- A maximum of three small, non-occupational pensions can be commuted under small pot payments.
- There is no limit to the number of occupational pensions that can be commuted under small pot rules.
A small pot payment (properly called ‘small lump sum’) can be made from any arrangement, whether the rights are uncrystallised or comprise a pension in payment, irrespective of the overall value of the individual's pension's worth. Up to three small non-occupational pensions (personal pension plans etc.) can be commuted under small pots payments, but there’s no limit on the number of occupational pensions that can be taken under small pots. To allow the payment of small pot commutation, the following conditions need to be fulfilled:
- the member has reached the minimum retirement age of 55, or satisfies the definition for ill-health early retirement or has a protected early pension age.
- each payment must not exceed £10,000 at the time it‘s paid to the client
- for non-occupational pension schemes, the payment must extinguish all member benefit entitlement under the arrangement
- for occupational or public service pension schemes, the payment must extinguish the member’s entitlement to benefits under the paying scheme,
in respect of non-occupational pensions (personal pensions etc.), there’s a maximum of three small pot payments are permitted. A full list of the conditions is in the Pensions Tax Manual (PTM063700) covering;
- Payments under occupational or public service pension schemes
- Payments under larger occupational or public service pension schemes
- Payments under a scheme that is not an occupational or public service pension scheme
Small pots from non-occupational pension schemes are about arrangements, not schemes
‘Small pots’ applies at arrangement level rather than scheme level. So the payments can be made from two or three separate registered pension schemes or from the same scheme where the payments are made from two or three different arrangements under that scheme.
Effect on entitlement to benefits
Small pot payments extinguish the member’s entitlement to benefits under the arrangement from which the payment is made, but not necessarily their entitlement under the scheme as a whole. A member can take a small lump sum even though they may still have an entitlement to benefits under another arrangement in that scheme.
Managing a large number of arrangements
For example 100 or even 1000 arrangements under the same registered pension scheme, where each arrangement contains well under the commutation limit under this regulation. Subject to what the scheme rules allow, these funds may be consolidated either by merging arrangements into a smaller number of arrangements or by a transfer of funds between multiple arrangements. This allows the maximum small pot to be taken from either one or each of two or three arrangements under the scheme. A ‘reshaping’ of existing arrangements (either by merging multiple arrangements or internal transfers of funds between multiple arrangements in the same scheme) won’t involve the setting up of a new arrangement. This avoids any potential consequences for members who have valid enhanced protection, fixed protection, fixed protection 2014 or fixed protection 2016.
Funds in excess of the commutation limit
If a member has funds in excess of the limit in an existing single arrangement, some of which are then moved into arrangements set up to allow a member to take one, two or three small lump sum payments under Regulation 11A, this will entail the setting up of one or more new arrangements. This could potentially have consequences if the member has valid enhanced protection or any of the fixed protections (i.e. the protection would be lost).
Please note: small pots don’t trigger the money purchase annual allowance (MPAA). We’ve written more about this in our Money Purchase Annual Allowance article.
Crystallised and uncrystallised benefit rights
Where the payment represents uncrystallised benefit rights, 25% of the payment is free of income tax, and the balance of the payment is chargeable to income tax as pension income. If the payment represents crystallised rights, all of the payment is chargeable to income tax as pension income. Where the payment represents a mixture of both uncrystallised and crystallised benefit rights, only 25% of the part of the payment relating to the uncrystallised rights can be paid free of income tax.