Can A Pension Transfer Help Me Pass My Pension to My Beneficiaries?
Question asked by Felix Beacham
I’ve built up a few small final salary pension pots over my working life. They’re not worth much in terms of annual income and I’m not planning on relying on them for a retirement income. Having the money sitting there in the small defined benefit pots isn’t much good to me and I’d like to get my hands on the cash. Is this possible?
You might not feel like your final salary pensions are worth much because they’re small, but they will still provide you a guaranteed and probably index-linked retirement income for life, no matter how low this might be.
It’s worth considering whether you’re really willing to give that up by cashing in your defined benefit pension pots.
For the majority of people, cashing in or transferring your defined benefit pensions to a defined contribution scheme won’t be the right course of action.
If you’re still thinking about cashing in your small pensions, you may fall under the trivial commutation or small pension pot rules. These are for those people whose pension provisions are very modest.
Trivial commutation rules allow you to, in some circumstances, take your entire pension as cash, whether your pension is defined contribution or defined benefit.
To find out if this could apply to you, ask yourself:
If you answer yes to both of these questions, you may be able to take the entire pension as a cash lump sum.
If you cash in a trivial pension pot, 25% can be taken as a tax-free lump sum providing you’re not already drawing on the pension. The remaining 75% is added to your taxable income during the tax year you’ve cashed in your pension and taxed at your highest marginal rate.
There are also similar flexible rules for small pension pots that allow you to take up to three small pots of no more than £10,000 each. Here, the value of your other pension entitlements isn’t taken into account.
To work out if the small pot pension commutation rules apply to you, ask yourself:
If you’ve answered yes to all three questions, then you may be able to commute your pension under the small pot rules.
Again, providing you haven’t yet drawn on the pension, 25% would be tax-free with the remaining 75% being added to any other income in that tax year and taxed at your highest marginal rate.
Be aware that taking a cash lump sum from your pension, including using the trivial commutation or small pot rules, could push you up an income tax bracket and hit you with a larger tax bill than you were expecting. Drewberry recommends getting financial and / or pensions advice before cashing in any small pension pots to make sure it’s the right decision for you.