Pensions limit for the rich also hits the poor

Published on 12 December 2008

We acknowledged that this year’s Pre-Budget Report had some good news for those on low-incomes. But tucked away in the detail is a proposal which will affect the poorer pensioner in a way that we do not like at all.

Since 6 April 2006, people approaching retirement who have only amassed a small amount of private pension savings have been able to benefit from a rule which allows them to take out all of that saving as a lump sum. This is known, in technical terms, as a ‘trivial commutation’.

The trivial commutation rules are, however, limited to those pensioners who have only saved up to 1% of the ‘standard lifetime allowance’. This is currently £1.65million, rising to £1.8million by 2010/11, meaning that the trivial commutation is limited to £16,500 currently, rising to £18,000 by 2010/11.

If you are a single woman aged 60 and your pension pot is £16,500 today this might translate (after taking the 25% tax free commutation) into an annuity of less than £9 a week with some inflation proofing. For many people on low incomes the trivial commutation is much more attractive.

And the bad news is…?

The Pre-Budget Report announced that the lifetime allowance is to be capped at £1.8million for a further five years from 2011; an announcement geared to squeezing the rich a little more tightly.

But at the same time, this limits trivial commutations to £18,000 for that same five years, potentially affecting some of the poorest pensioners who might otherwise have benefited from taking their pension monies all at once.

Crystal ball anyone?

Whilst it is difficult to predict what the economic climate will be like by 2011, it is well known that pensioners are currently facing huge financial difficulty. The unprecedented interest-rate cuts of recent weeks and increasing longevity have caused annuity rates to fall. This is therefore not a good time to be announcing a provision which will naturally force more pensioners into a small annuity purchase when they retire.

A plea

In light of the above, we urge the Government to reconsider this announcement to the extent that it affects those with the smallest pension pots. This could be achieved by decoupling the trivial commutation amount from the lifetime allowance.

The Exchequer could thus benefit from a little more tax up-front yet still leave affected pensioners the choice of a lump sum versus a trivial annuity.

Whilst we are in supplicant mode could we also ask HMRC to deal with the current trivial commutation procedure in a more efficient manner? We are besieged by people who are told by HMRC contact centre staff that there is no such form as a P53/P53A (the form you need to get a repayment of tax suffered on a trivial commutation). It gets tiring telling HMRC staff that they have to find it on the HMRC intranet. The experts on this subject are TaxHelp for Older People on 0845 601 3321.

(12-12-2008)

Contact: John Andrews (Tel: 0844 579 6700, Fax: 0844 579 6701)