18 October 2009 - Post by:Stephen Richards
Many of our clients have been waiting for some time for a relaxation in the rules on cashing out small pensions. We’ve finally got it – see our Pensions Prompt for the detail. The previous rules have been awkward to operate. Although in theory cash sums could be paid without member’s consents, in practice members had to be involved in the process. This was because their benefits under all their pension arrangements had to be aggregated and the total value had to be below 1 per cent of the standard lifetime allowance (i.e. £17,500).
One of the changes is to test the value at single scheme level – from December 2009 a lump sum can be paid if the member’s benefits under a single scheme have a value of up to £2,000. This means that the scheme can proceed to remove a member by cashing out with much less need for his involvement.
A client, keen to take advantage of this relaxation as soon as possible, asked me if the legislation allowed him to go ahead automatically or whether the scheme rules needed to provide the authority.
He was right in thinking that the rules need to allow this but wrong in thinking that his scheme rules already covered it. He was thinking of a rule change we did at A day allowing payment of a trivial commutation lump sum. To him, the new £2,000 payment seemed in the same category. It is true that the new regulations treat the new payment in the same way as the old one for tax purposes but, looking at them closely, I saw that they didn’t actually classify the new payment as a trivial commutation lump sum. My client therefore needs to make a rule change before proceeding. Where members’ consents aren’t being sought, it is even more important to ensure that the scheme rules properly authorise the action being taken. The rule change isn’t complicated and could save him a lot of time and costs later if a member complains.
Stephen Richards is an associate at Allen & Overy LLP.