What is small pot trivial commutation for pensions?

Full answer

Small pot rules provide a simpler way to cash in modest pension savings without the ongoing complexity of setting up drawdown, and crucially, without triggering the more restrictive Money Purchase Annual Allowance that normally applies once flexible pension income is accessed. **The £10,000 threshold** A "small pot" is a pension arrangement (or a specific sub-fund within an arrangement) with a total value of £10,000 or less at the point it is cashed in. If the pot meets this test, the whole amount can be taken as a single lump sum -- 25% tax-free (up to normal Pension Commencement Lump Sum rules) and the remaining 75% taxed as income at your marginal rate in the tax year it is paid. **Why avoiding the MPAA matters** Normally, once you flexibly access taxable income from a defined contribution pension (for example, via drawdown or a normal Uncrystallised Funds Pension Lump Sum, UFPLS), your future annual allowance for further pension contributions drops sharply to the Money Purchase Annual Allowance (£10,000 in 2026/27), severely restricting how much more you can pay into a pension with tax relief. Crucially, small pot trivial commutation payments are specifically exempted from triggering the MPAA, so someone still working and contributing to a pension can cash in eligible small pots without jeopardising their ability to make larger future pension contributions. **The three-pot limit for personal pensions** For personal pensions (such as a SIPP or personal/stakeholder pension), you can use the small pot rule for a maximum of three separate arrangements in your lifetime. Occupational pension scheme small pots (workplace defined contribution schemes) are not subject to this three-pot cap -- you can use the small pot rule for as many separate occupational scheme small pots as you have, provided each individually meets the £10,000 threshold. **Other conditions** You must generally be aged 55 or over (rising to 57 from 2028) to access a small pot, the payment must extinguish all of your rights under that specific arrangement (you cannot partially cash in and leave a smaller residual pot), and it must be paid within a set period once you decide to take it. **Worked example** Someone aged 60, still working full-time and contributing £15,000 a year to their main workplace pension, also holds three small, mostly-forgotten personal pensions from previous jobs, each worth around £8,000. Because each pot is under £10,000, they can cash in all three using the small pot rule (using up their full three-pot personal pension allowance), receiving 25% of each tax-free and the rest taxed as income, WITHOUT triggering the MPAA -- meaning they can continue contributing the full £60,000 annual allowance to their main workplace pension afterwards, rather than being restricted to just £10,000 a year if they had instead accessed the money via ordinary drawdown or UFPLS. **Practical tip** Before cashing in a small pot, check whether the scheme offers any valuable guarantees (such as a guaranteed annuity rate) that would be lost, since these can sometimes be worth significantly more than the pot's face value.

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