The small pots regime

MoneySavingGerbil

Cus said:

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.

The key word there is legal loophole. I don't see it as much different then a salary sacrifice scheme allowing me to legally reduce NI contributions. Rather than speculating about HMRC penalties being retrospectively applied which always seems to rear its head at some point in discussions on the small pots rule it might be helpful to post the text from a previous 2021 thread on the subject

From the Pension Tax Manual:

"..an individual can be given more than one small lump sum each not exceeding the limit that applied at the time the lump sum was paid, if all the other conditions are met. It should be noted that Regulation 11A applies at arrangement level rather than at scheme level. So the payments can be made from two/three separate registered pension schemes or from the same scheme where the payments are made from two/three different arrangements under that scheme."

The piece in bold is presumably why HL feel comfortable doing it and why i would suspect any retrospective action by HMRC would likely fail. As to whether it's in any way profitable for HL to offer it I agree with @Albermarle and others, they must be mostly losing money on it and if it's still available next year when my wife wants to use it then it's a bonus and if not we won't cry.

Albermarle

As to whether it's in any way profitable for HL to offer it I agree with @Albermarle and others, they must be mostly losing money on it and if it's still available next year when my wife wants to use it then it's a bonus and if not we won't cry.

I presume HL are hoping that once you have an account with them, and you like the service etc , then you may invest more/stick with them.

NedS

Albermarle said:

MoneySavingGerbil said:

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.

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.

As you can open as many SIPPs as you want, I deliberately contrived a small pot knowing I would want to take at least one small pot shortly after turning 55, and did not want to trigger the MPAA. I opened a new SIPP with Fidelity, and contributed just enough into it to keep it at the level I wanted to take as a small pot.

If you are a way off 55 (or 57), you have plenty of time to build 3 genuine small pots with 3 different providers, just in case HL change their position, and if the small pots rule goes away, you've lost nothing and can easily transfer the small pots into the main SIPP. So from a planning position, it makes sense to start to build 3 small pots in anticipation if you think you may have a reason to make use of them.

Albermarle

NedS said:

Albermarle said:

MoneySavingGerbil said:

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.

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.

As you can open as many SIPPs as you want, I deliberately contrived a small pot knowing I would want to take at least one small pot shortly after turning 55, and did not want to trigger the MPAA. I opened a new SIPP with Fidelity, and contributed just enough into it to keep it at the level I wanted to take as a small pot.

If you are a way off 55 (or 57), you have plenty of time to build 3 genuine small pots with 3 different providers, just in case HL change their position, and if the small pots rule goes away, you've lost nothing and can easily transfer the small pots into the main SIPP. So from a planning position, it makes sense to start to build 3 small pots in anticipation if you think you may have a reason to make use of them.

I did this in the last full year of employment. Added £7500 to each with £1750 tax relief added on. So there was some room to grow, without quickly passing the £10K limit. Currently that is not an issue......
It is best to do it with a provider with a % charge, due to the relatively low level of funds, and one who definitely will process a withdrawal under the small pots rule. Fidelity, HL and AJ Bell are all OK ( + others no doubt) but not Vanguard.