The Treasury is set to allow pensioners to withdraw small personal pensions as cash.
Today the Treasury announced it will allow people aged 60 or above with small pension pots of £2,000 or less to withdraw a maximum of two of these small pots over a lifetime.
Current trivial commutation rules prevent people withdrawing personal pots of £2,000 or less as lump sums because it would be too easy to set up thousands of small pots and withdraw all of the cash at the same time, Tom McPhail, head of pensions research at Hargreaves Lansdown, said.
Trivial commutation of sums below £2,000 was only permitted for small occupational pension pots, which, by virtue of needing an employer to set up, were harder to fake.
However, to reduce the risk of personal pension pots being set up and exploited, the Treasury has imposed a limit of two pots of up to £2,000 being withdrawn over any one lifetime.
"The rule change is a welcome easement which puts contract-based and trust-based pensions on a more equal footing and which will help the decumulation market by stripping out many of the smallest and least profitable pots of money," said McPhail.
Trivial commutation explained
The main trivial commutation rule is that individuals may commute all of their benefits into a lump sum if the total pension rights from all of their schemes did not exceed £18,000 in value (1% of the lifetime allowance).
However, another rule for small pots was needed because final salary pensions of £1,000 per year would be deemed by the Treasury to be worth more than £18,000 in real terms
So, people with a £1,000 per year final salary pension and £2,000 in an old occupational pot would be unable to access their small pot as cash and would have to buy a tiny annuity without the small pot exemption rule.
Today's decision by the Treasury means people with small amounts in personal pensions can also access the small pot exemption.
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