Small Pot Pensions....

[LC0112G]

So have I got this right?

My DC's are uncrytalised pots?  At the point I start to draw down, or want to take 25% tax free, it becomes crystallised?

Yes.

Plus I'm lucky enough to have a DB, so is that the same?

No.

DB's are a contract between you and whoever the provider is. There may not even be a pot of money - depends who the DB pension is with. You have a promise (contract) that says they will pay you whatever and whenever that contract says. There are thousands of different DB schemes, so its difficult to generalise since every scheme has it's own rulebook.

[LC0112G]

When I did my " retirement course" in the civil service our trainer said the most important thing is of course " living to retirement age" always remembered his words & took every penny that I was entitled to as soon as it was available to me & made sure we enjoy it, I can honestly say that I never really thought about retirement or put money aside for it but simply made sure that my employer/s provided a decent one. Retirement is great once you reach it..👍

The issue is that the civil service scheme is a Defined Benefit (aka DB, final salary or career average salary) scheme. There is no pot of money - it's paid for out of taxation. The money you paid in was NOT put into a pot reserved your you - it was pi55ed up the wall by a previous govt. That doesn't matter to you because you have a DB contract, so if they have to the current govt will just put up taxes, or borrow, or print more money to pay you whatever your contract says.

The rules for crystallising and TFLS's only apply to Defined Contribution (DC) schemes - which do have pots of money/assets assigned to the individual.

It doesn't help when people conflate DC and DB schemes because they are two completely different animals with very different rules.

[LC0112G]

So have I got this right?

My DC's are uncrytalised pots?  At the point I start to draw down, or want to take 25% tax free, it becomes crystallised?

Yes.

With the proviso that you don't have to crystallise the whole of any one pot at one time. Only the part you put into drawdown and/or take the TFLS from is crystalised.

Suppose you have a £80K pot, and want to take out £20K over the next 4 years till it's all gone. In the subsequent years you have...

[End of Year 0]
£80K uncrystallised pot.

[Start of Year 1] - you crystallise £20K of the £80K uncrystallised pot. You end up with...
£60K uncrystallised pot
£5K TFLS which you take out immediately and buy that OmegaB from eBay that you've always wanted.
£15K in a crystallised pot which you draw down as income at £1250 per month, paying whatever tax you are liable for.

[End of Year 1]
£60K uncrystallised pot
One OmegaB

[Start of Year 2] - you crystallise another £20K from the remaining £60K uncrystallised pot. . You end up with...
£40K uncrystallised pot
£5K TFLS which you take out immediately and buy another OmegaB from eBay for the missus.
£15K in a crystallised pot which you draw down as income at £1250 per month, paying whatever tax you are liable for.

[End of Year 2]
£40K uncrystallised pot
Two OmegaB's

[Start of Year 3] - you crystallise another £20K from the remaining £40K uncrystallised pot. . You end up with...
£20K uncrystallised pot
£5K TFLS which you take out immediately and buy another OmegaB from eBay for your son.
£15K in a crystallised pot which you draw down as income at £1250 per month, paying whatever tax you are liable for.

[End of Year 3]
£20K uncrystallised pot
Three OmegaB's

[Start of Year 4] - you crystallise the final £20K from the uncrystallised pot
£0K uncrystallised pot
£5K TFLS which you take out immediately and buy another OmegaB from eBay for the daughter.
£15K in a crystallised pot which you draw down as income at £1250 per month, paying whatever tax you are liable for.

[End of Year 4]
0K uncrystallised pot
Four OmegaB's, and a realisation that buying OmegaB's from eBay might not have been your greatest idea.

[jonathanh]

Can you explain crystallisation?

One of the  'naughty' but conditionally legal things you can do is crystallise £100K, take the £25K TFLS, and then pay it straight back into the pension. If you're a 40% tax payer, the tax man will gross up your £25K, to (effectively) £42K, and the pension co will add that into your uncrystallised pot. So you end up with £942K in the uncrystallised pot, and £75K in the crystallised pot. Don't touch the £75K crystallised pot, rinse and repeat for a few years......There are rules and regulations on what is called pension re-cycling, but with a bit of planning you can do this perfectly legally.

except the money purchase annual allowance will apply so you'll not get tax relief on anything over £10k going in to the pension??? ah i see, not withdrawing the taxable bit gets around it, sorry

[ronnyd]

On a slightly different note, my small private pension pot has almost run itself down, and as i took the 25% tax free sum when i started, i was wondering about the tax implications of either, taking the small amount left in one go, or letting it run down naturally.

