Have you been working for different employers over the last few years and as a result ended up with some small pension pots?

Are the amounts in these small pension pots unlikely to make any difference to your retirement in the future?

Would it be better to get the cash out now?

Well there are ways you can ‘cash-in’ these small pension pots.

There will be more and more small pension pots in the future

Apparently the average UK worker will work for around 9 employers or have 9 different jobs during their lifetime.

For millennials it’s likely to be 6 different jobs by the time they are 30.

In fact UK workers think about quitting their current job on average 16 times a year!

The law now states that every employer must auto-enrol their employees into a pension (subject to qualifying conditions). This means unless you opt out (which people rarely do), you will start to build up a pension for each new job from day 1.

So for a millennial it could mean 6 different pension pots by the time you are 30!

I was working with a client the other day who found a small pension pot that guaranteed to pay him £700 per year (£58 per month) from age 65. Or he has the option of cashing this in for around £14,000.

£58 a month is going to make little different to his retirement lifestyle, but £14,000 could be used now for investment purposes, perhaps for an extension on the home.

So how do you access these small pension pots?

Cashing in small pension pots

When it comes to dealing with small pension pots there are really 5 options.

#1 – A refund of pension contributions for short service
  • If you’ve been a member of a pension scheme for less than 30 days you should be able to request a refund of any pension contributions you have made.
  • For members of defined benefit pensions you may be able to request a refund of contributions if you leave within 2 years. It will depend if the individual scheme allows it.
  • If you’ve received tax relief on your pension contributions it will be clawed back.
#2 – Consolidating small pension pots into one
  • Every little helps, and individually small pension pots may seem small but together could be worth a lot more.
  • If you don’t need the cash and you want to continue saving for retirement then it could be a good idea to request to transfer and consolidate your small pension pots into your latest employer pension scheme, or a personal pension scheme.
#3 – Trivial lump sum

If you’re a member of a defined benefit pension scheme, over 55 or suffering from ill-health and the value of your total pension benefits (including other pensions) is less than £30,000, you may be able to cash in your pension under the Trivial Lump Sum rules.

  • The individual pension scheme rules will need to allow it.
  • 25% of the payment will be tax free and the remaining amount added to any other income you have in the year and taxed accordingly.
#4 – Small lump sums
  • For defined contribution pensions you can take a cash lump sum under the ‘small pots rules’ providing the pension is less than £10,000 and you’re over 55 or suffering ill-health.
  • You can do this with up to 3 different personal pension schemes and an unlimited amount of times with workplace pensions schemes.
  • Again 25% of each payment will be tax free and the remaining amount added to any other income you have in the year and taxed accordingly.
#5 – Winding up
  • If the pension scheme you are a member of is winding up, then you may be allowed to cash-in the pension even if you are below age 55.
  • The total pension benefits must be under £18,000 and the employer cannot be making pension contributions to any other arrangement and for one year after the payout.
  • Again 25% of the payout will be tax free and the remaining amount added to any other income you have in the year and taxed accordingly.

This article gives you an overview of the options. In fact there is a lot of finer detail that needs to be considered when cashing in a pension.

Things like the pension Lifetime Allowance, tax and death benefits.

If you would like to explore this area further or would like to take the opportunity to get your pensions assessed and tidied up, then why not take advantage of our free 15 minute call. You can speak to a Chartered Financial Planner who will listen to your situation, give you an outline of what you need to consider and guide you in the right direction.

Risk warning:

Stock market linked investments and any income from them, can fall as well as rise and is not guaranteed. Any figures quoted are for illustrative purposes and should not be taken as a forecast or guarantee. Past performance should not be seen as an indication of future returns and clients may get back less than they have invested.