Simon Read: Paltry pot needs pre-Budget boost

Wednesday's Pre-Budget report will offer little to please. Ahead of next year's election, Chancellor Darling will simply be tweaking tax to little noticeable effect I suspect. But there's one tax change he could make that would make a positive difference to hundreds of thousands of struggling people approaching retirement.

I'm talking about people with a small pension pot, often of less than £10,000. At present, they are forced to use their money to buy an annuity to give them an income in retirement. But for many, the amount of income is so paltry as to make it almost not worthwhile. For instance, at the current rates, a £10,000 pension pot could buy an annuity of less than £600 a year, or around £11.50 a week.

If they were instead allowed to take the cash – all £10,000-plus of it – it could make a massive difference to them, particularly to those suffering from ill-health. But anyone wanting to cash in their pension pot faces a heavy tax penalty at the moment. The penalty itself is necessary to stop those lucky enough to have huge sums stashed away – like most MPs – from simply cashing it in, but it leaves those already struggling facing even more financial concerns.

The answer, according to charity Age Concern and Help the Aged, is to change the tax rules so that anyone with pension savings too small to annuitise can draw them in cash without being penalised. Andrew Harrop, head of public policy at the charity, says: "The tax system penalises those with small pension pots and the annuities market is hamstrung by legislative complexity and dominated by a few major players. This adds up to a poor deal for people with small pension pots. The pre-Budget report provides an opportunity for ministers to signal a shake-up of the system." Over to you, Darling.

s.read@independent.co.uk