Arcane rules preventing "thousands and thousands" of people from transferring out of a defined benefit pension may soon be scrapped, a DB pensions expert has said.
David Brooks, technical director of pensions consultancy Broadstone, told FTAdviser he was "80 per cent" sure the government would propose relaxing "trivial commutation" rules for defined benefit lump sum payments in its upcoming green paper.
Relaxing the rules would make it much easier for people to access DB lump sums worth less than £30,000 after the age of 55.
Under current triviality rules, Mr Brooks said those aged 55 plus could access lumps sums worth less than £30,000 as long as any other pension pots they had did not tip their total pension wealth over £30,000.
“If you want to get a trivial commutation, and the benefits are worth, say, £20,000 of the scheme, and you’ve got a defined contribution pot of £50,000 somewhere else, you can’t have that defined benefit fund as a lump sum. Your entire benefits have got to be less than £30,000," Mr Brooks told FTAdviser.
He said the scheme-specific threshold for a trivial commutation was £10,000.
He said "a lot of people" had misunderstood the status of this "middle ground" for sums between £10,000 and £30,000.
He said "thousands and thousands" of people had missed out on trivial commutation exercises carried out by their employers because they had pots elsewhere.
He said HMRC was “paranoid” that people would create “little DB funds to trivially commute them to get around the tax rules”, but insisted this fear was ungrounded.
"People don’t have enough time in their lives to manufacture the situations where they can do it," he said.
He said he was confident the government would seek to make the £30,000 rule scheme specific, as the £10,000 rule currently is.
However, he added the government might apply the controversial money purchase annual allowance (MPAA) to trivial commutations, to prevent people "recycling" the tax concessions paid on pension contributions.
The government has proposed reducing the MPAA from £10,000 to £4,000, also to prevent such recycling - a proposal which has been met with strong opposition from the industry.
If the government does choose to relax trivial commutation rules, it will be following the recommendations of a recent report by the Work and Pensions select committee.
The committee has also recommended cuts to DB benefits, giving The Pensions Regulator more powers, and the creation of an aggregator fund for small DB schemes.
In a recent speech, pensions minister Richard Harrington suggested the latter three proposals would be addressed in the green paper.
He did not make any comments on trivial commutation rules.
Simon Torry, a chartered financial planner with SRC Wealth Management, said it would "make perfect sense" for the government to make the change, describing it as a "tidying up exercise".
He said the measure was brought in to prevent company directors setting up lots of little DB schemes with benefits under £30,000, and then transferring out under the triviality rules.
But he said this was simply not happening.
Mr Torry also pointed out that the £30,000 rule had nothing to do with the £30,000 threshold for unadvised DB transfers.
He said people with small DB pots who could not use triviality rules could still in theory transfer out of the scheme without advice.
However, he added: "Trying to find a pension company to accept the money from someone who hadn't had advice would be difficult. They [the receiving scheme] would be wide open to complaints."
Royal London director of policy and former pensions minister Sir Steve Webb said relaxing the triviality rules would "make a lot of sense".
"It seems bizarre in a world of pension freedoms to still have rules that have complex tests about whether a small pension pot can be turned into cash. I would warmly welcome a further simplification of these rules," he said.
Tom McPhail, head of retirement policy at Hargreaves Lansdown, also said it would make sense, adding he would not be surprised if the government brought the measure in.
He went on: "However it would mean DB scheme members enjoying yet another advantage relative to money purchase scheme members who would be caught by the MPAA, whilst DB scheme members would be free to draw cash and recycle it at will."
james.fernyhough@ft.com
