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Last Updated: Thursday, 6 January 2005, 23:09 GMT
Ask the expert: Small pension rules
Malcolm McLean
This week's expert is Malcolm McLean

BBC News Online's Ask the Expert column gives readers a chance to have their financial questions answered.

This week, Malcolm McLean, chief executive of the Pensions Advisory Service (Opas), answers a question from Your Money reader Mr Broder.

Mr Broder wants to know more about new rules for small pensions. Is it correct that people with pension funds worth less than 15,000 will be able to cash them in?

Malcolm McLean writes:

This question is about the rights of individuals to take the money that has been paid into their pension plan(s) as a cash lump sum instead of the usual arrangement of having to use at least three quarters of their fund to purchase an annuity or pension for life.

The rules at the moment on what are referred to as "trivial pensions" allow for the full cash option to be taken only in very limited circumstances.

Broadly speaking, this is currently only possible in an occupational scheme where the annual pension amounts to less than 260 and in a personal pension plan where the fund is less than 2,500.

As Mr Broder has heard, however, the rules are changing from next year in a way that will almost certainly allow more people to do this.


From 6 April 2006, the taking of pension funds fully in cash will be allowed as long as all an individual's pension plans have a total value of no more than 15,000.

The individual must be aged between 60 and 75 years and all the encashments from any number of different plans must be done within a single period of twelve calendar months.

It should be emphasized that the 15,000 limit will apply to all an individual's pension plans, including an assumed capital value of any pension already in payment.

In the case of a final salary pension scheme which is in payment, the capital value will normally be assumed to be the annual rate of the pension multiplied by a factor of 25.

For example, a pension of 320 a year would have a value placed upon it of 25 x 320 = 8,000.

NI contributions: Anyone requiring information on their NI contribution position, should contact the NI Contributions office on 0845 9155996
Pension Forecast: To obtain a forecast of your state pension entitlement get in touch with the Forecasting Unit on 0845 3000168
General information: For help on pensions ring the Opas Helpline on 0845 6012923

If the value of other pensions in this example came to 7,000 or less, then the full cash option would be allowed.

For taxation purposes, 25% of the cash payable can be taken tax free: the remainder will be treated as taxable income in the year it is received.

If the effect of this were to impose a tax burden on an individual or move him or her into a higher tax bracket, it is worth considering whether the encashments of the various pensions could be so arranged to be taken at either side of the end or beginning of a tax year to avoid or minimise tax.

The changed arrangements could affect a lot of people with small pensions, who might have been planning to retire and draw their pensions in the coming year.

Depending on the circumstances, it might be worth their while to delay taking the proceeds of their pension plans until after 6 April 2006 to take advantage of the new rules.

For further information or to check out your position, readers are invited to ring the Pensions Advisory Service helpline on 0845-6012923.

The Pensions' Advisory Service is an independent body which provides free expert advice on all pension matters to the general public.

The opinions expressed are those of the author and are not held by the BBC unless specifically stated. The material is for general information only and does not constitute investment, tax, legal or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for your own particular situation.




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