Govt must improve trivial commutation - report

The government must make reforms to improve transparency and clarity around tax on annuities and trivial commutation of pension pots, the Office for Tax Simplification (OTS) has said.

The OTS published its interim report on reforming pensioner taxation today, in which it made a number of initial suggestions.

Launching the review in July 2011, the OTS vowed to simplify the "spaghetti bowl" of pensioner taxation.

Today's report said Her Majesty's Revenue and Customs (HRMC) and the Department for Work and Pensions (DWP) should review the way providers explain tax on annuities for policyholders.

The two departments should also simplify the paperwork required for trivial commutation of pension pots, and consider uprating the trivial commutation limits of £18,000 and £2,000 in line with inflation, the OTS said.

Trivial commutation allows individuals to consolidate all of their pension benefits into one lump sum if the total benefits do not exceed £18,000.

There is a separate rule for small pots of under £2,000 because final salary pots of less than £1,000 were deemed by the government to be worth more than £18,000 in real terms.

The OTS also reported on several problem areas in the tax system, including age related allowances, the married couples allowance, the taxation of savings, pay as you earn (PAYE) paperwork and administrative processes pensioners must deal with.

Next the OTS will explore further the possible simplifications that can be made to these areas and will later make formal recommendations to Chancellor George Osborne.

John Whiting, tax director at the OTS, pictured, said: "Too many people find the tax system gets more complex as they get older.

"Our report has not shied away from the big issues and I hope this interim report helps stimulate a debate on pensioner taxation."

The DWP is known to be investigating further reform to trivial commutation rules as part of pensions minister Steve Webb's plans to improve consolidation of small pension pots.

In December, the government announced it would allow the trivial commutation of personal pension pots as well as occupational pots.