If you take all of the money out of a small pension pot it is known as trivial commutation.
Having a small pension pot
There are different reasons you may have saved small amounts in different pension pots. For example, if you have worked for different organisations and contributed to work pensions for a short time in each, or if you have worked for a short time.
Taking your small pension pots as a lump sum
If the total value of all your pension pots is less than £30,000, you may be allowed to take this as a lump sum. This is known as trivial commutation.
How is a trivial commutation taxed?
25% of the lump sump is tax free, but the remainder will be taxed as income. The remainder (the 75%) is usually taxed at 20%.
Trivial communication and final salary schemes
With final salary schemes, you don’t have your own ‘pot’, so the valuation of benefits in a final salary scheme for testing against the triviality limit (£30,000) is based on the pension you could receive multiplied by 20. However, the lump sum that is then paid to you is broadly equivalent to the amount that would be available to transfer to a new scheme.
Cashing in a pension worth £10,000 or less
Any occupational pension scheme where the value is £10,000 or less, the benefit can also be taken as a small pot lump sum separately from the triviality rule above. In addition, individuals over the age of 55 can also claim small pot lump sums from up to three personal pensions worth £10,000 or less, without having to purchase an annuity. Taking a small pot lump sum will not trigger the rules around the money purchase annual allowance.
Working out how much your pension funds are worth for this purpose may not be straightforward, especially if you have a final salary occupational pension scheme, so speak to your pension provider or the Money and Pensions Service.
What if I have other sources of income?
When you take a lump sum from your pension, HMRC usually taxes it without looking at your other income you might have. This could mean you pay too much or too little tax. If you’ve got other income, it’s a good idea to check what you need to do.