Are you making the most of your "small pots"?

10 separate pension pots. A single retirement plan. Are you making the most of your "small pots"? 

A fascinating report published by Pension Age caught my eye. According to recent analysis of FCA data, the number of people cashing in their pensions in full each year has jumped by 29% since 2018—amounting to over 100,000 extra full withdrawals annually. 

 

But look closer at the numbers, and a major trend emerges: the vast majority of these fully cashed-in plans (over 300,000 of them) were worth under £10,000 

 

I met with a potential client who perfectly illustrated this. Over a successful career, they had accumulated 10 separate pension pots. 2 were of a substantial size. The other 8 were all relatively small, varying amounts from short stints with previous employers over the years. 

 

Like many people, they had simply lost track of the collective power of those 8 smaller pots. 

When you have multiple old workplace pensions scattered around, it can be tempting to look at a £5,000 or £8,000 pot and think, "I'll just cash that one out to fund a holiday or clear a credit card." Sometimes, cashing in a small pot is the right tactical move. But doing it without a broader strategy can be a costly mistake. Why? 

 

1️⃣ The Tax Trap: Full pension withdrawals are taxed as income. If you cash out a pot in one go, you could inadvertently push yourself into a higher tax bracket for that year, giving a significant chunk straight to the taxman. Also, under the ‘small pots’ rule, you can take up to 3 separate pension pots of under £10,000 without triggering the Money Purchase Annual Allowance (MPAA). This allowance, if triggered, limits your ability to fund future pension contributions to just £10,000 per year. So be careful with also encashing additional pensions, especially if you or your employer are still making significant contributions to a pension and you are some years away from retirement. 

2️⃣ The Lost Compound Growth: When small pots are properly consolidated, they combine to support and fuel your larger core funds, maximising compound growth and reducing duplicate management fees. 

3️⃣ The 2027 IHT Countdown: Why are we seeing such a massive spike in people tidying up their pensions right now? A lot of it comes down to the impending Inheritance Tax (IHT) changes coming into effect in April 2027. With pensions set to be brought into the IHT net, savers are waking up to the urgent need to review, track down, and tidy up their historic arrangements. 

I help clients play detective. We track down those forgotten pots, analyse their terms (checking for any hidden guarantees you wouldn't want to lose), and build a consolidated, tax-efficient strategy designed for your lifestyle. 

 

Don’t let your hard-earned savings sit fragmented across old employers, and don't cash them out without checking the tax bill first. 

How many pension pots do you currently have? If you aren't sure, it might be time for a spring clean. Let’s connect and get them working together.