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HM Revenue & Customs has announced new legislation for trivial commutation pensions, which comes into force from April 2012. Investors who have multiple small pensions worth less than £2000 will be able to take the pension as a lump sum payment at the age of 60.

Currently, all pensions are added together and if they exceed £18,000 they can’t be taken as a lump sum payment. This results in the purchase of annuities which have to be converted into monthly payments at high cost to annuity providers. In the first instance, HMRC expect around 25,000 people to be affected by the new rules. However, as company personal pensions were extremely popular in the 1990s, the number affected could reach millions.

According to Hargreaves Lansdown’s Tom McPhail, bus companies are a typical example as bus drivers would work for a company for a short period before moving on to another bus firm. Contributions were usually made to each company pension, resulting in small pension pots which are only worth pennies per day and incur costly administration fees.

From April 2012, HMRC will allow a person to cash in any individual pension which is worth up to £2000. This is limited to two pensions with a maximum value of £2000 each to prevent misuse of the new rules. A trivial commutation is received with the first 25 percent being tax free, and the rest taxed at the marginal rate of the taxpayer. McPhail considers the move to be a welcome development, allowing investors to collect savings as a lump sum.

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