Can I cash in a pension from an old employer or a small pension pot?

According to the latest figures from the Pensions Policy Institute (PPI), the total value of “lost” pension pots in the UK is around £26.6 billion in 2022. However, the phrase “lost” is slightly misleading. “Misplaced” is probably a better description. With the average UK worker now predicted to work 12 different jobs in their lifetimes, we’ll all accrue multiple pension pots. Many of us move jobs, move house, and eventually lose track of some pensions.

That represents a huge amount of unaccounted-for pension savings, and that’s before you even factor in the pension pots that have been fully traced. Whether you’re fully on top of your pension savings or need to track down some of your schemes, it’s worth understanding the rules around cashing in a pension from an old employer – especially if you have several small pension pots. Here, we explain your options so you can be fully clued up.

Can I cash in a pension from an old employer?

The short, albeit slightly vague, answer is: it depends. You can only cash in a workplace pension under certain conditions depending on your age, the type of pension scheme you’re in, and your pension provider’s rules.

Defined contribution pension

If you have a defined contribution pension, you can typically access your pension pot once you reach the age of 55 (rising to 57 in 2028) or earlier if you’re retiring due to ill health. You can usually take up to 25% of your pension pot tax-free, while the remaining amount can be taken as a taxable lump sum.

Defined benefit pension

If you have a defined benefit pension, also known as a final salary scheme, the rules are stricter. You won’t be able to access your funds until you reach the minimum retirement age defined by the scheme. 

When you reach the specified retirement age, you have several options available: 

• Trivial commutation – If the total sum of all your workplace and personal pensions (excluding the State Pension) totals £30,000 or less, you might be able to take your defined benefit pension as a one-off lump sum through a process known as “trivial commutation”. However, you’ll need to check your scheme’s terms and conditions.  
• Pension transfer – If your pension savings exceed £30,000, the only viable option for cashing in a final salary pension is a pension transfer. This entails transferring your benefits to a defined contribution pension. However, this course of action is rarely recommended because defined benefit pensions offer a guaranteed income for life, which is typically far more valuable than taking a lump sum. For that reason, it’s now compulsory to seek independent financial advice before making such a decision to ensure you fully understand the consequences. 
• Leave it be – Last but not least, your final – and usually most sensible – option is to leave your defined benefit pension alone. This type of pension is rare for a reason; the benefits are incredibly valuable. As with most rare things, this makes them precious. If you can, leave it be and reap the rewards later.

What is a small pension pot, and what are the small pension pot rules?

When it comes to cashing in a small pension pot (£10,000 or less), you have slightly more flexibility and freedom at your disposal. This is all thanks to what’s known as the “small pension pot rules”, which allow you to cash in up to three personal or stakeholder pensions, each totalling a maximum of £10,000, during your lifetime. Better yet, there is no limit to the number of workplace pensions you can cash in under these rules.

Another significant benefit of cashing in a small pension under the small pots rules is that any lump sums you take won’t activate the Money Purchase Annual Allowance. This means you can keep contributing the full annual allowance and continue to enjoy tax relief on your pension savings. However, it’s worth bearing in mind that any encashed lump sums will be taxable if they take your income over your £12,570 Personal Allowance.

If you have a combination of several small pots and a defined benefit pension, you could take advantage of the trivial pension commutation rules and small pots rules in tandem. For instance, let’s say you had three small pot personal pensions worth up to £10,000 each and a defined benefit pension worth £30,000, you could cash in your small pensions first and then cash out your defined benefit pension funds under the trivial pension rules.

As such, you could in theory access up to £60,000 of pension funds in quick succession (potentially spread across two tax years if planned carefully). However, it’s worth bearing in mind that your small pension encashments must have been made within 12 months of the trivial commutation.  

Get pension advice at Hilltop Financial Planning

Cashing in a pension isn’t a decision to be taken lightly. Even if you want to cash in a small pension, there may still be tax implications to consider. Therefore, before making any major decisions, it’s always advisable to speak with an independent financial adviser to ensure you fully understand all the available options. 

At Hilltop Financial Planning, we keep things simple, providing you with all the tools you need to make informed decisions about your pension savings. Our advisers speak in plain English, providing clear and straightforward advice. Ultimately, we’re real people, giving real-life financial advice about your pensions and investments.

When you come to us for financial advice, you won’t have to visit an office or wait for a financial adviser to turn up at your home. Our forward-thinking, technology-led service means we can provide on-demand pension advice at a time and place that suits you best. Whether you’d rather talk over the phone or face-to-face on a video call, our advisers are always here to deliver bespoke pension advice tailored to your specific needs.

For pension advice made personal, contact us today on 0161 413 7051 to speak to one of our advisers.