Introduction »

Small pension pots

In the Coalition Agreement, the Government made a commitment to explore the potential to allow individuals to access part of their personal pension fund early as part of the wider objective to encourage people to save and invest more.

The Government has now announced that early access to pension savings should not be considered at the present time. However, there is support for extending the existing commutation rules applying to very small pension funds in occupational schemes to small personal pension funds.

Current position

A registered pension scheme is only allowed to pay out benefits to or in respect of a member in two forms, either as a pension or as a lump sum. There are a number of conditions and restrictions that these payments must follow in order to be authorised payments. Unauthorised payments are subject to more penal tax charges depending on the circumstances and the recipient could face a 55% tax charge on the payment.

An individual aged 60 or over can take all of their pension savings as a lump sum if their total pension savings are less than a trivial amount. This amount is less than £18,000 and such payments are known as trivial commutation lump sums.

For those in an occupational pension scheme (OPS) (including a public service scheme), funds of £2,000 or less (known as small pots) can also be paid out to an individual aged 60 or over, irrespective of the value of any benefits already taken from that scheme or funds held in any other registered scheme.

Proposed changes

From 6 April 2012 funds of £2,000 or less held in personal pension arrangements can also be paid out as lump sum payments to individuals aged 60 or over provided certain conditions are met. These payments can be made regardless of the value of the individual’s total pension savings and can be made in addition to any trivial commutation lump sum or OPS small pot payments the individual may have received. However, an individual can only have two such ‘personal pension small pot’ payments in their lifetime.

This will help individuals aged 60 or over who have total pension savings over £18,000 and who have not therefore been able to use the trivial commutation rules to access any small pension pots. It will also benefit those who have already taken a trivial commutation lump sum and later discover small benefit rights in a personal pension scheme.

Introduction »