Trivial Commutation

gterr

My husband has a couple of small deferred final salary pensions which will start to come into payment over the next few years.

He also has a tiny personal pension which he started many years ago when he was self-employed. He only contributed to this for a short time. He's just had a letter to say that this tiny pension can be taken from April 2013. The forecast is for a tax free lump sum of about £644 and an annual pension of about £21.

We think that taking the pension in a single cash payment under trivial commutation might be the best thing to do, but are slightly confused by the rules. The pension company's notes suggest that for trivial commutation my husband's "total pension funds" must be below £18000. Do these funds include his deferred final salary pensions, or just personal pensions? If it includes all pensions, including the final salary ones, then his fund will exceed £18000.

Many thanks for your time.

dunstonh

We think that taking the pension in a single cash payment under trivial commutation might be the best thing to do, but are slightly confused by the rules. The pension company's notes suggest that for trivial commutation my husband's "total pension funds" must be below £18000. Do these funds include his deferred final salary pensions, or just personal pensions? If it includes all pensions, including the final salary ones, then his fund will exceed £18000.

Total pensions means all personal, individual, employer/occupational pensions of any type. The only exception is the state pension.

In the case of final salary scheme, there is no fund value but an equivalent is applied to give a figure. You cant use the stranded pots rule either as the personal pension is bigger than that.

Many people in retirement use pensions to take advantage of tax relief and build up a pot to kick in later. If they die before starting it then the lump sum is paid out tax free. If the leave it until later they can get a boost in income later in retirement. So, maybe this could be applied to this small pension.

kidmugsy

There's a recent new rule about what are referred to as "stranded pots", meaning pension pots of £2000 or less. You can cash in up to two of them in one fell swoop: 25% is tax-free, the other 75% exposed to income tax. If your husband's personal pension company doesn't offer the service, he could consider transferring to a firm that does. The minimum age for the cashing-in is (if my memory is right) 60.

gterr

kidmugsy wrote: »

There's a recent new rule about what are referred to as "stranded pots", meaning pension pots of £2000 or less. You can cash in up to two of them in one fell swoop: 25% is tax-free, the other 75% exposed to income tax. If your husband's personal pension company doesn't offer the service, he could consider transferring to a firm that does. The minimum age for the cashing-in is (if my memory is right) 60.

Many thanks for this. I had not come across "stranded pots" but now that I've Googled it there is plenty of information. I think these new rules will help us.

Yes, the minimum age is 60. Also, if the pension pot was over £2000 but under £4000 then it would, in theory, be possible to transfer half to a new scheme and then cash both in.

Apparently there is also a risk of abuse of the system, since it would be possible for someone over 60 to place £1600 into a new personal pension, get £400 tax relief, then immediately vest the pension, getting £500 cash tax free, and £1500 taxable income. You could do this twice.

wallpaperman

gterr wrote: »

Many thanks for this. I had not come across "stranded pots" but now that I've Googled it there is plenty of information. I think these new rules will help us.

Yes, the minimum age is 60. Also, if the pension pot was over £2000 but under £4000 then it would, in theory, be possible to transfer half to a new scheme and then cash both in.

Apparently there is also a risk of abuse of the system, since it would be possible for someone over 60 to place £1600 into a new personal pension, get £400 tax relief, then immediately vest the pension, getting £500 cash tax free, and £1500 taxable income. You could do this twice.

The stranded pots won't be any use for the small pension that has a cash sum of £644, as presumably the value of this policy is over £2000, i.e. £644 being 25% of the fund.

In theory you could split the pot between two providers, but I think you would find it impossible to find a pension company that would take a transfer only of less than £2000, most will only accept a minimum TV of at least £5000, unless you already have a pension policy with them.

Also, the tax relief point is not relevant here, as you do not get tax relief on a transfer contribution, only a personal single premium.

gterr

wallpaperman wrote: »

The stranded pots won't be any use for the small pension that has a cash sum of £644, as presumably the value of this policy is over £2000, i.e. £644 being 25% of the fund.

In theory you could split the pot between two providers, but I think you would find it impossible to find a pension company that would take a transfer only of less than £2000, most will only accept a minimum TV of at least £5000, unless you already have a pension policy with them.

Also, the tax relief point is not relevant here, as you do not get tax relief on a transfer contribution, only a personal single premium.

I realise I made a mistake in the figures I provided in my first post. It is the entire fund that is £644, not the tax-free lump sum. So, this is well below the limit for cashing in under the 'stranded pots' rule.

atush

the op's pension is over 2.5K

kidmugsy

gterr wrote: »

Apparently there is also a risk of abuse of the system, since it would be possible for someone over 60 to place £1600 into a new personal pension, get £400 tax relief, then immediately vest the pension, getting £500 cash tax free, and £1500 taxable income. You could do this twice.

I'd be grateful if anyone could point me to providers whose charges are low enough to make this scheme attractive.