UK to allow lower pensions commutation
UK - The UK government has announced some "easements" of the rules around trivial commutation to allow occupational pension scheme savings below £2,000 (€2,614) to be taken it a lump sum even if they have another larger pension fund elsewhere.
Notes accompanying the 2008 UK Budget revealed the "regulations under the widened power" would allow members to "commute some small ‘stranded pots' as well as pension savings below £2,000 in occupational pension schemes".
But the documents confirmed "these will have effect in addition to the current rule that restricts the aggregate of an individual's pension savings to £16,000 for trivial commutation".
The pension industry has lobbied the government for this change for some time because the impact of pension simplification rules on April 6 2006 increased the level of trivial commutation available, but changed it so all pension pots had to be added together.
This means members of defined benefit (DB) and defined contribution (DC) occupational schemes could have a number of small pots below the commutation level, which is 1% of the lifetime allowance or £16,000 for 2007/08, and one larger pot which would take them across the trivial commutation threshold.
Jane Beverley, principal and head of research at Punter Southall, pointed out the government had concerns about reverting to a scheme by scheme solution, as it feared members could spread their pensions across a number of schemes in an attempt to convert it all into cash at retirement.
She said: "This is a compromise, but it's a good compromise. It means occupational pension schemes don't have to pay out some of the tiny pensions we've seen, which can be a problem particularly for DB schemes, as trying to find an annuity provider for pension pots that are less than £1,000 can be impossible, and it either has to pay huge costs or the member doesn't receive the pension."
Andrew Tully, senior pensions policy manager at Standard Life, pointed out forcing people to buy annuities with very small pension pots means they "don't get good value for money", so the change is "excellent news" for members.
Although he claimed it was "disappointing" the government currently appears to restrict the change to occupational schemes, as following pension simplification "it seems bizarre that the government is now introducing different rules for occupational and personal pension schemes".
However, Keren Goldschmidt, chairman of the Association of Consulting Actuaries (ACA) pensions taxation committee, suggested the level of the new scheme by scheme approach should be higher than £2,000 and asked HM Revenue & Customs (HMRC) to keep the rules and, in particular, the commutation limit under review.
She said: "We are sure that evidence will support that the new facilities are not abused. Occupational pension schemes are complex and expensive to run and are very unlikely to be set up to abuse this very modest facility. The interaction of the current facility for trivial commutation and the new one will not lead to unreasonable levels of cash out".
Joanne Segars, chief executive of the National Association of Pension Funds (NAPF), said: "We know that one of our larger NAPF member schemes has at least 1500 individuals with a pension entitlement below the new ‘trivial' limit, so we believe there are tens of thousands of UK pension scheme members who will welcome the announcement," she added.
Meanwhile, the Budget also published details of revisions to the way tax relief is calculated on overseas pensions.
According to Budget Note 41 (BN41) migrant workers in the UK and their employers can currently receive tax relief on contributions to non-registered pensions outside the UK, but HMRC intends to introduce some revisions to help monitor the amount of tax relief given, in relation to UK tax limits and any charges.
Teresa Preece, principal in the retirement business at consultancy firm Mercer, explained that under the current legislation, there is a mechanism for measuring how much the 'pension input amount' should be for individuals claiming migrant member relief - which is effectively calculated in the same way as for UK registered schemes but is then pro-rated.
She said: "The fraction taken into account is the full amount multiplied by the result of the person's taxable income divided by the total employment income."
However, the problem is that the figures for total employment income currently include exempt employer contributions to the scheme, which Preece pointed out is an "unintended" consequence that "distorts the fraction".
As a result, the government confirmed the new measure outlined in the Budget will "ensure that the amount of the employer's contribution will not affect the calculation of the proportion of the fund that is subject to UK tax rules".
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