[LC0112G]

On a slightly different note, my small private pension pot has almost run itself down, and as i took the 25% tax free sum when i started, i was wondering about the tax implications of either, taking the small amount left in one go, or letting it run down naturally.

Not sure what you mean by "letting it run down naturally". Are you currently taking a regular income from it? Or is it's value being eroded by charges?

Anyhow, if you take whatever remains in the pot as a single lump sum, then that value will be a treated as income in the current tax year. You will therefore pay 20%, or 40%, or 45% of the whole amount in tax, depending upon what your other income(s) is(are) for the current tax year. If whatever you take could push you over the edge into the next tax band (£50K for the 20%-40% band, or £125K for the 40%-45% band) , you'll pay some tax at the higher rate.

IMV it would be unwise to take any lump sum that would push you into the next higher tax band.

[ronnyd]

Sorry, yes i'm taking a monthly amount from it.
Thanks LC

[ronnyd]

On a slightly different note, my small private pension pot has almost run itself down, and as i took the 25% tax free sum when i started, i was wondering about the tax implications of either, taking the small amount left in one go, or letting it run down naturally.

Not sure what you mean by "letting it run down naturally". Are you currently taking a regular income from it? Or is it's value being eroded by charges?

Anyhow, if you take whatever remains in the pot as a single lump sum, then that value will be a treated as income in the current tax year. You will therefore pay 20%, or 40%, or 45% of the whole amount in tax, depending upon what your other income(s) is(are) for the current tax year. If whatever you take could push you over the edge into the next tax band (£50K for the 20%-40% band, or £125K for the 40%-45% band) , you'll pay some tax at the higher rate.

IMV it would be unwise to take any lump sum that would push you into the next higher tax band.

The plan always was to take small monthly income, as the original pot was quite small in real terms. But it has been helpful over the last 17 years.

[LC0112G]

On a slightly different note, my small private pension pot has almost run itself down, and as i took the 25% tax free sum when i started, i was wondering about the tax implications of either, taking the small amount left in one go, or letting it run down naturally.

Not sure what you mean by "letting it run down naturally". Are you currently taking a regular income from it? Or is it's value being eroded by charges?

Anyhow, if you take whatever remains in the pot as a single lump sum, then that value will be a treated as income in the current tax year. You will therefore pay 20%, or 40%, or 45% of the whole amount in tax, depending upon what your other income(s) is(are) for the current tax year. If whatever you take could push you over the edge into the next tax band (£50K for the 20%-40% band, or £125K for the 40%-45% band) , you'll pay some tax at the higher rate.

IMV it would be unwise to take any lump sum that would push you into the next higher tax band.

The plan always was to take small monthly income, as the original pot was quite small in real terms. But it has been helpful over the last 17 years.

The tax implications will be the same either way providing the pot value wouldn't push you into the next tax band in the year you took the lump sum. You'll always pay 20/40/45% regardless of when/how.

Unless there is a good reason for taking it as a lump sum (like there is a good OmegaB on eBay you fancy) I'd be inclined to keep taking it as a regular income until the pot is exhausted.

[ronnyd]

On a slightly different note, my small private pension pot has almost run itself down, and as i took the 25% tax free sum when i started, i was wondering about the tax implications of either, taking the small amount left in one go, or letting it run down naturally.

Not sure what you mean by "letting it run down naturally". Are you currently taking a regular income from it? Or is it's value being eroded by charges?

Anyhow, if you take whatever remains in the pot as a single lump sum, then that value will be a treated as income in the current tax year. You will therefore pay 20%, or 40%, or 45% of the whole amount in tax, depending upon what your other income(s) is(are) for the current tax year. If whatever you take could push you over the edge into the next tax band (£50K for the 20%-40% band, or £125K for the 40%-45% band) , you'll pay some tax at the higher rate.

IMV it would be unwise to take any lump sum that would push you into the next higher tax band.

The plan always was to take small monthly income, as the original pot was quite small in real terms. But it has been helpful over the last 17 years.

The tax implications will be the same either way providing the pot value wouldn't push you into the next tax band in the year you took the lump sum. You'll always pay 20/40/45% regardless of when/how.

Unless there is a good reason for taking it as a lump sum (like there is a good OmegaB on eBay you fancy) I'd be inclined to keep taking it as a regular income until the pot is exhausted.

That's what i will do. Cheers LC.