What is the small pots pension rule and how does it work?

Full answer

The small pots rule is a special way to take a small pension entirely as cash from age 55 (rising to 57 from April 2028) without affecting your ability to keep saving into pensions. A pot qualifies if it is worth GBP 10,000 or less. You can use the rule on up to three separate personal or stakeholder pensions in your lifetime, and on any number of occupational (workplace) scheme pots. As with normal pension access, 25% of each small pot is tax-free and the remaining 75% is taxable as income in the year you take it. Who it affects: people with several small, fragmented pots from different jobs, and -- importantly -- anyone who wants to take some pension cash but carry on contributing meaningfully. Normally, taking taxable income flexibly from a defined-contribution pension triggers the money purchase annual allowance (MPAA), which for 2026/27 cuts your annual pension input limit to GBP 10,000 (down from the standard GBP 60,000 annual allowance). The small pots rule does NOT trigger the MPAA, so you keep your full contribution headroom. Worked example: you have a GBP 9,000 deferred workplace pot. Taking it under the small pots rule gives you GBP 2,250 tax-free; the remaining GBP 6,750 is added to your taxable income for the year, taxed at your marginal rate (20%, 40% or 45% in England and Wales depending on total income). Because it is a small pot payment, your standard GBP 60,000 annual allowance is untouched and you can keep paying into your main pension. Providers often apply emergency tax on the taxable portion, which you reclaim from HMRC. To see the income-tax impact of the taxable 75% and your remaining contribution allowance, use a pension or income tax calculator.

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