In 2003, I stopped the payments and froze the pension. I hadn’t thought about it again until last week, when I unearthed the documents and rang NatWest. I was told the £4,900 I had paid into the pension over nearly ten years has grown into the princely sum of £5,700. “You lost a lot of money during the recession,” said the girl in the call centre, helpfully.
I may sound clueless, but I am not unusual. The Pension Tracing Service says over 350,000 people have asked for its help since it was set up in 2005 by the Department for Work and Pensions. One-fifth have turned up long-lost pensions. Most are fairly small, though: the average value is £1,900.
So what can you do with such a paltry pension? As provision for your dotage, it is obviously useless. “If you judge the average annuity to be around five per cent, a pension pot of around £5,000 will give you £250 a year,” says Matthew Richard of Alan Seward Financial Services. And at this late stage, there isn’t much you can do about it.
Matthew says: “Basically, if you haven’t built up a decent pension by the time you reach your fifties, it’s too late.”
Cashing in your fund
There is some good news, however, in the shape of the Triviality Rule. This allows those of us with small pension funds to withdraw them as a lump sum once reaching 60 instead of having to buy an annuity. To qualify, the value of your pension funds must currently be under £18,000, which is 1% of the standard lifetime allowance. Savvy savers may be aware that this allowance is the maximum amount of pension savings allowed to benefit from tax relief, which this financial year is set at £1.8 million.
The triviality rule applies to both personal and occupational pensions, but the important thing to remember is that it only applies if the total value of all your pensions added together is under £18,000, though of course the government may change that threshold in years to come.
There is an extra rule, introduced two years ago, which allows people with very small ‘stray’ occupational pensions to cash them in, regardless of their other pensions. The payment cannot exceed £2,000.
Another important detail is that if you are cashing in (or ‘commuting’) several pensions, you must do it all within a year. The first quarter of the sum is tax-free, and the remaining three-quarters is treated as taxable income. You don’t have to withdraw the money at 60. Until this year, the upper age limit was 75 but that was scrapped in April, so you can now take it out whenever you want to.
Once you have the money, you are free to do what you like with it, including putting it in a cash ISA. This offers the double benefit of tax-free savings and access to the money if and when you need it. However, for people who have been truly useless at preparing for retirement, this may not be the best option.
Matthew Richard says: “There is a paradox here. If you are expecting to rely solely on the state pension, the government will top it up with a pension credit − but only if you have no substantial savings. So it may not actually be in your interest to save the money.”
Instead, he suggests that you could invest your windfall in home improvements, or simply use it to live on until you hit the State Pension age, which is currently 65. Or you could just gamble on the government looking after you in your old age, blow the lot on booze and party like you’re 59!
Visit the Pensions Tracing Service at Directgov or call 0845 600 2537 (textphone 0845 300 0169).
Visit the Pensions Advisory Service for further information on this subject, including cashing in your pension, the rule on stray occupational pensions and pension credit, or call 0845 601 2923