Your small pots questions: answered

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We’ve been getting a few questions about “small pots” and how you can take money from them. That’s why retirement expert Adam Templeton is here to explain more about small pots and help you understand what your options are.

Hi, Adam! What’s considered a “small pot”?

A small pot, essentially, is just a pension plan that’s valued under £10,000.

What are your options for taking a small pot? Can you still go for drawdown, an annuity, or lump sums..?

That depends on your pension provider.

But yes, you can normally still buy an annuity (which gives you a guaranteed income for life). You could also go for drawdown (also known as taking a “flexible income”), or you could take your pot in one go.

The amount of annuity income you could get from a small pot each month would be very small. If you wanted to take your money via drawdown, you could potentially still get a decent amount from your pot, say, every month, although this money could run out quickly. Taking your pot as a lump sum might be a good option for you depending on your circumstances, but keep in mind that your money might not last for as long as you need it to. Overall, what’s right for you really depends on your own situation.

You can find out more about different ways to take money from a pension plan on MoneyPlus.

What does “small pot rules” mean?

When I talk about “small pot rules” here, I’ll talk about the rules that usually apply to defined contribution plans (although defined benefit plans and some types of defined contribution plans have different rules, so check with your provider before making any decisions). 

Under small pot rules, up to three pots worth up to £10,000 each can be taken as a lump sum in your lifetime. You need to be at least 55 years old to do this (rising to 57 from 6 April 2028). 

You can normally take up to 25% tax free from each of them, and the remainder of each will be taxed.

And here’s something that makes taking a small pot as a lump sum attractive to people. If you take a small pot under “small pot rules”, you don’t trigger something called the Money Purchase Annual Allowance (MPAA).

Essentially, you have something called your ‘annual allowance’, which means you can usually pay in up to £60,000 gross (or 100% of your UK relevant earnings, whichever is lower) across all your plans before you could face a tax charge. But if you trigger the MPAA, £10,000 gross is the maximum you can pay in before a tax charge applies. 

So, you won’t trigger the MPAA under small pot rules. But you can trigger it in other ways. You can find out more on MoneyPlus. 

How are you taxed on your small pot?

Imagine you’ve taken 25% tax free from a small pot. You might be wondering what happens to the remaining 75%.  

Well, that remaining 75%, no matter how you choose to take it, will be considered ‘income’. That means that the money you take could be subject to income tax during the tax year you take it. The tax you pay will depend on the tax band that you’re in. 

If the money you withdraw takes your total taxable income for the year to over £12,570, you’ll normally owe tax. You can find out what the tax rates and bands are in the 2024/25 tax year on GOV.UK. Just remember, tax rates and bands can be different depending on where you live in the UK.

If you don’t need the money right now, what else can you do with your small pots?

It depends. Everyone’s situation is different.

Let’s say you think there’s something coming up that you might need a lump sum for. Rather than dipping into, say, a bigger plan you’ve got, you might prefer to cash in your small pot. Under small pot rules, you could continue to pay into other plans without worrying about triggering the MPAA. 

Or if you’re currently paying into a small pot, you might want to keep doing so until you’re actually ready to take your money. 

If you think combining all of your small pots together might be better for you than cashing them in, then that’s something you could consider. For example, if you have a larger pension pot out there, you might want to think about transferring your smaller pots into it. But this won’t be right for everyone, and you’ll need to check that you won’t be missing out on any benefits or guarantees by transferring.

Some people have multiple jobs and may have forgotten that they paid into a pension plan that an old employer set up. So if you think you have pension plans out there somewhere, it’s worth trying to find them. And checking the government’s Pension Tracing Service could be a good place to start. 

Got more questions?

Want to know more about your retirement options or planning for life after work? You can visit our support page for FAQs and ways to get in touch.

Don’t forget, Pension Wise, a service from MoneyHelper, offers free impartial guidance to over-50s about their options for taking their pension savings. 

If you’re not sure about your options, it could be worth getting financial advice from a financial adviser.

 

The information here is based on our understanding in July 2024 and shouldn’t be taken as financial advice

A pension is an investment and its value can go down as well as up and may be worth less than was paid in.

Your own personal circumstances, including where you live in the UK, will have an impact on the tax you pay. Laws and tax rules may change in the future.

Standard Life accepts no responsibility for information in external websites. These are provided for general information.