Can I transfer money from an uncrystallised SIPP to another provider and cash it in?

Hello,

I haven't used my tax-free allowance of £12,570 this year as I have no earnings. Can I transfer £9,950 (<£10,000) from my uncrystallised SIPP to another provider and cash this small pension pot in? I'm keen not to trigger the MPAA by doing this in case I get another job. I'm 59, if this makes a difference.

Many thanks.

Dear reader,

The good news is that it seems you may well be able to benefit from the "Small Pot" rules under pension legislation that allow people with small pension pots to cash them in without impacting any other pension entitlement.

Importantly, you are over 55 as access to pensions is not normally possible below this age. If you transfer a portion of your SIPP to another pension provider and the value of benefits with that provider are no more than £10,000, you can then use the small pots rule to cash it in - provided it completely ends all entitlement under the plan.

Accessing benefits as a small pot would provide 25% tax-free with the remainder being taxed as income in the year it is received. This is where you can benefit from the fact you are not currently earning and thus have spare Personal Allowance under income tax rules to set the taxable income against. You expect to have zero tax to pay.

Taking a small pot as cash is not considered a "relevant benefit crystallisation event" and thus does not trigger the Money Purchase Annual Allowance (MPAA), which is important to you because of future earning and pension contribution potential that you wish to preserve. It has the added advantage of not using up any of the lifetime limits on the amount of tax-free lump sum you can access from pension schemes or the lump sum and death benefit allowances available.

The icing on this cake for you is that you can also do this three times! You would probably want to spread this over 3 tax years to make the most of your personal allowances. It is therefore limited to the years your limited income continues and the total benefits of returning to work and funding a pension may exceed working the small pot rules, but while you have personal allowance available, it is a good way of liberating pension benefits tax efficiently.

A couple of things to note;

• There could be set-up costs for your new plan or early encashment penalties so make sure you choose wisely.

• Most SIPP providers make and accept partial transfers, but some may not. You might not be able to achieve a partial transfer via an online service and may need to contact the pension provider and use a more manual process.

• If you have any entitlement to a bigger tax-free lump sum than 25%, because of historic rules in your plan being honoured under legislation, you would lose this, although it is unlikely to make much difference to the outcome as you expect to get the whole pot tax-free anyway.

The values of your pension change daily, so make sure you specify a monetary amount rather than holding to be transferred just in case an unexpected uptick in value takes you over the £10,000 threshold.

In summary - Small Pot rules under personal pensions:

1. The value of the arrangement must be £10,000 or less

2. The payment must extinguish all the members' rights under that arrangement

3. Payments of this type can be made up to three times

I hope this helps!