Reports and Briefing Notes

Increasing the value of saving in Personal Accounts: taking small pension pots as lump sums

Many people are not currently saving enough for retirement to secure the level of income they are likely to consider adequate. As a response, the Government has proposed Personal Accounts, a new national pension savings scheme. The Equal Opportunities Commission (EOC) has asked the PPI to analyse a series of reforms to the trivial commutation limit, which could improve the suitability of Personal Accounts and also provides some illustrative cost estimates of how much the reforms could cost the Government.  

The reforms analysed in this paper are:

1.  Double the trivial commutation limit to £30,000 and increase the capital disregard to £10,000.
2. Increase both the trivial commutation limit and the capital disregard to £30,000. 
3. As reform option A but in addition launch a new drawdown product. This is a special type of limited-term annuity that would not count in the calculation of entitlement to means-tested benefits. It could encourage individuals to voluntarily buy an annuity with part of their trivial commutation lump sum.

Chapter one describes the Government’s proposal to introduce a new national pension savings scheme called Personal Accounts and summarises existing PPI research on the suitability of Personal Accounts.

Chapter two investigates the existing potential for individuals to use tax-free lump sums as a way of improving their returns from saving 

Chapter three considers the potential for individuals to use trivial commutation lump sums to increase returns from savings.  

Chapter four analyses the three reform options in detail, considering their effect on hypothetical individuals and Government expenditure.

Executive Summary