New rules to free up small pension pots will open the door for more investors to take small pension funds in cash and get a bonus from the Inland Revenue, according to Hargreaves Lansdown.
The Revenue is proposing to increase the trivial commutation level – where a pension fund can be returned rather than converted into an annuity – to £14,000, or 1 per cent of the lifetime limit, from its previous proposal of a limit of £10,000.
Under current rules, a pension fund can be taken as cash if an annuity would generate total income of less than £260 a year.
Hargreaves Lansdown head of pensions research Tom McPhail says the new rules could mean that a low-rate taxpayer could pay £10,920 into a pension and see it grossed up to £14,000 with tax relief.
The fund could then be withdrawn at retirement with 25 per cent tax-free and the remainder subject to income tax, making a profit of £770. A higher-rate taxpayer would gain £1,400 after
putting £8,400 in a pension.
McPhail says: “It is hard to see that this is what the Treasury means but, on the other hand it does make pensions, a more attractive proposition for people with smaller funds if they know that they can get their hands on their money.”