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Last Updated: Saturday, 4 March 2006, 14:50 GMT
The clock is ticking for small pensions
By Louise Greenwood
BBC Radio 4's Money Box

The rules on how we save for pensions and how they are paid out will change on April 6th.

From that date, anyone over sixty with pension savings of fifteen thousand pounds or less can cash them in, provided that sum represents all their pension savings in both occupational and private schemes.

Multiple pensions

But people with more than one pension may find they can no longer cash in smaller pots if they delay and are being advised to take action now.

Under the present rules for cashing in small pensions, company pensions and personal pensions are treated separately without reference to each other.

For example, as far as personal pension plans are concerned, a fund of less than 2,500 can normally be cashed in by someone aged between 50 and 75, but with the important proviso that it is their only personal pension, even if they have one or more occupational pensions in addition.

If however the plan was used to contract out of Serps, the earliest age the personal pension can be cashed in is 60.

Malcolm McLean says people could lose out if they don't take action

Act quickly

People with under 2,500 in their personal pension which they want to cash in should act soon says Malcolm McLean, chief executive of the Pensions Advisory Service, or they will lose out by being caught by the new overall limit.

He told BBC Money Box "we've been absolutely inundated with calls on our helpline indicating to me that there is a lot of people out there who could gain from this, (and) haven't heard about the present rules, aren't aware of the changes".

The changes have been welcomed by life insurance companies, who are often unwilling to offer annuities on such small pots of pensions savings, according to Stuart Bayliss, managing director of Annuity Direct.

"The cost for a life company in setting up an annuity is around 300, obviously those costs relative to the size of the pot are too high. If you've not got a lot of other financial resources then using that money to pay off loans is a good idea. If you wanted to invest it, then investing in something that is going to give you tax free income, an isa, is a good idea as well".

Pay off debt

Tom McPhail head of pension research at Hargreaves Lansdowne told Money Box that especially as these policyholders are often on low incomes, better use could be found for their savings, like paying off debt.

"The reality is that the bulk of their income in retirement is going to come in the form of state benefits. If your pension fund is less than fifteen thousand pounds in total the income would be very modest ..much better to have it back as cash".

The Revenue has told Money Box that people wishing to cash in anything up to two and a half thousand pounds must have their application in by the fifth of April and should contact their pension savings provider.

BBC Radio 4's Money Box was broadcast on Saturday, 4 March, 2006, at 1204 GMT.

The programme will be repeated on Sunday, 5 March, 2006, at 2102 GMT.

Money Box



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