The small pots regime

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  • AlbermarleAlbermarle Forumite
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    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.

    This is correct, you have to take the whole small pot in one go, leaving zero behind.
    Fidelity will facilitate a withdrawal of a genuine small pot under the small pots rule, but will not split off small pots from a bigger one . Don't blame then as must be a lot of faffing around for little reward, and it is against the spirit if the Small pot rule, and probably they therefore do not want to get involved. Not sure why HL do to be honest.
  • BimblyBimbly Forumite
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    SarahB16 said:
    Say for example, my DC pot is worth £45k and I take £10k out on three separate occasions there will be £15k left.  
    Just to be clear, you have to take the whole pot under the small pots rule, not just withdraw £10k. So you must transfer the 10k to another pension and then withdraw it under the small pots rule. In rare cases, a platform may agree to split off the 10k for you.

    You may have understood that, but I wanted to make sure.
  • SarahB16SarahB16 Forumite
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    Bimbly said:
    SarahB16 said:
    Say for example, my DC pot is worth £45k and I take £10k out on three separate occasions there will be £15k left.  
    Just to be clear, you have to take the whole pot under the small pots rule, not just withdraw £10k. So you must transfer the 10k to another pension and then withdraw it under the small pots rule. In rare cases, a platform may agree to split off the 10k for you.

    You may have understood that, but I wanted to make sure.
    I didn't understand that (not sure I even do now) so thank you for adding that.  I had been under the impression I could withdraw (subject to Standard Lite's agreement) 3 x £10k pots and simply have Standard Life transfer the money to my bank account (less any personal tax due). 

    Note, this is something I would do after the age of 57 (realistically at the age of 62ish I think). 

    The only other pension schemes I have are a current DB scheme and an old DB scheme.  

    On the assumption Standard Life agree to this @Bimbly would you mind literally telling me, step by step, what I would need to do please? 

    When we talk of the whole pot I interpret one whole pot to be a £10k pot.  I'm not bothered about taking less than £10k.  From what I'm reading this sounds like it's going to be an absolute nightmare (and not even sure Standard Life would agree to it).  I think I'll probably just take the 25% tax free and then the rest would be a pension but I do like to weigh up my options. 

    However, as I can make AVC contributions via salary sacrifice I know this DC pot is using up part of my LTA and would prefer to free up £30k of my LTA if I can do.  

    If I have interpreted this correctly the steps seems to be.

    1.) Keep up to date with the small pots rule as this is c.10 years away. 
    2.) Contact (in 10 years' time) Standard Life and see if they would agree to this. 
    3.) On the assumption they do it would appear I need to set up a new personal pension?  (Please can somebody provide me of the details - what type of pension?  This may be helpful information but somebody considering doing this in 2022/23). 
    4.) Ask Standard Life to transfer the £30k into my new personal pension. 
    5.) Withdraw the £30k (either in one go or in three separate instalments).  Noting 25% will be tax free and the rest will depend upon whether I have used my personal allowance that year.  My current thinking is perhaps draw this money just after I have stopped work/retired (in the following tax year so use my personal allowance against the £30k) and then my DB pension and AVC pot the year after (something to consider for the future not now).  
    6.) The balance left with Standard Life (if there is a balance) to be taken as 25% tax free and the rest as a very small pension. 

    It would appear there is a lot more to it than I originally thought and would be grateful for some more help please as I don't fully understand what the required steps are.    

  • AlbermarleAlbermarle Forumite
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    As already said it is very unlikely that Standard Life will do this for you. 

    You have to remember that it is exploiting a loophole, so many mainstream providers will not be willing to do that for the very very small number of customers, who would be interested to do it.



  • BimblyBimbly Forumite
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    SarahB16 said:
    On the assumption Standard Life agree to this @Bimbly would you mind literally telling me, step by step, what I would need to do please? 
    I doubt Standard Life will do this.

    The point of the small pots rule is for someone who has very small pension from, say, an employer they were with for only a year, they can withdraw the money and close it down without worrying about damaging their ability to continue to pay into another pension such as with their current employer.

    Step by step? Well, I haven't done it. But I understand, call Hargreaves Lansdown, say you want to transfer in £30k to split into three to withdraw under the small pots rule. Or call three other providers and transfer £10k into each one. Then hope Standard Life will allow partial transfers out.

    It seems this plan of yours is some years out? The alternative is to open pensions (SIPPs) with other providers and contribute to these so you have up to three small pots in these SIPPS. That is rather cumbersome.

    All this assumes the small pots rule continues to exist until the time you want to use it.

  • CusCus Forumite
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    So only one provider offers this. The purpose of the small pot is being misused, so seems like a legal loophole. I would not be surprised if there is retrospective tax penalty applied for historically using this to reduce LTA tax, or at least this loophole closed. Imo.
  • edited 25 November 2022 at 7:58PM
    Dazed_and_C0nfusedDazed_and_C0nfused Forumite
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    edited 25 November 2022 at 7:58PM
    4.) Ask Standard Life to transfer the £30k into my new personal pension. 

    5.) Withdraw the £30k (either in one go or in three separate instalments). Noting 25% will be tax free and the rest will depend upon whether I have used my personal allowance that year. My current thinking is perhaps draw this money just after I have stopped work/retired (in the following tax year so use my personal allowance against the £30k) and then my DB pension and AVC pot the year after (something to consider for the future not now).  
    You do realise that taking it in three separate instalments of £10k each isn't going to come under the "small pots" rules?

    And would trigger MPAA.
  • BimblyBimbly Forumite
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    If you have time to retirement, you'd probably be better off to just save the money you think you are going to need outside of the pension.
  • AlbermarleAlbermarle Forumite
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    So only one provider offers this. The purpose of the small pot is being misused, so seems like a legal loophole. I would not be surprised if there is retrospective tax penalty applied for historically using this to reduce LTA tax, or at least this loophole closed. Imo

    Only one retail provider, but I think some providers/platforms used by financial advisors will do it as well.

    It is a loophole, or a rule that is being misused. However I guess it will be way down any priority list for pensions reform, as the amounts of people using it/money involved is not large

    It seems this plan of yours is some years out? The alternative is to open pensions (SIPPs) with other providers and contribute to these so you have up to three small pots in these SIPPS. That is rather cumbersome.

    In fact it is rather easy to do this. You can open a SIPP on line in a few minutes and add around £7500, then just take it when you are ready. Probably best to wait though until you are relatively close to retiring, in case something changes, or they grow bigger than £10K

  • SarahB16SarahB16 Forumite
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    I'm 50 and am just being sensible thinking ahead to when I can retire and don't wish to look back and think why didn't I do this or that hence why I enjoy reading the wonderful threads on this forum. 

    Thank you for all the wonderful replies I have received.  I didn't realise this was viewed as a tax loophole or a rule that is misused.  I will simply take that pension from Standard Life when I decide to retire/decide I need it. 

    I'm currently making additional provision for my retirement via my salary sacrifice LGPS AVC contributions as well as of course continuing to contribute to my work pension scheme. 

    Thank you all again.  
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