I have two pensions. One starts at the age of 60 and the other at the age of 65.
My thinking is this. Can I ‘draw’ from the first one for 10 years such that there will be nothing left?
Five years into this the second one will kick in, and seven years into the first (two years into the second) the state pension will kick in. Is this possible?
Pension dilemma: What’s the best way to juggle retirement pots which start paying out at different ages?
Steve Webb replies: The short answer to your question is that it depends what sort of pension you have.
It may be possible to do what you want to do, though you would need to be confident that you had enough to live on once that first pension had run out.
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What kind of pension do you have?
Thinking first about the pension that you can draw at 60, things would be relatively simple if it is a ‘pot of money’ – also known as ‘defined contribution’ – pension.
If you simply have a fund that has been invested and which you plan to take at age 60, then you could move the money into something called a ‘drawdown’ account.
There are two ways of doing this. One would be to take a quarter up front as a tax free lump sum with the rest going into a drawdown account from which withdrawals would be taxable.
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The other would be to move the whole amount into a drawdown account and then each withdrawal would be a mix of taxable and tax-free.
The advantages and disadvantages of each would depend on things like how much other taxable income you had at the same time and whether you were likely to want to put any money *into* a pension once you had started drawing out.
You can read more about the different sorts of drawdown accounts on the PensionWise website.
The crucial point about a drawdown account is that you can choose how quickly to take the money out. In principle, you could take relatively large amounts each year with the intention of running it down over a ten year period.
However, you should bear in mind that the money in the drawdown account is being invested and could itself go up or down. You can choose whether to invest cautiously so that the money doesn’t grow much but probably won’t go down either, or by taking a higher risk so that your money might grow faster but where there is probably more risk of it going down.
As an alternative to going into drawdown, you could use your first pension to buy a fixed term annuity.
You could use all of your pot or take a tax free lump sum and use three quarters of your pot. The annuity could provide you a guaranteed income for ten years.
As with the money you take out of a drawdown account, the income from the annuity would be taxable.
If your first pension is an older style final salary or ‘defined benefit’ pension then the situation is a bit more complex.
These pensions were originally designed to give you a guaranteed pension for life rather than to be run down over a shorter period.
However, provided your final salary pension is from a private firm and has a pension fund sitting behind it, you should have the option to exchange it for a lump sum.
You would ask your scheme for something called a ‘cash equivalent transfer value’ which is an amount they would give you in exchange for giving up your rights under the scheme.
If the lump sum is worth more than £30,000 you would be obliged to take financial advice (for which you would have to pay) about whether or not to transfer.
This is very much an individual decision, based on your own needs and circumstances, but regulators say that people should generally assume that holding on to a guaranteed income for life is likely to be the right answer for most people.
Should you take your 25% tax-free pension lump sum?
The chance to pocket a tax-free 25 per cent lump sum from your retirement fund when you stop working is one of the most popular perks of saving into a pension, but there are reasons for and against doing this.
If you did do a transfer of this sort you would then have the same options as mentioned earlier for a ‘pot of money’ pension, in terms of running it down quickly until other pensions start to be paid.
What other issues should you consider?
Here are a few other things to think about before making your decision.
1) I’m assuming that you want to draw a pension at 60 and live on it so that you can retire.
But if you have a job and are fit and able to do it, you might find that your standard of living in retirement would be better if you carried on working for a bit longer.
It’s obviously up to you, but the longer you work, the bigger pension you are likely to get, including a pension contributions from your employer, and the better standard of living you could have in retirement.
2) The other thing to think about is income tax. Each year you can have a certain amount of income from earnings, pensions and so on before you have to pay income tax. Currently the tax-free allowance is £11,500.
It would make sense to think about the profile of your income from your different pensions to make sure that there are not years when you are ‘wasting’ part of this annual tax free allowance.
How much can you save into a pension after starting withdrawals?
Over-55s who dip into their defined contribution pensions are only able to put away £4,000 a year and still automatically qualify for tax relief.
For example, if you took £10,500 one year and £12,500 the next, you would pay more tax than if you took £11,500 in each year.
3) I also touched on whether you might want to put more money into a pension once you had started drawing out.
If your first pension is a ‘defined contribution’ pot, once you start drawing on it you will only be able to put away £4,000 a year and still qualify for tax relief on these payments, rather than £40,000 a year as before.
This could limit your ability to boost your pension pot in future if you want and can afford to do so.
4) One final thing to bear in mind is that people tend to under-estimate how long they will live. It may seem like a good idea to draw down your first pension in full while you are in your sixties but you obviously then won’t have any of that money in your eighties or beyond.
You should think about what your spending needs are likely to be in retirement (including cash for things like repairing your house or replacing your car) and be sure that these would be covered just by your state pension and other private pension.
ASK STEVE WEBB A PENSION QUESTION
Former Pensions Minister Steve Webb is This Is Money’s Agony Uncle.
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.
If you would like to ask Steve a question about pensions, please email him at firstname.lastname@example.org.
Steve will do his best to reply to your message in a forthcoming column, but he won’t be able to answer everyone or correspond privately with readers. Nothing in his replies constitutes regulated financial advice. Published questions are sometimes edited for brevity or other reasons.
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If Steve is unable to answer your question, you can also contact The Pensions Advisory Service, a Government-backed organisation which gives free help to the public. TPAS can be found here and its number is 0300 123 1047.
Steve receives many questions about state pension forecasts and COPE – the Contracted Out Pension Equivalent. If you are writing to Steve on this topic, he responds to a typical reader question here. It includes links to Steve’s several earlier columns about state pension forecasts and contracting out, which might be helpful.
If you have a question about state pension top-ups, Steve has written a guide which you can find here.
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