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Last Updated: Saturday, 11 March 2006, 11:13 GMT
Cashing in 'trivial' pensions
Malcolm McLean, The Pensions Advisory Service
Malcolm McLean, chief executive of The Pensions Advisory Service

BBC Radio 4's Money Box has received many inquiries about cashing in small pension funds as A-Day approaches.

Malcolm McLean, chief executive of the Pensions Advisory Service, has produced this guide.

HMRC rules change from 6 April 2006 (A-Day).

Under existing rules, occupational (company) pensions and personal pensions have prescribed limits but are treated separately without reference to each other.

From A-Day they are brought together under a new catch-all limit (15,000).

Some people can benefit from the new rules who cannot benefit from the existing ones. For others, the reverse applies.

Those who benefit from the existing rules may need to act by 5 April, 2006 to avoid missing out.

Present rules: Personal pensions

Under the existing rules, if you have a personal pension with a fund value of 2,500 or less you can usually cash it in if you are aged between 50 and 75.

An important extra proviso however is that the personal pension is your one-and-only personal pension - you cannot have more than one.

Another constraint is that if the fund contains "protected rights" (that is, monies derived from government rebates for contracting out of Serps) encashment of your personal pension fund is not allowed until age 60.

Present rules: occupational pensions

For occupational pensions, the present rules allow encashment where the annual pension, including any AVCs/Free Standing AVCs, is 260 or less.

You can have any number of this type of pension and cash them all in provided the pensions derive from different employments and, importantly, you have the agreement of the scheme trustees to do so.

They may not be able, for example, if you are under the scheme's normal pension age, to permit you to take the pension at that early stage.

Once again, you must be aged between 50 and 75 for encashment to be sanctioned.

With a salary-related scheme the pension is the amount you are entitled to based on your years of service in the scheme.

In a money purchase arrangement it is the level of annuity which could be bought with the money you have built up in your pension fund.

New pension rules

Under the new rules effective from 6 April 2006, pensions (both occupational and personal) can be cashed in only if the combined total assessed value does not exceed 15,000.

The 15,000 limit embraces all types of private pension arrangements including Retirement Annuity Contracts (old style personal pensions) which previously did not have a provision for trivial encashment.

For the purpose of testing against the 15,000 limit, personal pensions and non-salary-related occupational pensions not yet in payment are valued at their fund value.

A salary-related pension not yet in payment is valued on the basis of a ratio of 20:1 of the annual pension.

All pensions actually in payment are based on a ratio of 25:1. This allows for the possibility of a tax-free lump-sum having been taken when the pension is put into payment.

The minimum age for cashing in small pensions is increased from 50 to 60 from 6 April, 2006.

All encashments after 6 April, 2006 must be done within a 12 month period (not necessarily a financial year).

A quarter of the cash paid out will continue to be allowed tax-free with the remainder treated as taxable income in the year it is received.


1. A man aged 53 has a personal pension of 2,500 (no protected rights) plus a salary-related occupational pension of 10,000 pa, which is already in payment.

Pre A-Day: He will be able to cash in his personal pension of 2,500, a quarter of which will be tax-free.

Post A-Day: He will now not be able to cash in his pension on two counts:
He is under 60 and the total of his pension funds exceed the 15,000 limit. The occupational pension's assumed value is 250,000 (25 x 10,000), which together with the personal pension fund of 2,500 produces a grand total of 252,500, far above the limit.

2. A woman aged 61 has a personal pension fund of 3,000 and a salary-related occupational pension of 290 pa, not yet in payment.

Pre-A-day: She is above the limits for both the personal pension and the occupational pension.

Post A-day: Her pension funds are assessed as 8,800 (3,000 personal pension plus 20 x 290 = 5,800 occupational pension).

She will therefore be able to cash in both pensions (assuming the trustees of her occupational pension scheme agree).

Main areas of misunderstanding

Based on queries received by The Pensions Advisory Service helpline, the main areas of misunderstanding are:

  • Under existing rules a personal pension must be your only pension. Even if you have say two personal pensions with a combined value of less than 2,500 you would not be allowed to cash them in without transferring one into another to produce a single pension fund, almost certainly not now achievable before A-day.

  • Encashment of an occupational pension will always be subject to the agreement of the scheme (trustees) which they may not always be able to give - particularly, if the request is from an individual who has not yet reached the scheme's normal pension age.

  • The notional value of an occupational pension for comparison with the 15,000 limit (that is, the 25:1 or 20:1 ratio) is not generally appreciated.

    Some people seem to be under the impression that they can simply add the annual pension to their personal pension fund value(s) to establish the total.

    For example, an occupational pension of 10,000 a year plus a personal pension fund of 3,000 equals 13,000, well within the 15,000 limit.

    In reality, the value will be more like 213,000 if the ratio of 20:1 is applied to the occupational pension, well above the limit!

    Aide Memoir

    Existing rules
    Occupational Pensions Personal Pensions
    No more than 260 pa (including AVCs / FSAVCs) Up to 2,500
    Any number of pensions if from different employments Must be only personal pension
    Age 50 to 75, and must have consent of scheme Age 50 to 75 (with minimum age 60 if protected rights included)

    New rules: From 6 April, 2006
    Up to 15,000 total value
    No specified limit on number or type of pensions included
    Minimum age 60
    Occupational pensions encashment must have scheme agreement
    All encashments must be completed within a 12 month period
    Source: The Pensions Advisory Service

    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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