Small Pots vs Trivial Commutation: How to Withdraw Small Pension Amounts Efficiently

For those with modest pension savings, navigating how to access funds in retirement can be confusing. In this article, we look at two key ways to withdraw smaller pension amounts efficiently: small pots and trivial commutation. This article is relevant for anyone studying for their CII R04, J05, or AF7 exams.

This article is correct as at 28 February 2025.

Small Pots

The small pots rule allows members to withdraw up to three personal pensions or an unlimited number of occupational pensions, provided that each pot does not exceed £10,000.

Key Features:

• Each withdrawal is taxed under PAYE—with 25% tax-free and the remaining 75% taxed as income.
• Taking a small pot does not trigger the Money Purchase Annual Allowance (MPAA), meaning the member can still contribute up to £60,000 per year into a pension (or £10,000 if the MPAA is already triggered).
• The withdrawal does not use up their Lump Sum Allowance (LSA) or Lump Sum and Death Benefit Allowance (LSDBA).

It might be useful to take a Small Pots Payment if the member:

• has several small pensions from different jobs and wants to access the cash.
• is still working but needs access to additional funds without reducing their pension contribution allowances.
• is a non-taxpayer and has excess personal allowance that is currently unused.
• wants to avoid complex (and potentially costly) drawdown arrangements for smaller amounts.

Using the small pots rule can be an efficient way to access pension funds without affecting future pension planning.

Trivial Commutation

Trivial commutation allows individuals with defined benefit (DB) pensions or in-payment money purchase in-house scheme pensions to withdraw their entire pension as a lump sum if the total value of all their pensions is £30,000 or less.

Key Features:

• The member’s total pension value (DB and defined contribution (DC), including crystallised funds) must be £30,000 or less on the nominated date.
• It can be taken if the member has not previously received a trivial commutation lump sum, except within the commutation period.
• The member must take all of their pensions as a lump sum within 12 months of their first trivial commutation payment.
• The member must have some LSA remaining, though the payment does not reduce this (nor their LSDBA).
• Withdrawing a trivial commutation lump sum does not trigger the MPAA.
• The member must be at least 55 (rising to 57 in 2028), qualify under ill health rules, or have a protected pension age.
• The lump sum fully extinguishes the pension rights under the scheme making the payment.

It might be useful to take a trivial commutation lump sum if the member:

• has one or more small DB pensions and prefers a lump sum instead of a small monthly pension.
• has a pension that is unlikely to provide significant ongoing income, and a lump sum would be more beneficial for immediate needs or paying off debts.

Planning Tips

Both small pots and trivial commutation lump sums are subject to income tax on the 75% taxable portion. If the withdrawal pushes the member into a higher tax bracket, they could face a higher-than-expected tax bill.

To reduce the tax impact, the member could consider:

• Spreading withdrawals across tax years to avoid pushing themselves into a higher tax band.
• Using personal allowances and tax-free cash wisely—consider combining small pots with tax-efficient withdrawals from other pensions.
• Checking their marginal tax rate before withdrawing, especially if they have other taxable income.

Another key consideration is Inheritance Tax (IHT). Pension funds are currently outside of the member’s estate for IHT purposes, although this may change from 6 April 2027. However, if they withdraw a lump sum and keep it in a bank account, it could form part of their taxable estate if they do not spend it prior to death. Keeping funds inside a pension wrapper may, therefore, be more tax-efficient in some cases, at least in the short term.

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