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Hi Charlene,
I have a pension pot of about £45,000 from a previous employer which I have “crystallised” and started to draw down from. However, I have noticed that it only grew by about £2,000 on a balance which then stood at £50,000. Is it too late to close the fund and switch to another provider, or is the pension pot now locked in?
I already have an extremely generous index-linked final salary pension of about £30,000 from another employer, plus my state pension (I am 71 years old) and so I don’t need the pot for a pension. I just kept the funds parked there out of harm’s way.
I am thinking of taking the tax hit and drawing it all out and just putting it into a long-term savings account.
What are the options?
Best regards,
- David
Dear David,
I don’t have all the information on your current plan and investments, so my answer is based on your broader options with your drawdown pot.
Unlike a pension annuity, you aren’t locked into the provider you started to draw down with. Transferring might benefit you if a new provider can offer the options and features you need at a lower ongoing cost – letting you keep more of your investment returns.
There might be other features you also value, such as a wider range of investment options to suit your needs, or better technology and customer service.
There are a couple of things to bear in mind. Firstly, HM Revenue and Customs rules mean you can’t split drawdown arrangements – so anyone thinking of making a drawdown transfer would need to be prepared to move their whole pot.
You might be out of the market or unable to make any investment changes while a transfer is going through, and while most providers have consigned transfer-out and exit fees to history, a few haven’t, so you should double check exactly what it might cost you to move.
But it sounds as if investment performance is bothering you the most. If the options are there, you could keep your current plan but review the underlying investments in line with your goal to keep the fund parked but growing in value over time.
These first two options will still require time and effort to manage the drawdown pot and review the investments over time, especially if you wanted to start or increase any income you take.
But keeping the pot does come with some big tax advantages if you don’t need to draw on it.
Any income and/or growth generated by your pension investments is sheltered from income and capital gains taxes, and the pot is outside of your estate for inheritance tax (IHT) purposes. Money can be passed on very tax efficiently to your loved ones from a pension pot, if that is something you’d like to consider.
In contrast, anything you withdraw from the pension will be subject to income tax – as you’ve noted.
Any interest on what you place in a cash account could be subject to tax, unless it was in a tax-efficient cash Isa, or you have sufficient personal savings allowance to cover the interest generated outside of an Isa each year. A cash account would also form part of your estate for IHT purposes.
Potential income tax if you withdraw the whole pot
I’ve assumed that the whole pot is crystallised, so there’s no further tax-free cash available.
Based on your existing defined benefit pot and state pension, taking the whole £45,000 at once would leave you with just over £28,750 after tax.
Because of the way pension providers must apply income tax and emergency tax codes to pension withdrawals you might initially suffer as much as 45pc tax on the whole of the £45,000 withdrawal, if this is the first time you’ve taken any income from it.
You can reclaim overpaid tax from HMRC to avoid having to wait until the end of the tax year using form P53Z where your whole pot has been emptied.
You could avoid a big tax hit by drawing down a lower amount over a few years. But while this might be a tax-efficient way of taking the money out, you have said you don’t need the income, and you’d still have to spend time reviewing and managing the plan until you’ve taken the last of the pot.
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