More confusion for pensions?

The Government today issued regulations which will allow occupational pension schemes to pay small pension pots entirely as a lump sum, without taking into account other pension benefits which an individual may have.

The new rules apply only to benefits held in an occupational pension scheme, and don't apply to personal and stakeholder pensions.

Andrew Tully, Senior Pensions Policy Manager at Standard Life said: 'This change is beneficial for people who hold very small benefits within an occupational pension scheme. But it is very disappointing that only three years after pensions simplification, the Government is introducing new differences between occupational and personal pensions. Standard Life believes all pensions legislation should be the same across all pension contracts. This would cut red tape significantly and make pensions cheaper and easier for people to understand. These new rules create an uneven playing field, make pensions more complicated and appear completely illogical.'

The pension tax rules introduced in April 2006 (A-Day) harmonised the vast majority of pension tax rules across occupational, personal and stakeholder pensions. The current rules allow people aged between 60 and 75 to take small pension pots as a lump sum (known as trivial commutation), rather than receive very small income payments during retirement. Since April 2006 people must aggregate all pension benefits which they have under all registered pension schemes, and if the total value is below 1% of the lifetime allowance (currently £17,500) benefits can be paid out as a lump sum. One quarter of the lump sum payment is tax free with the remainder being taxed as income.

The new rules mean occupational pension scheme members will be permitted to take benefits valued below £2,000 (equivalent to a pension below about £100 per year) as a lump sum, without taking into account other pension benefits. However controlling directors, or people connected to controlling directors, of the sponsoring employer who will not be allowed to make use of these new rules. For example, if an individual has pension benefit in one scheme which exceed 1% of the lifetime allowance (currently £17,500) and one very small pension benefit valued at less than £2,000 in an occupational pension scheme, these new rules will allow the small benefit to be taken as a lump sum. However, this scheme-specific option will not be extended to personal and stakeholder pension schemes because HMRC believe there is a risk of abuse.