The Mail reports that Chancellor George Osborne is set to unveil the changes in the Budget this week.
Around 150,000 people a year with pots of less than £15,000 would be able to take advantage of the change. The Government has been under pressure to relax the rules around small pots because the fixed costs of running the products mean a greater proportion of the fund disappears in charges, and because competition in the small pot sector is weak.
Pension experts say the Treasury will have to make a call on whether the benefits of raising the threshold, underlined by the FCA’s thematic review finding that annuities offer poor value for small pots, are outweighed by the potential for abuse of the system.
Hargreaves Lansdown head of pensions policy Tom McPhail says: “I can’t see an way for this to work without HMRC swallowing the risk of abuse. But I put in a Freedom of Information Act request to them last year that found out they are not even counting the number of people using trivial commutation.
“But if this rumour is true, then there are some very interesting potential ramifications, given the fact that the number of people who will be able to take this cash runs into six figures. Will they put it into Isas? What will the effect on annuity rates be? And what about all those fifty-somethings opting out of auto-enrolment? Would they be better off staying in and drawing their pension as cash a few years down the line?”
Towers Watson senior consultant David Robbins says: “The FCA’s review set the general narrative about annuities being poor value for small pots. Relaxing this would mean a short-term tax boost for the Treasury. What we don’t know is how you would stop the whole thing being circumvented. How do you stop big pots being broken into small pots to take advantage of this rule? It may be that they change the rules and then cross the bridge of how to tackle this issue until later, if it becomes a problem.”