Pensions minister Steve Webb wants to reform trivial commutation rules to allow people with small pots to use their fund to buy extra state pension, Money Marketing understands.
Under Government plans outlined in the Autumn Statement, anyone who has reached state pension age or will do so by April 2016 will be able to pay between £900 and £25,000 to top up their pension.
It is thought the Government will offer to increase peoples’ weekly state pension by around £1 for every £900 paid in.
Webb’s idea would be an extension of this reform, allowing people with total pension savings worth less than £18,000 – the trivial commutation limit – to use their pot to buy extra state pension rather than annuitising or taking the money as cash.
A source says: “The minister has been floating an idea that would simplify the process of buying extra state pension for people with small pots.
“So rather than having to turn their pot into cash and then use that cash to buy extra state pension, people could take their pot to the Department for Work and Pensions and it would be automatically converted into extra state pension.”
The idea could form part of the Liberal Democrat manifesto ahead of next year’s general election. But it remains unclear whether the Treasury, which oversees trivial commutation policy, would support the policy.
A DWP spokesman says the Government has “no plans” to pursue the reform.
Hargreaves Lansdown head of pensions research Tom McPhail says: “Trivial commutation is ripe for reform. Allowing savers with private savings below the trivial commutation limit to convert their pot into state pension would be a positive step.”