I have multiple pension pots which I was advised to not bring together as I now don’t have enough time to recoup the transfer costs and they have continued to increase by small amounts each year.
I am 52 and plan to retire at 55, in summer 2022. I am in receipt of a Royal Air Force pension which will index link on my 55th birthday and is forecast to be £11,500 per year. Along with that I have four other pensions.
Pot 1: £40,000 frozen since 2010
Pot 2: £50,000 frozen since 2014
Pot 3: £90,000 current workplace pension (estimated value at age 55)
Pot 4: £181,000 current private pension (estimated value at age 55)
Retirement planning: Should I take 25% lump sums from all my pension pots at once, or draw from them in order?
My question is can I take the 25 per cent lump sum from all pensions at the same time, and then draw down each pension pot one at a time starting with the pot with the lowest amount in it?
Or should I take the lump sum from pot one and draw it down, then move on to pot two and so on?
Due to my Royal Air Force pension I can see no way of paying no income tax but would like to keep this to the lowest rate possible.
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Steve Webb replies: There are several things to think about when deciding whether to draw on your four pension pots, the order in which to draw on them, and whether to take just your tax-free lump sums or to go further.
Whilst I can’t give you personal advice (and given the amounts involved, I would have thought a one-off session with a financial adviser for an agreed fee would be money well spent) I can explain how the rules work and what you would need to think about.
Before we go into the details, it’s worth looking at the big picture.
Although you would like to retire at 55, you would still be relatively young.
Assuming you are in average health, you could easily live well into your 80s (or beyond) and this means your pension pots are going to have to last you a long time if you start accessing them at 55.
One option to think about would be working a bit longer and then enjoying a higher standard of living when you do stop work because your pots can be drawn down a bit more quickly.
Taking your 25% lump sums
If you decide to stick to your current plan, you could, if you wish, draw a 25 per cent tax-free lump sum from any or all of your pots once you reach 55.
You don’t have to do this all at the same time and your decision to draw tax-free cash from one of your pots has no effect on your ability to draw tax-free cash from the others.
The balance of any pot (eg the remaining 75 per cent) could then be invested in a drawdown account which you could access over time.
Alternatively, you can spread your tax-free cash over your retirement, with each withdrawal being a mixture of tax-free and taxable cash. The government’s PensionWise website is a useful source of factual information on your options.
However, for as long as you leave the money in your pension pots it should be growing if it is suitably invested. This means that unless you actually need the cash now, it is likely to be a better idea to leave the money in your pensions for as long as you can.
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When you do eventually draw a lump sum from the pension, it should then be larger because the fund has grown in the meantime.
Minimising your tax bill
With regard to tax, the current tax-free personal allowance is £12,500 a year and you would be using £11,500 of this via your RAF pension.
So, it sounds as though you could draw roughly £1,000 per year from one of your pensions (over and above any tax-free cash) without paying income tax.
What you should probably avoid doing is emptying out one of your larger pots all in one go.
This is because the money you take out of your pension (beyond the tax free lump sum) is treated as income in the year in which you withdraw it.
As higher rate income tax currently cuts in at £50,000 per year, if you took more than £38,500 of taxable cash in a lump sum then you would face higher rate tax on some of it.
There doesn’t seem to be any reason why you would want to do this.
Still on tax, you do need to be aware that once you start taking taxable cash out of one of your ‘pot of money’ pensions you are then heavily restricted on future saving into a similar pension.
So, for example, if you changed your plans and went back to work or wanted to do more pension saving in the future, you would be capped at just £4,000 of contributions per year on which you could get tax relief.
Deciding which pot to draw on first
In terms of which pot to access first, you may want to review the four different pots in terms of things like how the investment has been performing, how much you are being charged and whether there are any penalties for withdrawals before a certain age.
Obviously, as the regulators would point out, ‘past performance is not a guide to the future’, but if one of your pensions is in a high charging, poorly invested fund then that might be an obvious candidate to access first.
Topping up your current pension
I see that you are still in paid work and therefore presumably paying in to a workplace pension at the moment. If you are in a position to do so, you might want to think about maximising the amount you save into that pension, especially if you plan to retire soon.
For example, if you save a bit more you may find that your employer will match your extra contributions and that represents a fantastic rate of return on your additional savings, especially given that you would only be locking up the money for a few years.
Check your state pension
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He is ready to answer your questions, whether you are still saving, in the process of stopping work, or juggling your finances in retirement.
Since leaving the Department of Work and Pensions after the May 2015 election, Steve has joined pension firm Royal London as director of policy.
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