For SSAS, when it comes to dealing with small pension pots the rules and practicalities can create significant challenges, explains Mark Plewes, Head of Pensions Technical, WBR Group.
With the proliferation of small pots only increasing in the pensions industry, small lump sum payments have become increasingly necessary to allow affected members to commute their benefits efficiently and without fuss.
Government consultations have highlighted the problem. Deferred small pots, often created by auto-enrolment and job changes, are costly to administer and confusing for savers. While SSAS schemes are less affected by auto-enrolment, they are not immune to the inefficiencies caused by fragmented savings.
Originally reserved for occupational pension schemes, previous Government changes have both increased the potential upper limit of small lump sum payments to £10,000 and opened them up to personal pension schemes as well, subject to a maximum of three such payments in a member’s lifetime in such schemes.
Unlike other lump sum options, small pot payments do not trigger the Money Purchase Annual Allowance (MPAA) and are not treated as a Relevant Benefit Crystallisation Event (RBCE). This means that the member does not have to have Lump Sum Allowance (LSA) or Lump Sum and Death Benefit Allowance (LSDBA) available to make the payment and nor do the payments use up either of those allowances. This makes them attractive in theory, but practical difficulties abound depending on the type of scheme in which the benefits are held.
Whilst the majority of SSAS schemes will see members with significant pension provision, on rare occasion our pensions technical team do see a SSAS member enquiring about their ability to take a de minimis amount under the small lump sum rules.
For SSAS, when it comes to dealing with small pension pots the rules and practicalities can create significant challenges. While legislation permits the payment of small lump sums under certain conditions, the reality for trustees and members is far from straightforward and much less so than it can be under a personal pension scheme such as a SIPP.
Under HMRC’s small pot provisions, a member can take their entire pension pot as a lump sum if its value does not exceed £10,000, subject to certain conditions. The conditions for an occupational scheme such as a SSAS include the following:
- The member must be aged 55 or over (rising to 57 from April 2028) or have an entitlement to take their benefits prior to this age, either by way of a protected pension age, or because they meet the ill-health condition.
- The total value of the SSAS benefits and any related schemes linked to the same employer must not exceed £10,000.
- This payment must extinguish all rights under the scheme for that member. Any benefits held in related schemes linked to the same employer do not have to be taken in this way.
- The member cannot have made any transfers out of the SSAS or any related scheme within the three years prior to the payment.
- The member must be at “arm’s length” from any scheme employers, meaning that they cannot be a controlling director or connected to somebody who is one.
The requirement to consider benefits held in related schemes linked to the same employer can present issues for SSAS members which do not need to be considered when looking at personal pension schemes. In addition, given that SSAS members are likely to be business owners, directors and their family members the requirement for the member not to be a controlling director in their own right, or to be connected to one is the primary stumbling block for this type of request.
Compliance is another area of concern. HMRC rules are strict, and errors can result in unauthorised payment charges of up to 55%. Trustees must ensure that members are not controlling directors, a condition that can be difficult to verify in family-owned businesses where relationships are complex.
For multi-member schemes, additional steps such as fund splits may be required, adding layers of complexity. These processes may also require the trustees to obtain market valuations for all scheme assets and the costs of doing so, along with any associated administration are often disproportionate to the small sums involved.
While 25% of a small lump sum can be tax-free, the remainder is taxed as income. This fact is often overlooked by members when enquiring and can come as a surprise to members who assume the payment will be largely tax-free. It is important that the process and taxation of the payment is properly understood by members who meet the criteria for payments of this type. For members with other income, payment of a small lump sum can push them into a higher tax bracket, creating unexpected liabilities or consequences.
Moreover, the requirement that the member’s rights be fully extinguished means partial payments are not an option.
Small pension pot lump sums in SSAS schemes present a paradox: they offer simplicity for members but complexity for administrators. The combination of rigid eligibility criteria, tax pitfalls, and operational challenges means trustees must tread carefully. For members, the appeal of immediate cash must be weighed against tax costs and the loss of long-term investment potential. As the pensions industry grapples with the broader small pots issue, SSAS providers will need to balance compliance, efficiency, and member outcomes, no easy task in today’s regulatory environment.
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