Financial Planning for people with small pension pots

Problem – people with small pots with no financial plan

In case we were in doubt, Jo Cumbo spells it out  – we are using tax-receipts from early encashment of pensions to meet acute financial needs resulting from the financial conditions many of us are finding ourselves in,

It may not be the biggest windfall this Government will get from the cost of living crisis, but it’s significant and is generated by people cashing in pension pots behaving like Muppets.


Solution? A financial plan with a super-safe drawdown and boosted state pension,

I put this problem to readers of yesterday’s blog and got one extraordinary reply from someone by text message (whoever you are – thanks – I hope your fingers recover soon!).

Maybe it takes a cost of living crisis to focus the mind,  the more I read the text, the more I liked it.

Interesting to read the criticism of people using their pension pots to fill in the time before they get their state pension.

Of course we don’t want people giving up work at 55 and living off around £10.000 a year for the rest of their lives. Or perhaps a couple living off £20,000 – (tax free of course.)

Sounds mad but is it? Is there a germ of an idea there?

The age of starting matters. A lot. Suppose we change it. Let’s say the same couple work for 5 more years. They will have saved more. Let’s work back.

Suppose they think of still paying for 12 years out of their pots and deferring state pension for 5 years. getting 26% increments in state pension. So say £12,500 and £25000 when a couple. (Still tax free). With a bit more saving and investment return I guess they can drawdown £12500/25000.

With a bit of luck I guess inflation can be taken care of too. Note that they don’ t need to worry about longevity and their savings running out. (Assuming they don’t take much risk). Not long term investment risk.

Still too early? So let’s go to SPA. If we reduce it to 10 years, the increments mean 50% increase to £15000/30000 so a little bit of tax.

They can probably put aside some cash from their pot and withdraw £15,000 or £30, 000. The question is whether this is better than taking state pension now so 10/20k and buying a couple of index linked deferred annuities from SPA+10 – to give the same risk outcome.

Or to take the SP now and drawdown the extra £5/10k to reach the same total. With this one there is the longevity risk on the top up unless they insure at some point.

I don’t know the answer. But for the future median earner this is the problem to be thought about. Using the SP more creatively.

And if someone really wants to stop work early, assessing how much more they need to save as it is just determined by the number of years needed before they take their state pension with deferral for a period  needed to make the numbers add up.

Other flexibility can be considered. Are you happy with planning for a lower income when 85 say?

Creative planning about how you take your state pension and how you use your pension pot is not on any financial planning curriculum, but  it should be. If people are uncomfortable speculating with their pension pot, then a fixed term drawdown using cash funds looks a good answer . Deferring the state pension as insurance against living too long,  also looks a good idea.

My question is “where would you go to make such a plan?”, who really thinks about flexing the state pension and using a pension pot as a bridge? Where is the modelling, where is the guidance?

Is this a realistic  strategy for people without a plan B to fall back on , but with need of certainty? Is this how people who don’t earn much, do tax-planning, and how would such a plan play out if you were in receipt of universal credit and savings credit? (one for my friend the Ferret).

At present this is a kind of “dark web” for financial planning, it’s people sending me texts with ideas that are semi-processed. There is no mechanism for putting these ideas into action, but they are ideas that could be taken up by a Martin Lewis or even a Money and Pension Service specialist team.

It’s this kind of thinking that is desperately needed. For while 90% of our nation’s energy is focussed on the 10% of the nation that have the money, there are many of the remaining 90%, who have no money to pay for this kind of help.

If we are serious about financial inclusion, and I think the Minister for Pensions and Financial Inclusion is, then a pension plan for those with less than £60k in their pots may have been germinated by that random text.

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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3 Responses to Financial Planning for people with small pension pots

  1. John Mather says:

    The current inflation issue impact on the State Pension if not fully compensated
    will negate the well intentioned alchemy

  2. henry tapper says:

    You are right there John, the only way to protect against the impact of long-term inflation is through investment. But for people with small pension pots , is investment realistic, this doesn’t look like alchemy, it relies on the generous deferral factors offered by the state pension and the tax advantages enjoyed by people on very low incomes. But there may be problems for those entitled to benefits that I haven’t properly scoped.

  3. A brief comment on deferment, the rules changed a few years ago.

    It used to be that deferment meant that the untaken pension was treated as notional income for benefit purposes but the pension deferment increase applied (remembering that the generosity of that was sharply reduced a few years ago).

    Now, the rule means that notional income is not applied but no increase in the final pension is generated while means-tested benefits (not tax credits) are being received.

    Going back to your earlier posts on older workers vanishing from the workforce. My question is, how many of these are entirely ‘self-funding’ and how many are depending on state support? That’s where the text you received needs expanding.

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