Cashing in a small defined benefit scheme

You may be able to cash in a small defined benefit (DB) pension, either directly from the scheme under the "trivial commutation" or "small pot" rules, or by transferring it to a defined contribution pension and taking it from there. Each route has conditions, and the taxable part of any cash is added to your income for the year. If the transfer value is over £30,000, you must take regulated advice from an FCA-authorised firm with the pension transfer permission before you can transfer.

Taking a small DB pension as cash: the main routes

There are three main ways people turn a small DB pension into cash. Your scheme's rules decide which are available to you.

• Trivial commutation lump sum: if the total value of all your pension savings, across every scheme, is £30,000 or less, a DB scheme may let you take your pension from it as a one-off lump sum. Conditions apply, including your age (normally at least the minimum pension age).
• Small pot lump sum: a DB scheme may let you take your pension from that scheme as a lump sum if it is worth £10,000 or less, whatever your other pension savings, again subject to conditions.
• Transfer and then withdraw: you can transfer the DB pension to a defined contribution pension and then take money out flexibly. This means giving up the scheme's guarantees. For transfer values over £30,000, regulated advice is a legal requirement first.

In each case, 25% of the lump sum is usually tax-free and the rest is taxed as income in the year you receive it. MoneyHelper's guidance explains the rules in more detail, and your scheme administrator can tell you what your scheme allows.

Trivial commutation: the £30,000 rule

Trivial commutation lets a DB scheme pay out a small pension as a one-off lump sum instead of a regular income. The rules are set by HMRC and explained in its Pensions Tax Manual. Schemes don't have to offer it, so your scheme's rules must allow it too.

The main conditions are:

• The £30,000 limit. The total value of all your pension rights, across every registered pension scheme you belong to, must be £30,000 or less. This includes defined contribution pots and pensions already being paid, not just the DB pension you want to cash in. Your State Pension doesn't count, because it is not paid from a registered pension scheme.
• A nominated date. The value is tested on a date you choose, which must be the day the first trivial commutation payment is made or within the three months before it. If you don't choose, the first day of the commutation period is used.
• Your age. You must normally have reached the normal minimum pension age, which is currently 55. It rises to 57 from 6 April 2028, as HMRC confirms in its small lump sum guidance. You can qualify earlier if you meet the ill-health condition or have a protected pension age.
• The 12-month window. If you have more than one pension that could be commuted this way, all the trivial commutation payments must be made within 12 months of the first one.
• It pays out everything. The lump sum must extinguish all your defined benefit rights under the scheme that pays it, so you can't cash in part of the pension and keep the rest.
• Lump sum allowance. You must have some of your lump sum allowance left when the payment is made.

If you haven't taken any benefits from the scheme before, 25% of a trivial commutation lump sum is normally tax-free and the other 75% is taxed as pension income. Because the scheme pays you directly, there is no transfer involved, so the £30,000 advice requirement for transfers does not apply. It is still worth getting free guidance from MoneyHelper, because once a guaranteed pension is cashed in it can't be restored.

Small pots: the £10,000 rule

The small pot rules are separate from trivial commutation, and they don't depend on the total value of your other pensions. HMRC's small lump sum guidance sets out the conditions:

• The £10,000 limit. The pension being paid out must be worth £10,000 or less.
• Your age. As with trivial commutation, you must normally have reached 55, or 57 from 6 April 2028, unless you meet the ill-health condition or have a protected pension age.
• It pays out everything. For an occupational scheme, such as a DB scheme, the payment must extinguish all your rights under that scheme.
• No recent transfers out. For an occupational scheme, there must have been no transfers out relating to you from that scheme, or a related scheme, in the three years before the payment.

How many small pots you can take depends on the type of scheme. For occupational schemes, including DB schemes, HMRC's guidance sets no limit on the number of small pot payments. For personal pensions and other non-occupational schemes, you can take no more than three small pot payments in your lifetime.

Some large schemes and public service schemes can use a slightly different version of the occupational small pot rule, with its own conditions. Your scheme administrator can tell you which rule applies. For another worked example of how these rules fit together, see our illustrative example on trivial commutation and small pots.

If neither rule applies and you are thinking about a transfer instead, remember what you would be giving up. Our defined benefit pension guide explains the guarantees, and our guide to safeguarded benefits explains why advice from a pension transfer specialist is compulsory above £30,000.

Illustrative example: Graham, 60

Imagine Graham, who is 60, single, with no children. He has rediscovered a small DB pension from a job he left many years ago.

At a glance

• Transfer value of the small DB pension: £45,000
• Pension from the scheme at 65: about £2,500 a year
• Other pension: Armed Forces pension of £18,000 a year, already in payment and inflation-linked
• Mortgage: £35,000 outstanding
• Spending: about £20,000 a year
• Work: part-time self-employed, earning around £10,000 a year
• Likely approach a regulated adviser might consider: a transfer to a cash-based drawdown plan, with withdrawals spread over two to three tax years

Graham already has a secure, inflation-linked income from his Armed Forces pension, and he expects a full State Pension later. He does not feel an extra £2,500 a year from 65 would make much difference to him.

