What is the small pot lump sum rule for pensions?

Full answer

The small pot lump sum rule (also called 'small pots commutation') lets you fully cash in an individual pension worth GBP 10,000 or less in one go, once you reach the normal minimum pension age. You can do this with up to three separate personal pension pots in your lifetime, and with an unlimited number of occupational scheme pots, each under the GBP 10,000 limit. The key attraction is the Money Purchase Annual Allowance (MPAA). Normally, once you flexibly access a defined-contribution pension, your annual allowance for further DC contributions drops to GBP 10,000 from the standard GBP 60,000. Taking a small pot lump sum does NOT trigger the MPAA, so you keep your full GBP 60,000 annual allowance and can carry on saving heavily into pensions. This makes it valuable for people who want to tidy up tiny legacy pots without restricting their ongoing retirement saving. Tax treatment: 25% of the small pot is tax-free and the other 75% is taxable as income in the year you take it. Providers usually apply an emergency tax code, so you may overpay initially and reclaim from HMRC. Who it affects: anyone over the minimum pension age with one or more small, often forgotten, workplace or personal pots - common after job-hopping and auto-enrolment. Worked example: you cash in a GBP 8,000 pot. GBP 2,000 is tax-free; the remaining GBP 6,000 is added to your taxable income. If your other income already uses your GBP 12,570 Personal Allowance and keeps you in the basic-rate band, that GBP 6,000 is taxed at 20%, roughly GBP 1,200, leaving about GBP 6,800 net (before any emergency-tax reclaim). Use the pension and income-tax calculators to model the impact.

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