Where you have small pension pots of less than £10,000 each, you may be able to take them as a cash lump sum, rather than converting to income in certain circumstances!
As with anything pensions, there are strict rules on the number of pensions you can encash (or commute as we call it) under these rules being:
- A maximum of 3 non-occupational (or personal pension type plans)
- No limit where the plans are from occupational pensions (workplace type schemes)
It doesn’t matter how much you may have in other pensions, the rules apply to the individual pension plans being commuted so if you had for example £200,000 in pension 1 and £8,000 in pension 2 – you could then encash the smaller pot under the “small pot payment” rules!
However, some further rules also need to be met:
- You must have reached the legal minimum pension age (currently 55) – or meet the definition for ill-health retirement if earlier.
- Each pension policy cannot be worth more than £10,000 at the time it is encashed
- The payments must then leave no benefits behind. In other words, the payment must extinguish all remaining benefits in that scheme.
Taxation of small pots
This will depend on whether your pensions are what we call “uncrystallised” or “crystallised”!
Uncrystallised – is usually paid in the normal manner, meaning 25% (or one-quarter) is tax-free with the remaining taxable as income.
Crystallised – tax is usually paid on the entire amount
Other points to consider
- The taking of small pots will not usually trigger the Money Purchase Annual Allowance
- You can encash different pots over multiple tax-years to reduce any tax paid
Still confused? Contact your local experts for advice on all things pensions and guarantee your very own Financial Fortress!
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