Small pension pots: what you can do with your cash

Still wondering what to do with your pension after the Budget? Here are the rules for this year

Pension pot is under £10,000 

If you’re over 60 and you have some pension pots that are each worth less than £10,000, you can take the money out as a cash lump sum. It doesn’t matter how much you’ve got overall in pension savings, if you’ve got a few pensions with a few thousand pounds in them, you can empty them and put the money into something more sensible.

The Government is also increasing the number of personal pension pots you can access—to three, plus one occupational pension. So in total the most you can take out is £40,000 in one year.


If you have a pension pot under £30,000

If you’re under 60 and have a pension pot under £30,000, or if you’re over 60 and your TOTAL pension savings are worth less than £30,000—whether that’s in one pension or lots of smaller ones—you can now take ALL of that out as a lump sum.

A quarter of it will be tax-free, but the rest will be taxed (probably at 20%, but it depends how much other cash you’ve made in that tax year).

To do that you must contact your various pension administrators and fill in an application to withdraw your savings, which will include a disclaimer that states your total pension wealth is below £30,000 (apart from the £40,000 in little pots). You need to be very careful that you don’t have pensions elsewhere that you’ve forgotten about or that may be worth more than you think. If you say your pensions are worth less than £30,000 and it turns out they’re worth more, your money will be treated as an “unauthorised payment” by HMRC and you’ll get a 55% charge.

If you’re in any way unsure, speak to an independent financial adviser (one that you pay) to find out what the situation is.


If you want to do a “capped drawdown” 

This is where you take lumps of cash out of your pension each year on top of, or instead of, actual pension payments. If this idea appeals, you’ll be able to take more out under the new rules. Instead of only being allowed to take out 120% of the Government rate, it’s now 150%.

Usually drawdown is only available to those who have pots of at least £50,000, but already companies are starting to change their rules to allow people to dip into their pension cash using capped drawdown.

To do this, talk to your pension providers and a financial adviser.


If you want a “flexible drawdown” 

You’ll only need £12,000 of secured pension income from other sources (such as your state pension or an annuity from elsewhere) to make unlimited withdrawals through what’s called “flexible drawdown”.


What will happen in April next year? 

Anyone over 55 will be able to take the whole of their pension out if they want (although remember that there are tax implications if you take a lot of cash out in one go).

So this means that if you have a £100,000 pension you could take £25,000 tax-free and then withdraw the other £75,000 to do what you like with it (after paying tax on it).

But you will be able to take the money in bits over a few years so that you pay less tax. You will still be able to buy an annuity if you want. In fact, it might be a good idea to consider one later in life, say, when you’re over 80, as an annuity can be useful then.