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 but in practice, there are a number of factors to consider.
The Impact Of Fees
There are perhaps bigger questions to ask (see below) but to answer the specific question the key issue affecting the minimum pension drawdown pot is fees. The level of fees can vary substantially depending on the provider and the chosen pension plan but charges typically apply to set up a drawdown pension arrangement and each time benefits are withdrawn. There are also often annual administrative charges.
As an example, the most common type of pension for drawdown arrangements is a Self Invested Personal Pension (SIPP). To set up a SIPP typically costs up to £500, a fee of a few hundred pounds applies when income is first withdrawn, there is an annual management fee costing from zero to over £1000 depending on provider and trading fees of a few pounds each time an investment is bought/sold. These fees can soon add up to erode the value of a small pension pot in drawdown.
Consider The Options
Any decision to enter pension drawdown (or not) must be taken as part of an overall retirement planning exercise. It may be best to leave pensions where they are if they offer valuable benefits. There are decisions to be made between annuity, drawdown and their relationship with any other investments (including ISA’s). Many individuals have several pension funds and it may be best, depending on personal circumstances, to combine funds into a larger pot.
A quick review of readily available information on the internet will show that estimates vary wildly on what an individual may need as a retirement fund. There is a level of scaremongering with some stating that a pension fund of £1m is required to fund a reasonable standard of living in retirement. That may be true for some but not the vast majority of the population. The reality depends entirely on individual circumstances and tax position.
The key issue when considering drawdown is drawings from the fund and how and when those drawings are taken. Longevity rates are increasing and it is important to ensure pension funds do not run out in retirement. It is important that pension drawdown fits into an overall retirement strategy. A small drawdown fund may be appropriate, depending on personal circumstances, but it is important to decide how that fund will be used and to carefully consider the impact of fees.
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.