Taking a small pension pot as a lump sum

If your pension pot is small you may prefer to take it all as a lump sum rather than using it to get a pension, if your pension scheme rules allow this. Find out more about the ways that you can qualify to do this.

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When you can take your pension pot as a lump sum

You must be at least 60 years of age to take your pension pot as a lump sum.

You may qualify to take all of your pension pot as a lump sum if:

  • one of your pension pots is worth £10,000 or less
  • your total pension pots under all the schemes you belong to are worth £30,000 or less

If your pension pot is £10,000 or less there are different rules depending on whether you're a member of a company or public pension scheme, or a personal pension scheme.

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Company or public sector pension scheme - pension pot worth £10,000 or less

If you're a member of a company or public sector scheme and your pension pot is worth £10,000 or less you may be able to take all your pension pot as a lump sum if you meet the following conditions:

Condition 1

You must take all your pension pots with the same pension scheme as a lump sum - for example if you've worked for different councils you may have several pension pots in the local government pension scheme.

Condition 2

You haven't transferred any funds out of the pension scheme in the last three years.

Condition 3

You're not a 'controlling director' - or someone connected with a controlling director - of an employer that participates in the pension scheme.

Condition 4

You belong to more than one company or public sector scheme for the same job and your total pension pots are worth £10,000 or less.

If you meet the first 3 conditions but not condition 4 you may still be able to take your whole pension pot as a lump sum but you'll need to check with your scheme administrator.

Before 27 March 2014 to qualify for this type of lump sum your pension pot must have been worth £2,000 or less.

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Personal pension scheme - pension pot worth £10,000 or less

If your pension scheme isn't a company or public sector scheme you may still be able to take all your pension pot as a lump sum if your pension pot is worth no more than £10,000. You must take all the money in that pension pot as a lump sum.

You can only take a lump sum 3 times under this rule.

Before 27 March 2014 to qualify for this type of lump sum your pension pot must have been worth £2,000 or less, and you could only take a lump sum twice under this rule.

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Total of all pension pots worth £30,000 or less

If all your pension savings in all the pension schemes you belong to are worth no more than £30,000 you may be able to take all your pension pots as a lump sum. You can do this even if one or more of your pension pots is worth more than £10,000 or if you've already started to take one of your pensions.

This type of lump sum is called a 'trivial commutation' or 'trivial' lump sum. To be paid this type of lump sum you must:

  • take all the savings in all of your pension pots within the same pension scheme as a lump sum
  • have your pension savings in all your pension schemes valued on the same date which must be no more than three months before you take your first trivial commutation lump sum

If you belong to more than one pension scheme you don't have to take a lump sum from all your schemes. For example, if you're a member of two pension schemes you can take a trivial lump sum from one scheme and a pension from the other scheme.

If you are taking a trivial lump sum from more than one of your pension schemes you must take all the trivial lump sums within 12 months of the first lump sum payment.

Before 27 March 2014, to qualify for this type of lump sum the value of all your pension savings must have been £18,000 or less.

Valuing your total pension pots

The rules for valuing your pension pots depends on:

  • whether or not your pension has started to be paid
  • when your pension started
  • the type of pension scheme you belong to

The valuation that you get for a trivial commutation lump sum payment will often be different to the valuation for taking a pension.

Valuing your pension pot before your pension has started

The value of pension savings held under a money purchase or cash balance arrangement is the value of savings held in your pension pot. Your pension scheme administrator can tell you how much your pension pot is worth.

The value of your pension pot in a defined benefits arrangement is your promised pension multiplied by 20. If your pension scheme gives you a lump sum without having to give up ('commute') your pension you also need to add on the value of this separate lump sum.

For example if you've built up a pension of £500 a year and your scheme also gives you a lump sum of your pension multiplied by 3, your lump sum will be £1,500. Your pension pot is valued as £11,500.

(£500 x 20) + £1,500 = £11,500.

Valuing your pension fund after your pension has started

The rules for valuing a pension in payment depend on whether your pension started:

  • before 6 April 2006
  • on or after 6 April 2006

Calculating the value can be complex and you should ask your pension scheme administrator to do this for you.

Types of pension schemes

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How your lump sum is taxed

If a lump sum is paid instead of a small pension before you started to get that pension, only 75 per cent of the lump sum is taxable. If you were already getting the small pension but have turned it into a one-off lump sum instead, the whole lump sum is taxable.

Your scheme administrator will deduct any tax due at the basic rate of 20 per cent using Pay As You Earn (PAYE) and should give you a P45 showing how much tax has been paid.

The amount of tax you pay depends on your total income for the tax year. Even if you normally pay basic rate tax at 20 per cent, you may still end up paying too much tax on your lump sum. If this applies to you, or if you normally don’t pay tax at all, you can claim back the overpaid tax from HM Revenue & Customs (HMRC). If you're a higher or additional rate taxpayer you may need to pay more tax through self assessment, as the tax on your lump sum will only have been deducted at 20 per cent

If the lump sum payment doesn't meet the conditions described above it will be an unauthorised payment and you may have to pay extra tax.

Claiming a refund on a pension lump sum ('trivial commutation')

Unauthorised payments from pension pots

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Trivial lump sums and the lifetime allowance

The lifetime allowance is the maximum amount of pension and/or lump sum that you can get from your pension schemes that benefits from tax relief. A trivial lump sum will not use up any of your lifetime allowance.

Understanding the lifetime allowance

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How to arrange to take all of your pension pot as a lump sum

You should contact your pension scheme administrator to find out if your scheme allows you to take this type of lump sum. If your scheme allows it, your scheme administrator will get your pension pot valued so that they can check that it meets the conditions. They may also ask you to get valuations for any pension savings you have under other pension schemes. Your scheme can refuse to pay this type of lump sum if they don't think your pension meets the conditions.

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More useful links

Technical guidance on valuing a pension that started on or after 6 April 2006

Technical guidance on valuing a pension that started before 6 April 2006

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