RETIREMENT REVOLUTION February 2015 SMALL PENSION POTS THE SITUATION Paul Brown’s brother Stuart is 60 & is married to Wendy who is 58. Both built up significant benefits in a final salary pension scheme. In addition they have accumulated a number of small pension pots as follows: • Stuart - £19,000, £8,000 & £3,500 in 3 different Personal Pensions • Wendy - £27,500 in a Stakeholder pension plan THE EXPECTATION They are looking at realising the capital value in these pension pots immediately and are vaguely aware of new rules allowing them to take their pensions as lump sums and have approached their financial adviser for guidance. After an initial review of their pension arrangements, Stuart is told that he may be able to receive some of his pension funds in cash under the ‘small lump sums’ rules. Wendy is told she cannot do the same with her stakeholder immediately as she is not yet 60 (see below). Both are informed about the new pension freedoms in force from 6 April 2015, which will allow Stuart to take any remaining benefits and Wendy to receive her stakeholder pension as a lump sum payment. THE SMALL LUMP SUM RULES The small lump sum rules have been in place since April 2012. They were introduced to help those with 1 or 2 small pension pots that they would normally have had to convert to an annuity. Purchasing an annuity with a pension fund as low as £2,000 – where possible - was unlikely to represent value for money. In this situation, a small lump sum was much more likely to be of benefit to the client. From March 2014, the small lump sum limit was increased from £2,000 to £10,000 and the number of pots that could be taken from 2 to 3. CONDITIONS - To receive a small lump sum: o the member must be at least 60 o the lump sum must not exceed £10,000 when it is paid o the member must not have already received more than two small lump sums under these rules o all rights under the arrangement must be extinguished The limit to the number of plans that can be taken applies at arrangement level. Lump sums could be taken from separate schemes, or from separate arrangements within a scheme. This allows a member to take a small pot from an arrangement within a scheme, despite total benefits across the scheme exceeding £10,000. The small lump sum rules apply to personal pensions, stakeholder pensions, FSAVCs and section 226 plans. Separate conditions cover defined benefit schemes. TAXATION OF SMALL POTS 25% of the lump sum will be free of tax. The rest will be added to an individual’s income and will be subject to income tax at their highest marginal rate. Basic rate income tax will be deducted from these payments and those entitled to a refund can apply to HMRC. THE CONCLUSION STUART Stuart is advised that he can take advantage of the small lump sum rules immediately but will need to restructure the £19,000 Personal Pension before he does this. He is advised to approach the product provider and ask to split this into two plans worth £9,500 each - we’ll call them Personal Pension fund A & Personal Pension fund B. Once he has done this he will be able to request that the following plans are taken as lump sums: 1. £9,500 Personal Pension fund A 2. £9,500 Personal Pension fund B & 3. £8,000 Personal Pension fund This will produce a total of £27,000. 25% of the total value of the 3 funds (£6,750) is free of income tax. The rest is taxed at Stuart’s marginal rate. As Stuart has now received 3 small pots, he can no longer make use of these rules. This means he will have to wait until April 2015, before he can take the £3,500 Personal Pension fund as a lump sum. WENDY As Wendy has not yet reached 60 years of age, she cannot take a small lump sum from her Stakeholder pension. She must wait until April 2015 when the new pension freedoms will allow her to receive all her stakeholder as a lump sum.

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