Smaller Funds Made Smarter – Stranded Pot Legislation

With effect April 2012 it is possible to commute small pension funds, £2,000 or less, to lump sum benefits under HMRC ruling.

Whilst there has, for many years, been the facility to take pension benefits under ‘triviality rules’ the ‘stranded pot’ legislation is in addition to triviality and can be used along side or exclusively of a triviality payment.

‘Stranded pot’ legislation potentially allows persons 60 years or over to take up to two personal pension pots that are valued less than £2,000 as lump sum benefits.

This payment must exhaust all rights under the arrangement, it is not possible to commute part of a larger fund.

The legislation was introduced mainly for people who already had pensions over the triviality limit but who also had small funds in alternative schemes. Prior to the new legislation the majority of people in this situation would have to purchase an annuity with these funds, however in these circumstances such a small annuity purchase is rarely beneficial for either annuitant or provider.

Whilst the legislation to allow payment has been introduced, not all providers are offering ‘stranded pot’ as a vesting option. Even if you meet the eligibility criteria, it is still necessary to contact the provider to ascertain whether or not it is an option they support.

On the assumption that they do, benefits will be paid as follows:

25% tax free
75% added to other income and taxed accordingly

If you have any pension plans you feel may come under the new rules, please do not hesitate to contact us to investigate the options available to you.