Making the Most of a Smaller Pension Pot

Pensions allow a greater freedom when it comes to managing your finances. The flexibility of pensions means that you can place your money in whatever scheme however you like. Each has different benefits and is designed for various personality and investment types.

Your pension is something you save for over most of your life, with this pot expected to see you through retirement. However, with life expectancy rising, retirees are now facing the task of making the most of their pension and still being able to rely on it until they die. Although many of us are saving all our working lives, we can still find the amount lacking. We’re looking at how to make the most of your pension, whatever the amount.

Pension freedom rules

The arrival of pension freedoms is giving retirees more options when it comes to their pension. There are three choices that we’ll be considering. Each of these will work for a smaller pension pot, so it is best to choose a scheme that you feel comfortable with.

  • Buy an annuity: This is an insurance product which allows you to swap your pension savings for a guaranteed regular income. The amount you receive is determined by your annuity provider. It is a good idea to shop around, as rates change between providers. This is a good option if you want a steady income and don’t want your retirement income to be subject to market fluctuations. Annuities provide good financial planning and mean that you won’t spend your savings pot too soon. It is not advisable if you have a short life expectancy or want to keep your money invested.
  • Move your pension to a drawdown scheme: A drawdown keeps your pension invested. This will provide you with a regular retirement income, as you can withdraw money from your pension pot, while still investing it. As you withdraw, 25% can be taken tax-free, while the remainder is taxable as income. You can choose how much income to take, being able to start, stop or vary the amount at any time. While this can help to increase your pension due to investment, it can also decrease the amount through poor investment or market fluctuations.
  • Keep your pension where it is: You can choose to leave your pension in its scheme. From here, you can take multiple lumps out of it, with the first 25% being tax-free. This allows you control over the amount of money you withdraw. While your pension scheme will not grow, it is also not subject to changes in investment markets. This is a good solution if you are good at controlling your money or have a short life expectancy so don’t need to make your money last a while.

Smaller pension pots

While pension pots between £30,000 and £50,000 may seem like large amounts, this must last you for the rest of your life. Over many years, you can see this amount stretched thin. Annuity remains a safer option, providing simple and constant income.

Alternatively, a flexible drawdown scheme is advisable for people willing to take a slight risk. This means your pension will be invested in markets and you are free to take as much taxable income from it as you would like. The best possible outcome of this method is that the growth helps to spread your money for longer. The flexibility of the amount you can take also allows you to adjust to your current financial needs should you face an emergency. While it is important to remember risks, such as withdrawing too much too fast and poor market activity, it is a viable option for a smaller pension pot.

If you are unsure of which method is best for you, seeking a professional financial adviser’s help can give more information on what is right for you.

Pension pots below £10,000

With funds this small, it is uneconomical for your pension to provide annuity. While there are some constraints, the government generally allows for small pots to be taken in cash. You must be at least 60 years old to take this option. Once you have your money withdrawn, there are more options open to you, such as investing your pot in stocks.

This provides some risks, so you must understand all the pitfalls of your investment. It is advisable that you talk to a financial adviser before making any high-risk investments with your pension later in life.

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