Can I cash in small pension pots?

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?

Question asked by Mr S Kapoor
Need Pension Advice?
Call us on 02084327333
First Name
Phone
Email

Answered by Michael Englefield

 

Cashing in small final salary pensions

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.

Cashing in small pension pots

It’s worth considering whether you’re really willing to give that up by cashing in your defined benefit pension pots.

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.

What does trivial commutation mean?

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:

  • Are you at least 55 (or are retiring early as a result of ill health)?
  • Is the value of all your pension entitlements, excluding the state pension, under £30,000?

If you answer yes to both of these questions, you may be able to take the entire pension as a cash lump sum.

Trivial commutation and defined benefit pensions

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.

Small pension pots and commutation

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:

  • Are you at least 55 (or are retiring early as a result of ill health)?
  • Is the value of the pension arrangement you’re cashing in worth £10,000 or less?
  • Is the pension arrangement  in question the first, second or third one under £10,000 that you’ve cashed in?

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 would recommend getting financial and/or pensions advice before cashing in any small pension pots to make sure it’s the right decision for you.

Pension
 
Final salary pension
 
Small pension pots
 
Trivial commutation
 
Defined benefit pension
 
This information does not constitute financial or other professional advice. You should consult your professional adviser or contact us directly on 02084327333 should you require financial advice. It is important to ensure any insurance policy you take out is suitable for your needs.
Start your journey today...
  Find out how a Drewberry financial adviser can help you reach your destination by making the most of your finances.
Call us on 

Frequently Asked Pensions Advice Questions

 
I keep reading about the benefits of pension transfers but I’m still not sure what’s involved...
 
I’ve been saving into a final salary pension for all of my working life. My neighbour is about...
 
I’m a bit confused about the new pension drawdown rules. What’s the difference between flexi-access...
 
I’m not in particularly good health and a friend said I may be better off with an enhanced annuity....
Need Help? Live chat now and get an instant answer from our Experts...

Neil
Pensions

Victoria
Insurance
Our Latest Reviews
Kevin Paul
05/09/2017

Excellent service renewing our medical insurance, professional advice, good rates found and excellent professional after service, highly recommended.

Max Edgar
09/09/2017

Nadeem was brilliant. He was very patient and worked very well with me to come up with the best solution possible for my budget. Perfect solution. Thank you very much.

Aidan Smyth
11/09/2017

Dealt with me promptly and provided me with the most cost-effective option consistent with my requirements. Very pleased and thank you.

We are rated 4.9/5 based on 1129 independent client reviews.
To read more of our independent client reviews click here →
REVIEWS
EXCELLENT
4.93 / 5 Average
1,222 Reviews
A
Overall Rating
Really, really helpful! Stopped me from signing up with an unhelpful company, and did basically all of the legwork for me in signing up with the right one. I can't have been the most helpful client as I'm 19 and only just started looking into it last week, but he took all the questions in stride! Put up with me turning to ask my dad questions every 2 minutes as well. I was helped by 2 workers; Sam and Nick. Thank you very much to both!
L Finch
Overall Rating
Good communication and follow ups. Friendly. A thorough research for my insurance needs.
M
Overall Rating

Sam Barr-Worsfold was very helpful and provided excellent customer service. Sam discovered I was paying too much premium for my current cover. Sam recommended and helped moved to a new cover with lower premium that provided the level of cover (terms required stated in the provider's policy) I wanted. I recommend highly recommend Sam and Drewberry Insurance. Thank you Sam.
Anonymous
Overall Rating
Thorough, knowledgeable and great communication
Anonymous
Overall Rating
Went through each policy in detail and made sure I was getting the correct one for me