Personal pension savers to benefit from new rules allowing small pension pots to be cashed in

"From 6 April 2012 funds of £2,000 or less held in personal pension arrangements can be paid out as lump sum payment to individuals aged 60 or over [...] provided certain conditions are met," the Government said in outlining changes to the commutation of small pension funds (3-page / 30KB PDF). Commutation is where a member withdraws pension savings as cash.  

Currently pension scheme members aged 60 or over can cash in all their pension arrangements if, together, those arrangements are worth no more than £18,000. They can exercise that option only once in their lifetime.  That option doesn't help individuals with a very small pension pot in one scheme if they happen to have a separate large pot exceeding the limit elsewhere.  However, members of occupational pension scheme members aged 60 or over have been able since 1 December 2009 to cash in their pension pot if it is worth no more than £2,000, even if they have large pension savings elsewhere.  The new proposals would extend that £2,000 cash option to personal pension schemes.

"With the introduction of auto-enrolment into pension schemes from next year, a large number of workers will join a personal pension scheme for the first time," Simon Tyler, expert in pensions at Pinsent Masons, the law firm behind Out-Law.com, said.

"However, some workers may decide to opt out after a while, or they may already be approaching retirement.  They may find themselves with such a small pension pot that they won't be able to find an insurer willing to sell them an annuity.  Their total pension savings may exceed £18,000 because they may previously have been a member of an occupational pension scheme.  The Government’s announcement that pots up to £2,000 can be paid as cash to such individuals on reaching age 60 is welcome.  It was rather unfair that occupational pension schemes could pay out such small sums as cash, but personal pension schemes couldn't.  This move has levelled the playing field," Tyler said.

"To stop individuals abusing the system, by setting up lots of separate pension arrangements with just less than £2,000 in each, the Government will provide that an individual can only cash in his pensions pot from a personal pension scheme twice in his lifetime," he said.  "That restriction will not apply to occupational pension schemes since those schemes are less open to manipulation."

The Government estimates that around 25,000 over-60s could benefit from the change, because their total pension savings exceed £18,000 but they have savings in a single personal pension scheme worth no more than £2,000.