The Government is facing growing calls to relax rules around the trivial commutation of pension pots worth less than £5,000.
Earlier this month, shadow pensions minister Rachel Reeves issued a written question to pensions minister Steve Webb asking whether he would bring forward proposals to facilitate and reduce the cost of annuitising sums of less than £5,000.
In his written response, Webb said: “The Government recognise that some people with pots of less that £5,000 may have difficulties when it comes to annuitisation. DWP is considering the long-term consequences of automatic-enrolment to better understand the implications for employers and schemes in administering small pots and also to help individuals maximise their savings.
“DWP is working with HMT, HMRC, FSA and TPR to share knowledge. We will consider whether any action may be needed to address issues around small pots.”
The trivial commutation limit for occupational pension schemes is currently £18,000. Barnett Waddingham consultant Malcolm McLean says people with personal pension savings of less than £5,000 whose occupational pension pot exceeds £18,000 are unable to trivially commute their additional savings. He says insurers refuse to offer an annuity on a pot below £5,000, effectively leaving the funds stuck in “limbo”.
He says: “This really is a problem which should have been addressed a long time ago. The Government has put a lot of effort into constraining tax reliefs for high earners. They should now look to let go a bit and do what is necessary for small pension earners.”