Small Pots Lump Sum OR Uncrystallised Funds Pension Lump Sum?

MySpinningHead

Sorry if this seems a silly question, but I'm looking into this for a relative who's looking to cash-in a small pension pot of less than 5k.

Bearing in mind they don't have any other pots or plans for future contributions, which option would be most suitable?  I'm just wondering if there's anything that needs to be considered or which I / we need to be aware of before proceeding.

From my understanding, the Uncrystallised option entails lifetime allowances and MPAA - both of which are irrelevant here due to size of pot(?) and that in certain circumstances, this would be suitable for someone needing to drawdown in installments (or more than 3 compared to Small Pots option) - for flexibility?

The Small Pots options seem to attract a straight 20% basic rate tax on the remaining 75% of the pot, whereas the Uncrystallised option has a smaller tax amount deducted - think it's emergency tax M1 basis, so 1 / 12th of personal allowance, offset against remaining 75% - thus smaller tax amount due.

Other than state pension, they don't have any other income, so it is likely tax will be refunded in due course.

So is it just a case of how much tax they're happy to have deducted upfront?

What are they main differences between Small Pots and UFPLS?

Thanks for any advice.

NoMore

The tax will be the same for both, 25% tax free and the rest taxable. The small pots withdrawal merely has the advantage of not triggering the MPAA or the LTA (or new Lump Sum allowance), so if you say these are irrelevant then it doesn't matter which method you use. I suspect UFPLS will be less admin, but not much in it.

molerat

NoMore said:

The tax will be the same for both, 25% tax free and the rest taxable. The small pots withdrawal merely has the advantage of not triggering the MPAA or the LTA (or new Lump Sum allowance), so if you say these are irrelevant then it doesn't matter which method you use. I suspect UFPLS will be less admin, but not much in it.

As OP states, the 75% taxable element will be taxed on a different basis according to the type of withdrawal, BR for a small pot and 1257M1 for a UFPLS.   Of course it will all come out the same in the end but will differ at the point of payment.

MySpinningHead

NoMore said:

The tax will be the same for both, 25% tax free and the rest taxable. The small pots withdrawal merely has the advantage of not triggering the MPAA or the LTA (or new Lump Sum allowance), so if you say these are irrelevant then it doesn't matter which method you use. I suspect UFPLS will be less admin, but not much in it.

Thanks for your reply.  When you say UFPLS will be less admin, in what regard and to whom?  Less admin for my relative?

MySpinningHead

molerat said:

NoMore said:

The tax will be the same for both, 25% tax free and the rest taxable. The small pots withdrawal merely has the advantage of not triggering the MPAA or the LTA (or new Lump Sum allowance), so if you say these are irrelevant then it doesn't matter which method you use. I suspect UFPLS will be less admin, but not much in it.

As OP states, the 75% taxable element will be taxed on a different basis according to the type of withdrawal, BR for a small pot and 1257M1 for a UFPLS.   Of course it will all come out the same in the end but will differ at the point of payment.

Thanks for clarifying - exactly this; taxed differently, I suspect end result will be the same considering the circumstances outlined.

So it looks as if it doesn't matter too much which option to take?

Ciprico

Not all pension companies offer small pots.

That could impact your options

MySpinningHead

Ciprico said:

Not all pension companies offer small pots.

That could impact your options

Those were the two options presented when a cash-in request was made.

NedS

Personally I would still use the Small Pots option, as although you state MPAA is not considered an issue now, you never know what the future may hold, so why close off that option unnecessarily. What if a future government drastically reduces the MPAA limit and the person gets a small part time job with DC pension.

dunstonh

Going with small pots would be the most logical option.   You never know what changes in future and small pots is the least restrictive.

MySpinningHead

Thanks NedS and dunstonh for your further comments.

Under the circumstances, I am also leaning towards the Small Pots option as that seems to be less restrictive, despite no plans for future contributions etc.  The only difference in this case is really the tax upfront, but I'm intrigued into NoMore's comment regarding potentially less admin using UFPLS.

NedS

MySpinningHead said:

Thanks NedS and dunstonh for your further comments.

Under the circumstances, I am also leaning towards the Small Pots option as that seems to be less restrictive, despite no plans for future contributions etc.  The only difference in this case is really the tax upfront, but I'm intrigued into NoMore's comment regarding potentially less admin using UFPLS.

I did a Small Pots withdraw last year through Fidelity, and it was not onerous - a phone appointment was arranged and forms were sent for me to complete and return. I am not sure any providers offer a fully online service without having to complete and return some paperwork.