The Low Incomes Tax Reform Group (LITRG) has welcomed draft legislation published yesterday by HM Revenue and Customs (HMRC) which extends the relief for cashing in small pensions valued at up to £2,000 to personal pension schemes.
Working with a number of representative bodies and members of the insurance industry LITRG has been seeking this extension since early 2010.
Larry Darby, member of LITRG specialising in pensions for the lower paid, commented:
“This is a welcome proposal from HMRC which will put small personal pensions on the same footing as small occupational pensions. For pension providers it will cut out the cost of administering small pension payments, and for the individual it will offer greater flexibility and choice over how to use their money in retirement.
“As an add on, it offers an opportunity to access small pots for those with pensions savings of more than £18,000, or who have already taken trivial commutations up to that limit but subsequently discover a small pot they were previously unaware of. HMRC believe that up to 25,000 people might benefit. With the advent of auto-enrolment, this could be an increasing number as time goes on.
“There are still a number of areas in which the taxation treatment of small pension funds is not consistent with those for larger pensions - most notably in the age from which lump sums can first be taken and the time period over which this has to be done - but yesterday's draft legislation in response to representations is a welcome move in the right direction.”
Notes to editors
- Registered pension schemes pay out benefits to members in two forms: as a pension, or a lump sum. The latter is subject to restrictions, which, if exceeded, can incur a penalty rate of tax of up to 55%. Lump sums are normally only payable when a pension commences.
If an individual is over 60, however, and the pension is up to a trivial amount - set at £18,000 currently and for the next tax year - then the whole pension can be paid out as a lump sum without incurring the penalty tax charge. This applies whether the pensions savings are from a former employer (occupational schemes) or from private savings (personal pension arrangements). Depending on an individual’s circumstances, tax still has to be paid on all or part of the lump sum received, but only at an individual's normal tax rate.
In late 2009 an additional relief was introduced to allow funds valued at up to £2,000 to be paid out in full, but for occupational schemes only. This relief is in addition to the £18,000 limit, and can be paid no matter how much an individual may have in other pensions savings. The relief did not extend to personal pensions savings, which seemed an anomaly.
The new legislation now extends the £2,000 relief to personal pensions savings as from 6 April 2012. There is, however a limit of two such payments an individual can receive in his / her lifetime, and there is no current indication on whether this limit will be subject to increase for inflation in future (as, indeed, neither is there for the £18,000 limit).
- The Low Incomes Tax Reform Group (LITRG) is an initiative of the Chartered Institute of Taxation (CIOT) to give a voice to the unrepresented. Since 1998 LITRG has been working to improve the policy and processes of the tax, tax credits and associated welfare systems for the benefit of those on low incomes.
7 December 2011