My pension savings are in a Collective Retirement Account - how do small pots payments work?
Can I continue funding into my pensions?
The small pots rules allow you to continue making payments into your pension prior to age 75, up to the annual allowance (currently £40,000 a year) and receive tax relief. Plus you can use any unused annual allowances from the three previous tax years if you have sufficient ongoing earnings or if your employer is making contributions on your behalf.
This annual allowance may be reduced to £10,000 depending on if (and how) you’re taking income from other pension arrangements and where it does there will be no unused annual allowance entitlements from the previous three tax years available.
Do they affect my Lifetime Allowance?
The money you take under a small pots payment is not treated as using up any of your Lifetime Allowance (currently £1 million). If the value of your overall pension savings is large this means that, depending on the options available under your pension plan, up to 3.00% of your overall savings could avoid being subject to a Lifetime Allowance tax charge (currently 55%).
You cannot use the small pots payment facility under the Collective Retirement Account, where you have registered your total pension savings for Enhanced Protection, Fixed Protection 2012, Fixed Protection 2014 or Fixed Protection 2016, and the value of your Collective Retirement Account exceeds £10,000.
How do Income tax deductions apply?
If you’re a basic rate taxpayer, taking a payment under small pots rules will ensure that the right amount of tax is deducted.
If your tax position means you are liable for less or more than basic rate tax when a payment is made you will need to contact HM Revenue & Customs for either a repayment, or for them to notify you of the additional tax liability. More details can be found in our booklet ‘A guide to income tax and your pension’.
Taking income as a lump sum payment in any other way (ie not as a small pots payment) may subject the taxable element (75% of the value you request) to emergency rate tax on the first payment. If you are a basic rate taxpayer this could result in more tax being deducted from the payment than should be the case.