Pension "pot"?

[JoanThursday1972]

What does the "pot" consist of? Is this the lump sum plus the worth of monthly pension? If the latter, I don't understand it because it has to be a bottomless "pot" since nobody can predict when anyone will drop dead.

It depends on the type of pension, but I think of the “pot” as the lump sum in my private pension. I don’t think of my state pension as a “pot”.

With a DB pension there is no "pot" as such but you are guaranteed a pension for life (as well as a tax-free lump sum which is based on 25% of the hypothetical "pot").
With a DC scheme you do build up an actual pot of money and it is up to you how you take it based on various scenarios and yes, there is a very real chance that it will run out before you die but on the other hand, if you die early on the fund is transferred to your named beneficiary.

By the way, not a financial advisor so please disregard everything I have said. Just a retiree who has been through this.

My "pot" was valued at £180k. It is meaningless as it is a civil service pension. Took a lump sum, being paid monthly, index linked... already had half that amount.

Some people don't of course, my dad died 3 months before his (£270k "pot", no dependents) was due to be paid.

I think of the 'pot' as the actual amount that is building up in my private pensions (workplace pensions like nest) as I'll need to do something with them like buy an annuity when I retire. So my pot will be around (?) £130,000 and that will buy me an annual pension income of £X.

That is outside of my state pension which I wouldn't consider part of my pot, as I have no choice what to do with it.

I have a Teacher's Pension that I am paid every month for the rest of my life and if I die before DH he will get half for the rest of his life.

I have a full state pension but can't claim that until I'm 67. 5 more years to go.

I also had a separate private pension pot I paid into which included some money exh had to pay me because of the pension sharing order. In this pot I had £70k but I bought an annuity with it which is a set amount I'll get paid every month for the rest of my life.

I also still pay into my stakeholder pension pot every month as otherwise it would just go in tax. I've already built up over £5k since last September. It's invested in commodities including Shell, Total Energies, BHP etc and is doing well. Since Hunt changed rules around pension I can now invest more each month. Before rule change I could only pay in £266 per month now since April 6th I can pay in £400 pcm. At some point I can draw this money down and will get 25 percent tax free.

It's always worth paying as much as you can into a pension.

@caringcarer You should be able to pay in a bit more now. I guess you have the earnings as you mentioned you are paying tax.

With a DC pension there is a genuine pot as PPs have said.

With a DB scheme, they will calculate an average “pot” based on life expectancy and some other assumptions. Sometimes you can take that out of the pension as a lump sum (“transfer value”) and sometimes it’s just provided as an illustration.

I'm in a defined benefit scheme, my pot is hypothetical really as I'll get a lump then be paid until I die, however long that it. They just show us the value of the pot / anuity to make us feel grateful for the pension, which I certainly do.

A DC pot will last forever if an annuity is purchased (unless you only purchase an annuity for a specific period of time). If you draw down your pension then there is a risk it could be emptied if you live for a long time, splash out or what is left in the pension doesn't perform very well.

That's the clearest answer to my query.

What would you buy an annuity for? Is that just what you do with the lump sum, whilst receiving a monthly pension?

I think you need to clarify your question. There is no such thing as a pot of money for a DB scheme. You get what you get, you don't buy an annuity or anything.

A DC scheme you do build up a pot, with which you can buy an annuity, which pays out an agreed amount, with the annuity provider taking the risk that you live long enough to be unprofitable! Taking the lump sum obviously reduces the amount left over to buy an annuity. Or you can draw down the pot - but risk it running out.

What type of pension scheme are you in - defined benefit which is typical in the public sector (final salary, career average etc) or a defined contribution which is typical in the private sector?

Getting divorced... it's a statement on a form to show we both have some provision.

Me? The former. I just don't understand this terminology of "pot".

So, you receive a monthly amount as your pension (as per the poster above who mentioned teachers pension scheme) and then use the lump sum to buy an annuity? Excuse my stupidity but I don't understand. For argument's sake you get £45K as a lump sum, and buy an annuity with that? What happens to the £45K that wouldn't if you say bought a premium bond or ISA?

DH has a final salary and a state pension plus a D Contribution pot, we didn't take the lump sum when he retired last year, we will take it later when the pot has hopefully grown from the money we invested in Royal London, it is already growing so we are hoping that when we go to take 25% it will be of a larger sum.

We went into retirement mortgage free and debt free, so this shaped our decision to wait for the 25%.

If he dies early I will get the whole pot and a two thirds survivors pension from the final salary pension.

If you are in a DB scheme, you don't have a pot and you don't buy an annuity.

If your pension is defined benefit then you don't need to buy an annuity as you are guaranteed x amount every month for the rest of your life anyway. You take your lump sum and invest it how you like. As others have said there isn't really a 'pot' with a DB scheme.

You won’t want or need to buy an annuity if you have a decent DB (sometimes called a ‘final salary’) pension.

Some people who have a DC pension (‘defined contribution’, like most private sector pensions) but an annuity as it gives them an income for life, but you’ll already have that.

People often use the lump sum to finish paying off a mortgage.

If you're in a DB scheme you don't have a pension pot. What makes you think you do?

I'm in a DB scheme and intend to spend my lump sum on luxury travel!!!! If I wanted extra pension I'd forgo the lump sum and get the extra pension.

Thanks that makes sense.

I have a teachers pension. So I get a monthly pension until I die. The lump sum o received was partially used to pay my mortgage, carry out maintenance on my house and the rest went into high interest stocks and shares ISAs. I do t need that money to live on and will need it even less when I receive my state pension.

If you have a Defined Benefits pension, you will be told what your monthly pension payment at your retirement date will be. You can also take some as a lump sum on retirement - for you to spend as you want. You can usually reduced the size of the lump sum in order to get a higher monthly payment if you wish. The lump sum is tax free. The monthly pension is not - unless your income is less than the personal tax allowance. There is no 'pot' as such. There will be a pension value quoted but this is usually only an indicative transfer value if you wanted to take your money out of the DB scheme and put it into a different type of pension (which is rarely advisable).

With a DC scheme, you do build up a pot - the value of which goes up and down as it is affected by the financial markets. When you want to take your pension you can use that pot in a variety of ways to finance your retirement. You might opt to drawdown an amount each month as a pension payment (which will eventually run out if you live a long time) or you might purchase an annuity with the money which will guarantee you a set monthly income for life.

What’s got you even asking about annuities?
It would be quite unusual to buy an annuity with a DB lump sum. Not all DB pensions force you to take a lump sum - mine doesn’t. In which case if your preference was to guarantee what you would get each year, you’d be better off taking no lump sum at all, than taking one and buying an annuity.

“Pot” is just a meaningless colloquial term. Just like if someone said to you about your savings, how much is in the piggy bank then?”. It’s just a bit of casual language, not a strictly defined financial term.