Clients, small pots and the lifetime allowance

Mitigating the effects of the lifetime allowance can be challenging so when can small pot lump sums help?

The issue of small pot lump sums is no stranger to attracting attention – though not necessarily for the right reasons.

There’s a risk that the headlines could deter advisers from exploration of a route that could well be relevant to a client’s circumstances.

Because, while the tax savings may not be huge in the grand scheme of things, investigating the potential advantages of small pot lump sums is just the kind of thing that clients value.

So what’s the story with small pot lump sums? And what role can they play in a client’s financial plan?

First, let’s set the scene.

The Standard Lifetime Allowance (LTA) is frozen at £1,073,100 until April 2026 and we don’t know whether it will increase after that. (Given its trajectory in recent years, I won’t be holding my breath.)

Some people might have a higher personal LTA if they have one of the transitional protections to mitigate cuts in the value of the LTA over the past decade.

Those with high pension entitlements and/or large pension funds could face LTA charges when benefits are crystallised.

Planning to mitigate the effects of the LTA can be challenging so, inevitably, potential avenues for doing so are bound to be explored.

And this is why small pot lump sums are likely to catch the eye.

The appeal of small pot lump sums

A ‘small pot’ is any pension arrangement that has a value of no more than £10,000 – even previously crystallised funds.

Everyone is permitted to take any number of small pot lump sums from separate occupational pensions and up to three from individual pensions – such as a SIPP – as long as they are at least 55, or are allowed to take benefits before 55 because of ill health or have a protected pension age.

If an individual plan is made up of a number of segments or sub-policies, these are considered separate pension arrangements.

The appeal of small pot lump sums is that they can offer tax advantages for two reasons:

  • they’re not considered benefit crystallisation events for LTA purposes and
  • they don’t trigger the Money Purchase Annual Allowance (MPAA).

A small pot lump sum from an individual pension must exhaust all benefits within the ‘arrangement’ e.g. exhaust a segment. For occupational schemes, the small pot must exhaust all benefits in the scheme.

If the arrangement or scheme is uncrystallised, 25% of the small pot lump sum will be tax free and the balance is taxable. If the pot has been previously crystallised, the entire small pot lump sum will be taxable income.

Segmented individual pension plans may allow you to reallocate different amounts to existing segments to maximise the small pot lump sum opportunity – e.g. ensuring three segments are worth £10,000, with the balance of the pension fund spread among the others. Check the options with the provider.

Where a plan is not segmented, some providers may allow clients to ‘carve out’ up to three new arrangements in preparation for small pot lump sum withdrawals.

A word of caution though: setting up new arrangements will cause Enhanced Protection or Fixed Protection to be lost.


Susan has a SIPP worth £1,103,100 and no LTA protection. If she crystallises the whole fund, there would be a LTA excess of £30,000 which would have a tax charge of at least £7,500. If she could carve out the £30,000 into three separate segments and take them as small pot lump sums, there would no longer be a LTA excess and she would save at least £7,500 in tax.

And finally…

When it comes to small pots, here are four things to think through:

  1. Consider whether clients who have immediate or potential LTA issues could use small pots to mitigate some of its impact.
  2. Before consolidating multiple pensions in preparation for taking benefits, consider whether smaller arrangements should be left intact – a partial transfer, for example – to allow small pot lump sums to be withdrawn.
  3. Find out if there are options for rearranging segments within segmented plans to take advantage.
  4. If the pension plan is not segmented, find out if the provider will let your client carve-out new arrangements – but take care if the client has Enhanced or Fixed Protection.