What is the minimum pension pot I need for pension drawdown is a question we are often asked? Assuming a pension provider offers pension drawdown as an option then, in principle, there is no minimum. A drawdown account could be set up to hold less than one thousand pounds. However, most providers tend to insist on a minimum somewhere between £10,000 and £50,000.
The key issue affecting a viable minimum pension drawdown pot is fees. It is very important to understand how fees are charged and their impact on a small fund. There is wide variation in fees and how they are implemented across providers.
Typically, there will be some fixed costs such as set up costs and annual management fees and some variable costs associated with each transaction (for example a withdrawal of income). Fixed charges have a disproportionate impact on a small fund.
Let’s assume a £10,000 fund in drawdown and fixed annual charges of £500. Then in year one 5 percent of the fund will be lost to the fixed fees alone. The investment growth in that year will therefore need to be 5 percent (ahead of inflation) just to hold position.
If we assume a drawdown pension fund of £150,000 then with annual charges of £500 the fund will be depleted by 0.33 percent in year one. Investment growth should be able to cover this (and some) without many problems.
Fixed charges are therefore the enemy of small funds. That is not to say transactional charges are not a concern it all depends on the level of those charges and how they are applied. One potential solution may be to combine several small pension funds into one pension drawdown fund. However, it is important to ensure no valuable benefits are given up before moving funds.
The information in this article does not constitute financial or other professional advice. You should not take action on the basis of this article without seeking regulated independent financial advice that addresses your specific circumstances.