By netangel

22 January 2008 15:00

Can I get my small pension funds paid as a lump sum?

What is this?

 

Yours Expert Answer

By Yours Money Expert

Yes, there are special arrangements that apply to trivial pensions.

Six months before you are due to retire, find out the value of the pensions from each company that holds fund for you. This is fairly straightforward if the money is either invested in a personal pension policy, or if you are a member of a 'money purchase' pension scheme. 

Add the figures together to show your total fund value. If this figure comes to £16,000 or less you are not obliged to take out annuities because the amount is considered to be trivial. Instead, you can request each company to pay out the lump sum.

Of course, once you have received the lump sum you will no longer be entitled to receive a pension, although you should still qualify for the state pension. If, for example, you are able to take the maximum £16,000, 25 per cent of this - £4,000 - will be tax free. The remaining sum - £12,000 - will be taxed at 22 per cent. This will leave you with a total of £13,360 net of tax.

In some cases the extra taxable income in the year (in this example £12,000) can take you over the limit of £20,900 for the purposes of age-related reliefs.
Similarly, if this takes your income over £34,600 you will be liable for higher rate tax. So you might need to take professional advice before making a decision.

If you have been a member of a 'final salary' pension scheme you need to do a calculation to determine the value of the pension fund for the purposes of seeing if you are under or over the £16,000 limit for trivial pensions. To do the calculation, you should find out the annual pension and then multiply this by 25.

There are some rules to observe. When calculating whether you qualify under the trivial pension rules, you have to take into account all pensions other than the state pension. This can be complicated, especially if you are already in receipt of benefits under another employer's scheme or personal pension, or if you have previously obtained a lump sum. 

Also bear in mind, you only have one 12-month period in which to claim any trivial pension lump sums - and this must be done between the ages of 60 and 75. This can cause difficulty if you have been a member of several pension schemes over the years.

If your calculations show your total fund value exceeds £16,000 - or if you decide against taking the lump sum - consider approaching an independent financial adviser. He will be able to discuss with you the possibility of amalgamating the different funds so that you receive your pension income from just the once source.

He should also be able to make sure you obtain the best annuity rates available by shopping around on your behalf.