Product category:
Pensions and retirement
News Release from: Standard Life Bank | Subject: Pensions
Edited by the Insidemoneytalk Editorial
Team on 14 March 2008
Good news for people with small pension
pots
The Government have announced changes which will allow people to take very small benefits from occupational pension schemes as a lump sum (budget note 42).
The new rules will look at one scheme in isolation and allow benefits to be paid as a lump sum where the value is below £2,000 This allows people to take very small benefits in one occupational scheme as a lump sum under the triviality rules while receiving an income from another, larger, pension pot
This article was originally published on Insidemoneytalk on 28 Feb 2007 at 8.00am (UK)
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The Government have also said other 'stranded pots' will be allowed to be paid as a lump sum but no figure is currently mentioned.
The current trivial commutation rules allow people who have small pension pots to take the whole lot as a cash lump sum.
25% of the lump sum is tax-free with the remainder being taxed as income.
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Since April 2006, benefits can be taken under the triviality rules if the total value of all of an individual's pension benefits are less than 1% of the lifetime allowance (£16,000 in 07/08, £16,500 in 08/09).
Because the rules look across all of an individual's pension pots, it still means that people can be left with very small amounts in one scheme.
For example if someone has a final salary benefit worth £15,000, and benefits in an occupational defined contribution scheme worth £2,000 then, in total, the individual's benefits are above the trivial commutation threshold.
The defined contribution scheme is likely to pay 25% (£500) as a tax free lump sum, leaving the individual to buy an annuity with £1,500.
This is below the minimum annuity purchase price of most providers, so it is likely that the individual will be stuck with their current pension provider, receiving a very small amount.
Continuing the above example, this would mean the individual could take an income from the final salary scheme but take the occupational defined contribution benefits as a lump sum - 25% tax free with the remainder taxed as income.
Andrew Tully, Senior Pensions Policy Manager at Standard Life said: 'Forcing people to buy annuities with very small pension pots means they don't receive good value for money.
Allowing small pension pots to be paid as a lump sum even though people may be receiving income from other, larger, pensions is excellent news for consumers.
It is disappointing that the Government is suggesting restricting this only to occupational schemes.
The simplification changes in 2006 introduced the same set of tax rules for all schemes.
It seems bizarre that the Government is now introducing different rules for occupational and personal pension schemes.'.
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