EMPTYING SMALL PENSION POTS
Most people change jobs frequently. On average, you can expect to have eleven different employers during your working life. Some employers provide a salary package which includes pension contributions.
When you resign from a job, you usually leave the pension pot behind. Later on, as you approach retirement, you may not know how to find these pension funds: perhaps your employer has closed down, changed its business name, or been taken over.
The Pensions Tracing Service (PTS) helps you find lost pensions. PTS is a government-operated service. It can be contacted on 0845 6002 537 or online at:
www.direct.gov.uk/en/Pensionsandretirementplanning/Companyandpersonalpensions/DG_10027189
When you are reunited with your lost pension, you may find that it is a significant sum, making a big difference to your old age.
Many people, however, find that their fund hasn’t grown very much. It may only be sufficient to provide a small pension. The average payment from lost pensions is under £20 a month, plus a lump sum.
This may not seem like good news. But special rules allow small pension pots to be paid out in full. So, instead of getting a tiny sum every month for the rest of your life, you could have a lump sum now. This is called ‘commutation’ of your pension.
The rules are quite complicated, but if you have a small pension, you can ask your pension provider if commutation is possible. You can do this for lost pensions which you have found again, and also for small pensions you already know about.
The government has just announced a further relaxation to the commutation rules, allowing more pensions to be paid out as lump sums. In December 2011 they published draft regulations which are expected to come into force on 6 April 2012. So if you write to your pension trustees now, you may want to ask whether the new rules will improve your position.
Broadly speaking, you can commute up to two small pension pots if:
- you are over 60 years old; and
- the total amount you would be paid is not more than £2,000.
In addition, you can also commute one or more pensions if the total value of your pension rights from all pensions is not more than £18,000.
Commutation means that you get your hands on the whole of your pension fund now, instead of spreading it out over the rest of your life. But pensions are taxable, and commuted pensions are no exception. Normally 25% of the payment is free of tax, and the rest is treated as extra taxable income and subject to PAYE.
So, before you commute your pension, check whether the extra income will damage your tax position. This may happen, for instance, if:
- you are over 65, and
- your income (without the commuted pension) would be below £25,400 in 2012/13, but
- it would be above £25,400 when you add the commuted pension.
If you are thinking about commuting your pension, you may be able to get help on the tax implications from Tax Help for Older People, see www.taxvol.org.uk. You will also need to speak to the pension fund trustees, and you may wish to talk to a financial adviser specialising in pensions.
Anne Redston
Anne is a visiting professor at King’s College, London and a barrister at Temple Tax Chambers
The information contained in this article is intended to provide only a general outline of the subjects covered. It should neither be regarded as comprehensive nor sufficient for making decisions, nor should it be used in place of professional advice. The author and the publisher disclaim all responsibility for any loss arising from any action taken or not taken by anyone using the information in this document.
