Blowing your whole pension pot

[BrainInAJar]

Hello

It's been a while now since defined benefit pensions became rarer than hen's teeth. It's mostly now defined contribution pots. So a specific pot of money just for you.

You can get your hands on this in your late 50s. So presumably a lot of people ARE now suddenly laying their hands on a big chunk of money.

I believe the general wisdom is you can withdraw 4% a year from your investments and not run out of money before you die.

But have/will people just blow the lot?! And then end up surviving on the state pension?

Is that such a terrible idea one wonders?

Musings on a dark January evening.

Ha! My "final salary" pension changed to a standard company pension after I'd contributed for almost 15 years, and then I was made redundant. It's worth the grand total of £22 a month. Yeah, I'm rolling in the wealth here.....

I can’t imagine many people choosing to survive only on the state pension. It would be a pretty miserable life. I don’t think DB schemes are that rare anyway. I have one, as does almost everyone I know-LGPS, NHS, teachers etc.

My mum didn’t work much and didn’t have a workplace pension until later in life. She was able to take the £600 or so when she turned 55 and booked herself a nice holiday to Greece. I think that was a better use than waiting until retirement for that £600 to be spread over her retirement 🤣

Oh it was final salary pensions I was thinking of as v rare now. Not DB.

Yes so like nurses, teachers etc will be given a monthly payment. But the rest of us suddenly getting access to 6 fig sums if we've saved over the years and have to discipline ourselves to only drawdown 4%

But unfair tho eg on the public sector worker who has a year to live and can't just cash in the whole pot like those with a private sipp

I suspect for the next 20 years or so there will be people with a mix- lots of public sector and quasi public sector still has final salary, and a lot of people around their 50s are likely to have at least some provision in final salary schemes, and some old one still kick in a bit at 60 or even 55.

Also, if you look at spending patterns, people tend to spend more in early retirement, and then decline when they get older. Plus some people will have houses that can downsize in later life. Also depends on if you want to leave anything behind or spend most of the assets!

My expectation is I will spend probably more in early retirement from my DC pot, then I have the state pension plus a small amount from old DB guaranteed income from 67, topped up by what is lef5 in DC pot. And if I run out of money I will sell the house and move into a flat. I don't think there are right answers - but I do believe we should all think about it!

We have both.

I have a final salary scheme (I am at my company since 2004 and they only closed the scheme for new employees 15 years ago) and DH the DC.

We talk to our financial advisor around once a year and she already made noises how to sort out DH's pot as he turns 55 this year. But he has no plans to retire soon, we still have to bring DD through uni, we need his salary.

@BrainInAJar - if I die (in service or retired) my pension will go to the person I nominate as my beneficiary. It's not lost.

Good on her. My mam hadn't worked much for a long time until a couple of years ago when they enrolled her in the workplace pension. She was already 59 and didn't see the point. She paid into it for a while but last year decided to see if she could access what she'd paid in and opt out. Unfortunately she passed away just gone 61 before she was able to.

Nobody knows what's around the corner and, as you say, £600 spread over retirement isn't going to do much for anyone!

If you take out large chunks you end up with a bloody large wedge of tax to pay too. Human nature means most people baulk at handing their money over to the taxman. So they don’t do it usually.

(work in pensions)

When you withdraw money from a defined contribution pension you can take 25% tax free and the remainder is taxed at a rate dependant on your income and pension withdrawal amount.

If you had £500,000 in your pot, wanted to take it all at once and had no other income that financial year you would lose just over £154,000 in tax which is a deterrent in itself. There are loads of pension tax withdrawal calculators online for you to plug the figures into.

I thought 25% of it was taxable?

Nope 25.% tax free. Remainder taxed at income tax rate when you withdraw. Over tax year.

I know someone who cashed her pension out long before retirement.
She needed to get out of an ‘unsatisfactory’ marriage with two dcs with serious SN (special school) etc….

So far no regret in her side but yes it means state pension only in her older years.

I’m in my 50s and will be taking one of my pension pots this year. It is worth less than £200k and I will be using the 25% tax free lump sum to travel and have fun. The rest will buy an annuity to allow me to cut my hours and then retire by 60. There is no temptation to take the whole pot at once as you lose so much in tax.

I'm taking my finally salary pension when I'm 60 a few month away. I need to decide whether to take a lump sum or not. The difference is about 2k a year. Were also having income soon as my DH is waiting for probate on his parents estate.

Good point about the tax everyone!

I will have around 20 years final salary pension and the remainder in a care scheme. The lump sum will be tax free. I don’t plan to blow the lot on myself. Depending on how my DCs are doing at the time, I will probably help them with house deposits etc will see how it goes.

Have you had advice on that?
Maybe take the 25% but leave the rest- not a good time to buy an annuity.
If your pension doesnt allow that then look at moving the funds to one that does

(disclaimer- get proper advice)