The Government has brought in a new ruling that allows pensioners who have personal pension pots of less than £2,000 to turn them into cash lump sums. 
This is thought to benefit some 25,000 people who have total pension assets worth more than £18,000. Currently, only people who have an occupational pension scheme with funds under £2,000 can cash in their money instead of using it for a regular income.
As of April next year, all personal pensions will be included for those aged 60 and over. HM Revenue & Customs have released a statement saying that the new measure ‘will help individuals age 60 or over who have large pension savings’.
Savers who have less than £18,000 in pension funds are currently allowed to take all of their money as a cash lump sum, also known as trivial commutation, with 25% of this total paid out tax-free.
Those who had more than £18,000 were only permitted to turn a quarter of their total into a cash lump sum, which was tax-free. The rest was used to provide an income which could be either an annuity or a drawdown policy. Meaning that a person retiring with a decent final salary pension or large pension pots totalling more than £18,000 who also had a pot of less than £2,000, would have been made to buy an annuity with the small pot.
This would have equated to a sum of just £10 per month at the current market rates compared to a much more useful tax-free lump sum of £2,000.
Tom McPhail, of Hargreaves Lansdown accuses the Government of being reluctant to make any changes to personal pensions for fear of being seen to be ‘granny farming’. He goes on to say that the new rules will open up opportunities for unscrupulous companies to make money from the tax relief on pensions.
A company could persuade an elderly client to put £1,600 into a pension in order to get an automatic top up of £400 using the 20% tax boost that the Government brought in to encourage people to make pension contributions.
Once the total pot was worth £2,000 it could then use these new rules to get the client to withdraw the pot as a lump sum, instantly making £400 profit. This could then be repeated with the HMRC two-time rule, making an £800 profit which they could then split with the client. If enough people could be persuaded to do this then a serious problem of granny farming could occur with healthy profits for the firms.
This would leave vulnerable people liable to being preyed upon; especially those who aren’t tax payers because they have incomes of less than £10,000 a year. Although McPhail points out that he is sure that the HMRC will monitor proceedings to ensure this doesn’t happen.
‘The danger of granny farming shouldn’t detract from what is largely a positive development,’ he says. ‘It is good to see that the government is still pressing ahead with its agenda of simplifying and improving the pensions landscape.’
Its surprising how many people enter retirement without a plan. Would you plan a car journey without a map or indeed these days taking your sat-nav? No! I doubt very much you would, so why do so many retirees drift into retirement without a plan?