she was no longer contributing to, to AJ Bell and then sent 35K to Hargreaves Lansdown ready to do the 3 x Small Pots with it when she was no longer working. She's thinking about giving up next year and is currently at 103% of LTA, but with two further RPI increases due to be applied to a deferred DB scheme before it comes into payment at 60 she's going to be even further over.
We plan on asking HL to start the 3 x Small pots after April 2023 and will report back here on the outcome. If they won't still do it than it's no big issue, but if they do then it's an extra £7500 that we'll get as a tax free sum that HMRC would have taken as an LTA charge.

On a side note we're now consolidating everything with Fidelity after a suggestion that I think came from Albermarle :-) No idea what their policy is on small pots but we've got HL for that and will probably close the HL account once it's done.

Albermarle

SarahB16 said:

Albermarle said:

Bear in mind that legislation, and the willingness of providers to split off small pots for you, can change over that period of time

AFAIK, the only retail pension provider, who is willing to split off three small pots from a bigger pot is HL. I understand that some providers used by financial advisors will also do this.

It is not surprising others are not interested, as it must be a lot of admin for almost zero reward.

Some providers will not even let you even withdraw one small pot under the 'small pots rule' and just treat it as a normal UFPLS payment. Vanguard is one I think. 

The DC scheme I have is an old work pension scheme run by Standard Life.  I don't suppose you know if Standard Life would do this?  

I would be pretty sure they would not split three small pots off. Maybe if your actual pot was less than £10K you could withdraw it under the small pots rule.
If you are still adding to your pension, an alternative way is to set up three new pensions and add a bit less than £10K to them ( including tax relief) and divert savings or contributions to them, if practical. Then withdraw each one later under the Small Pots Rule. I know for sure you can do this with HL, AJ Bell and Fidelity. As they all only charge a % of your money, the charges are low.

ex-pat_scot

MoneySavingGerbil said:

I suspect it's unlikely that Standard Life would do it. A couple of years ago we realised my wife was likely to be over the LTA. We transferred her Standard Life DC workplace scheme she was no longer contributing to, to AJ Bell and then sent 35K to Hargreaves Lansdown ready to do the 3 x Small Pots with it when she was no longer working. She's thinking about giving up next year and is currently at 103% of LTA, but with two further RPI increases due to be applied to a deferred DB scheme before it comes into payment at 60 she's going to be even further over.
We plan on asking HL to start the 3 x Small pots after April 2023 and will report back here on the outcome. If they won't still do it than it's no big issue, but if they do then it's an extra £7500 that we'll get as a tax free sum that HMRC would have taken as an LTA charge.

On a side note we're now consolidating everything with Fidelity after a suggestion that I think came from Albermarle :-) No idea what their policy is on small pots but we've got HL for that and will probably close the HL account once it's done.

I'm using Fidelity for everything apart from current employment GPPP scheme. Not sure if it will do the "small pots" - to be honest I've not yet investigated the decumulation offerings from Fidelity or others. I suspect I'll use HL as a small pots vehicle, as a temporary arrangement, once I hit 55 in about 18 months or so.
There seems to be no reason not to crystallise the small pots asap at 55, take the TFLS and leave the 75% invested until needed (I know it doesn't trigger the MPAA but don't really want to get hit with 60% marginal tax rate by drawing the 75% whilst still working).

MoneySavingGerbil

ex-pat_scot said:

MoneySavingGerbil said:

I suspect it's unlikely that Standard Life would do it. A couple of years ago we realised my wife was likely to be over the LTA. We transferred her Standard Life DC workplace scheme she was no longer contributing to, to AJ Bell and then sent 35K to Hargreaves Lansdown ready to do the 3 x Small Pots with it when she was no longer working. She's thinking about giving up next year and is currently at 103% of LTA, but with two further RPI increases due to be applied to a deferred DB scheme before it comes into payment at 60 she's going to be even further over.
We plan on asking HL to start the 3 x Small pots after April 2023 and will report back here on the outcome. If they won't still do it than it's no big issue, but if they do then it's an extra £7500 that we'll get as a tax free sum that HMRC would have taken as an LTA charge.

On a side note we're now consolidating everything with Fidelity after a suggestion that I think came from Albermarle :-) No idea what their policy is on small pots but we've got HL for that and will probably close the HL account once it's done.

I'm using Fidelity for everything apart from current employment GPPP scheme. Not sure if it will do the "small pots" - to be honest I've not yet investigated the decumulation offerings from Fidelity or others. I suspect I'll use HL as a small pots vehicle, as a temporary arrangement, once I hit 55 in about 18 months or so.
There seems to be no reason not to crystallise the small pots asap at 55, take the TFLS and leave the 75% invested until needed (I know it doesn't trigger the MPAA but don't really want to get hit with 60% marginal tax rate by drawing the 75% whilst still working).

I stand to be corrected but I don't believe you can leave the 75% taxable element invested. The small pots rule is intended for winding up pensions therefore the 75% is counted as taxable income in the year it's triggered. OH has exactly the same issue as you. She doesn't want to get hit by 60% marginal rate of tax by taking the small pots now, or even 40% tax by taking it at 60 when her DB pension is in payment. The plan is to do 2/3 or even 3/3 next year in the window between stopping working and the DB pension coming into payment.