Small Pension Encashment Cap Rethink Call

Small Pension Encashment Cap Rethink Call.

The Association of British Insurers has called on the government to rethink its approach to small pension funds ahead of the budget next Wednesday.

The current ‘triviality’ rules for small pensions read as follows (and are for the over 60’s only):

• £2,000 or smaller for any pension pot – this can be cashed in automatically irrespective of any other pensions you may have.  25% of the fund is paid tax free in UK, the balance is taxable.

• £18,000 limit (this is 1% of the old Lifetime Allowance £1.8m limit – the maximum you can build up in pensions funds during life).  If you have total pension funds in value below £18,000 you are allowed to ‘cash in’ the whole amount subject to 25% tax free lump sum and balance paid as a lump sum but tax is deducted. 
• If your combined pensions are in excess of the £18,000 limit you must take your pensions as normal.

The ABI argues that these rules are too complex. 

The add pressure to pension companies who are forced to administer and make annuity payments to people even if their pension is only worth £3,000 (if they have combined pension pots above the £18,000 limit).  A £3,000 would offer an annuity of around £12.50 per month before tax.

The ABI suggest this restricts people when perhaps they should not even be considering an annuity income for such a small amount. 

The ABI suggests that removing all the limits above and allowing any pension fund worth £10,000 or less should be allowed to fully encashed under triviality.  This would bring instant tax revenue to the government as well as reducing the administration burden on pension and annuity providers.

Comment 

It makes total sense to us.  The rules are complex and so many people get caught by these rules.

There is a counter argument though – that if you have sizeable pension funds e.g. £200,000 – all you would need to do set up 20 different pension schemes will £10,000 in each and you would be able to withdraw them all in retirement after the age of 60 as lump sums.  We are sure HMRC and government would not want this, so we see that there will always need to be an threshold were you cannot take pension funds under triviality rules.