Triviality and Small Pots - frequently asked questions

On this page you will find all Triviality and Small Pots frequently asked questions. We outline the rules on triviality and small pots and how they are taxed.

A: Under a defined benefit scheme it's still possible for benefits to be taken on the grounds of triviality, but the following must apply:

  • The scheme rules allow it.
  • No previous trivial lump sum paid more than 12 months ago.
  • All of the benefits under the scheme have to be taken at the same time.
  • The total benefits value of the member's pension savings is not more than £30,000.
  • The member has some lifetime allowance available. 
  • The member has reached at least age 55 or a lower age if the member meets the ill-health requirement or if the member has a protected pension age.
  • After the payment the member has no rights left in the scheme.
  • 25% of lump sum will be tax-free, the balance will be taxed at the member's marginal rate.


PTM63500: Trivial commutation lump sum

Under a money purchase scheme triviality is no longer an option but benefits can be taken as an uncrystallised funds pension lump sum (UFPLS)

PTM063300: Uncrystallised funds pension lump sum (UFPLS)

A: No, since 6 April 2015 it’s only defined benefit schemes that can use the triviality rules to take benefits. Since that date benefits can be taken as an uncrystallised funds pension lump sum (UFPLS). There is no limit to the amount that can be paid. For the payment to be an UFPLS it must:

  • 25% will be paid tax-free and it is only available from uncrystallised funds (i.e. not drawdown).
  • 75% of the value of the UFPLS will be added to the member's taxable income in that year and be taxed at their marginal rate.
  • The member has reached at least age 55 or a lower age if the member meets the ill-health requirement or if the member has a protected pension age.
  • Not have primary or enhanced protection with protected tax-free cash over 25%.
  • Have available Lifetime Allowance (LTA), however, any amount in excess of the LTA will be a lifetime allowance excess lump sum and taxed at 55%.

Taking this option will trigger the Money Purchase Annual Allowance of £4,000.

PTM63300: Uncrystallised funds pension lump sum (UFPLS)

A:25% of the lump sum is payable tax-free. The rest is payable at the member's marginal rate of income tax. This means that if they currently pay tax at the 20% basic rate tax then 75% of the lump sum will be subject to this tax, unless the lump sum payment pushes them into a higher tax bracket. For example, if somebody has a lump sum of £10,000 then they will receive £2,500 tax-free and £7,500 will be subject to 20% tax. This means that, in this example, in total they will be entitled to a lump of £2,500 plus £6,000 after tax, being a total of £8,500.

The provider or scheme trustee is required to apply tax at the basic rate regardless of the amount of tax the member is actually liable for. This means that the amount of tax the provider or scheme trustee deducts may be greater or less than the amount which should apply to the member. If the member thinks that they have paid too much or not enough tax then they will need to discuss this with HMRC.

It is important to be aware that taking lump sums from the pension in this way could push the member into a higher income tax bracket, which could mean that they need to pay more tax than they originally thought.

When the small pot rule is being applied to crystallised funds, the entire lump sum will be taxed as income at the marginal rate.

A. You need to multiply the member's annual pension before commutation by 20, unless HMRC has agreed to the use of an alternative valuation factor. Tax-free cash lump sums, including those provided by commutation, are valued using a factor of 1:1 and are added to the above value.

A: Yes they do.

The small lump sum rules allow someone aged 55 or over to take a lump sum of no more than £10,000 so long as that extinguishes their rights under the scheme (occupational) or arrangement (personal pension or stakeholder) plan. For personal pension or stakeholder arrangements, three such lump sums could be taken in somebody's lifetime. There is no limit to the number of unrelated* occupational schemes that could be commuted in this way.

The trivial commutation rules allow someone in a defined benefits scheme aged 55 or over with total pension rights of no more than £30,000 to take them as a lump sum. Benefits can be taken before age 55 if the member meets the ill-health requirement or if the member has a protected pension age.

So if someone takes their small lump sums first and their remaining defined benefits pension rights are then within £30,000, potentially rights of up to £60,000 could be taken - 3 personal pension or stakeholder lump sums of £10,000 each and then £30,000 under trivial commutation.

* If the scheme is a larger pension scheme, there is no need to include rights under a related scheme. A larger pension scheme is one that has at least 50 members and meets various other conditions.

PTM063700: Lump sums: small pension payments

A: To be able to commute benefits from a defined benefit scheme on triviality grounds, the total value of all pension rights cannot be more than £30,000, so at first sight it would appear he couldn't.

However it is possible for non-occupational pension plans (e.g. personal pension plans, stakeholder pension plans, s.32 transfer plans) as well as occupational schemes to be commuted if the member is 55 or over, the amount paid is no more than £10,000 and it extinguishes all rights in the arrangement. It doesn't matter what the value of your other pension rights are. For non-occupational plans, you can do this three times in your lifetime.

So Sanjit could commute his personal pension plan and his stakeholder pension plan under these rules. This then just leaves his pension rights in the defined benefit scheme. As this is not worth more than £30,000, the defined benefit scheme rights could then be commuted on triviality grounds.

More information is available in our Technical Central articles on triviality and small lump sums.

A. No they have not increased. The value of the member's benefits value under the scheme cannot be more than £18,000.

PTM63600: Lump sums: winding-up lump sum

Note

The information provided is based on our current understanding of the relevant legislation and regulations and may be subject to alteration as a result of changes in legislation or practice. Also it may not reflect the options available under a specific product which may not be as wide as legislations and regulations allow.

All references to taxation are based on our understanding of current taxation law and practice and may be affected by future changes in legislation and the individual circumstances of the investor.

Share

Share

This website is intended for financial advisers only and shouldn't be relied upon by any other person. If you are not an adviser please visit royallondon.com.

The Royal London Mutual Insurance Society Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. The firm is on the Financial Services Register, registration number 117672. It provides life assurance and pensions. Registered in England and Wales number 99064. Registered office: 55 Gracechurch Street, London, EC3V 0RL.