If you’re over the age of 55 and your pension pot is £10,000 or less, it may be classed as a ‘small pension pot’. You can take the full amount as cash and this won’t reduce your annual allowance. 25% is tax free and we’ll deduct 20% income tax from the other 75%. If you exceed the 40p or 45p rate, you’ll have to pay any additional tax you incur on your lump sum via a Self-Assessment tax return.
Small pot lump sum rules apply differently depending on whether the pension is occupational or contract-based.
If you have a contract-based scheme, you can take up to 3 pension pot lump sum payments in your lifetime.
If you’re in a trust-based scheme (eg The People’s Pension) there’s no limit to the amount of occupational pension small pot lump sums you can take. Other rules apply if you’re in a trust-based scheme such as The People’s Pension. If you wish to take a lump sum worth less than £10,000:
- you can’t be a controlling director;
- you must have left the pension scheme you are claiming the pot from;
- you can’t have transferred any funds out of the pension scheme within 3 years of the payment;
- and mustn’t have had another pension fund transferred in within 5 years of the payment.