How does the small pots pension rule work?

Full answer

The small pots rule is a useful exception to the normal Money Purchase Annual Allowance (MPAA) trigger, designed to let people tidy up small, fragmented pension pots without permanently restricting their future contribution allowance. **How it works** If a single pension pot is valued at £10,000 or less, you can take the whole pot as a one-off lump sum ("small pot payment" or "trivial commutation" in older terminology) from age 55 (rising to 57 from April 2028). As with UFPLS, 25% is paid tax-free and 75% is taxed as income at your marginal rate in the year you take it. **Crucially: no MPAA trigger** Unlike taking taxable income via flexi-access drawdown or a normal UFPLS, taking a small pot payment does NOT trigger the Money Purchase Annual Allowance. This means you can clear out small legacy pots while continuing to make full-size pension contributions (up to the standard £60,000 annual allowance) elsewhere without restriction. **The three-pot limit for personal pensions** For personal pensions (including SIPPs), you can generally use the small pots rule for a maximum of three separate pots in your lifetime. If you have four or more qualifying small pots, only three can be cashed out this way -- any further small pots would need to go through normal drawdown or UFPLS, which would trigger the MPAA. **Occupational pension pots: no numerical limit** For pots held in occupational (workplace, typically trust-based) pension schemes, there is no overall limit on how many small pots can be cashed out using this rule -- each scheme is assessed separately, so someone with many small deferred workplace pots from previous jobs could potentially use the small pots rule multiple times across different schemes. **Worked example** Sarah, 60, has four old pension pots from previous employers: £3,000, £6,000, £8,500, and £9,000 -- all under the £10,000 threshold. If all four are personal pensions (SIPPs), she can only cash out three of them tax-efficiently under the small pot rule without triggering the MPAA; the fourth would need to go through UFPLS or drawdown instead, triggering the MPAA on her future contributions. If instead these are four separate occupational workplace pension pots, she can potentially cash out all four using the small pots rule. **Why this matters** Many people accumulate several small workplace pension pots over a career through auto-enrolment at different employers. The small pots rule offers a practical way to consolidate this fragmented pension wealth into cash (or reinvest it elsewhere, such as an ISA) at retirement age, without accidentally restricting future contribution capacity if they plan to keep working and saving into a pension.

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