What he would really like is to clear his mortgage, which would free up more of his monthly income.

Why the DB pension may not fit Graham's circumstances

The usual strengths of a DB pension include a guaranteed income for life and a pension for a surviving spouse. Graham is single, so the spouse's pension would not apply to him. He also already has a significant guaranteed income from his Armed Forces pension, which covers his essential spending.

The FCA's starting assumption is still that a DB transfer is unlikely to be suitable for most people. An adviser would look at whether taking the value of this small pension early, to clear debt, would serve Graham better than keeping the guaranteed income, and the answer depends entirely on his full circumstances. Because Graham's transfer value is over £30,000, he would need regulated advice from a firm with the pension transfer permission before he could transfer.

His total pension savings are well above £30,000 once his Armed Forces pension is counted, and the DB pension is worth more than £10,000, so he would not qualify for a trivial commutation or small pot lump sum. A transfer would be the only way to access the money as cash.

The tax problem with taking it all at once

If Graham took the whole £45,000 in one tax year, he would get 25% (£11,250) tax-free. The other £33,750 would be added to his £28,000 of other income, pushing a large part of it into the higher rate tax band. Taking everything at once would mean paying more tax than necessary.

What a regulated adviser might consider

In a case like Graham's, a regulated adviser might look at a transfer to a drawdown plan held in cash rather than invested:

• 25% tax-free straight away: about £11,250, which Graham could use to reduce his mortgage
• The rest held in cash: because Graham plans to take all the money within two to three years, investing it in the stock market would not suit that timescale. Some providers allow drawdown funds to be held in cash at low cost
• Withdrawals spread over tax years: by keeping an eye on his self-employed income, Graham could take the remaining money over two or three tax years while staying within the basic rate band, and clear the rest of his mortgage

Graham's other pension is an Armed Forces pension, which is an unfunded public sector scheme. It is already in payment and, like other unfunded public sector schemes, it could not be transferred to a defined contribution pension in any case. See my public sector pensions guide.

How long might it take?

Gathering the scheme details, getting a Cash Equivalent Transfer Value (CETV) and completing the advice process can take several weeks, and the transfer itself can take several more. A CETV is guaranteed for three months from its guarantee date, so it helps to have paperwork ready early.

A note on smaller transfer values

This site only makes introductions to firms with the pension transfer permission where the transfer value is £50,000 or more. Graham's £45,000 would fall below that. If your DB pension is worth less than £50,000, MoneyHelper is a good place to start, and its directory can help you find a regulated adviser.

This is a hypothetical example. Graham is not a real person and the figures are examples only. It is not advice and should not be relied on as a basis for any decision.

Getting help

For free, impartial guidance on your options, contact MoneyHelper or, if you are 50 or over, book a Pension Wise appointment. Be wary of anyone who contacts you out of the blue offering to release cash from your pension, and check the FCA ScamSmart site before acting.

If your DB pension is worth £50,000 or more and you would like a free chat about how DB transfers and the advice process work, you can get in touch. The chat gives general information, not advice. If you then want regulated advice, I can introduce you to an FCA-authorised firm that holds the pension transfer permission. Arthur Browns may receive a fee from the firm we introduce you to if you become their client.

Frequently asked questions

Can I cash in a small defined benefit pension?

Possibly. If the total value of all your pension savings is £30,000 or less, your DB scheme may let you take your pension as a trivial commutation lump sum. If the pension in a particular scheme is worth £10,000 or less, it may be paid as a small pot lump sum. Age and other conditions apply, and your scheme's rules must allow it. Otherwise, you would need to transfer to a defined contribution pension first, and regulated advice is legally required if the transfer value is over £30,000.

What is trivial commutation?

Trivial commutation is when a defined benefit scheme pays out a small pension as a one-off lump sum instead of a regular income. You must normally be at least 55 (57 from 6 April 2028), the total value of all your pension savings must be £30,000 or less on your nominated date, and all trivial commutation payments must be made within 12 months of the first one. Your scheme's rules must also allow it.

What is cash-based drawdown?

Flexi-access drawdown lets you take money from a defined contribution pension as and when you need it. In a cash-based approach, the money is held in cash rather than invested, which can suit someone who plans to take all of it over a short period, such as two to three years. Spreading withdrawals over several tax years can help keep you in a lower tax band.

How long does a DB pension transfer take?

It varies by scheme. Getting a CETV, completing regulated advice and transferring the money typically takes several weeks to a few months in total. A CETV is guaranteed for three months from its guarantee date.

What tax do I pay when cashing in a defined benefit pension?

Usually 25% is tax-free, up to the Lump Sum Allowance of £268,275, and the rest is taxed as income in the tax year you receive it. Taking a large amount in one year can push you into a higher tax band, so spreading withdrawals over several years can reduce the tax you pay.

Do I need advice to transfer a defined benefit pension?

Yes, if the transfer value of your safeguarded benefits is over £30,000. The law requires you to take regulated advice from an FCA-authorised firm with the pension transfer permission before the scheme will let you transfer. For smaller pensions, advice is not compulsory, but free guidance from MoneyHelper is a good idea before you decide.