Helpful Guides

Expert tips and guides to help you in planning your retirement.

Cashing-In Small Pension Pots

Mark Soper – RetireEasy

The Pensions Advisory Service has this month published its detailed guidance on taking small pension pots as a lump sum. Sometimes it is just inconceivable how the Treasury and HMRC can get things so wrong – you would think from the complexity of this document that every potential retiree out there with a total pension pot of more than £18,000 were bleeding the Treasury dry. Yet, after taking your legitimate tax free lump sum, you will be lucky to be left with a pension of £15 per week – this is because the Government’s quantitative easing policy has driven gilt yields into the ground and it is these record low gilt yields that control how much retirees can take as a pension.

If you add this £15 per week to the Government’s proposed ‘State Pension for all’ of £140 per week, the total annual income would be £8,060 p.a. – way below the £10,500 personal allowance for over-65s.

And it’s not as if by taking your pot as a lump sum of £18,000 that you avoid tax anyway. Only 25% or £4500 is paid out tax-free and the remaining lump sum is added to your income in the year of encashment to calculate any tax due on the balance.

This ‘triviality’ rule has been around for a while but was extended in December 2011 and now individual small pots of £2000 or less may be cashed-in individually – subject to massively complex rules, of course. It’s no wonder that PAS has taken this long to publish its guidance??

There is so much that is unfair about these rules and the latest adjustment tinkers at the edge and provides little additional relief – if anyone even knows about it – and if you do, how on earth are you going to access economic professional advice on something so ‘trivial’ – could not resist the pun here!

If the rules were adjusted further to fairly reflect current annuity rates then our view is that the triviality limit should be increased to a total pension pot of £30,000 or less, providing a basic rate tax payer with the option of receiving a lump sum of £25,500 after tax, instead of a tax-free lump sum of £7500 and a pension of around £25 per week.  The increased limit could always be adjusted downwards in the future as and when gilt yields improve.

Watch this space!

NB: For those inclined, here is the link to the PAS Detailed Guide here

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