In the Budget report on Wednesday, Alistair Darling announced that individuals who have only a very small occupational pension fund will no longer be forced to buy an annuity.
Although this is great news, it does apply only to those who have less than £2000 in their pension and that £2000 must be in a single pension scheme and that pension scheme must be an occupational one, so it doesn’t apply to your stakeholder pensions.
Under current rules, anyone with a pension pot of less than £2000 would be allowed to take the full amount as cash but only 25% as a tax free lump sum. The rest would be taxed as income. However, the current rules add up all of your pensions so many people are left with a small pension fund. For example, if you had £20000 in one pot and £2000 in another, then your total pension fund is £22000 so you are above the threshold (£16000) and have to take the £2000 according to the rules, i.e. you get up to 25% as a tax free cash lump sum and the remaining £1500 must be used to buy an annuity.
With these new changes in force, then providing that £2000 was in an occupational single pension scheme, you could opt to take the full £2000 as a tax free cash lump sum.
Buying an annuity with such a small sum is not cost effective at all and means you don’t get much for your money. When you have a small pension fund such as this, it becomes even more important to shop around and be sure you’re getting the best value for your money. Unfortunately, £1500 is below most annuity providers minimum purchase level so then the person is forced to stick with their current provider.
If it’s looking likely that you may have one or two small pension pots, it might be worth combining them. Some pension funds can be transferred to another although this can depend on your age at the time of transfer and value of the pot. To make the most of your pension and to make sure that your annuity options for shopping round at time of retirement are best for you, seek advice from an independent financial advisor.
Related posts:
