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:
Under a money purchase scheme triviality is no longer an option but benefits can be taken as an 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) or as a small pot.
A:25% of the lump sum is payable tax-free. The rest is payable at the individual's marginal rate of income tax. This means 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 individual is actually liable for. This means the amount of tax the provider or scheme trustee deducts may be greater or less than the amount which should apply to the individual. If the individual thinks 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 can push the individual into a higher income tax bracket, which can mean 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. Multiply the individual's annual pension before commutation by 20, unless HMRC has agreed to the use of an alternative valuation factor. Tax-free cash lump sums, excluding 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 aged 57 from 6 April 2028) 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 can be taken in somebody's lifetime. There is no limit to the number of unrelated* occupational schemes that can be commuted in this way.
The trivial commutation rules allow someone in a defined benefits scheme aged 55 (or 57 from 6 April 2028) 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 (or age 57 from 6 April 2028) if the individual meets the ill-health requirement or if the individual 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 can 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.
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 appears he can't.
However, it is possible for non-occupational pension plans (for example personal pension plans, stakeholder pension plans, s.32 transfer plans) as well as occupational schemes to be commuted if the individual is 55 (57 from 6 April 2028) 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 their other pension rights are. For non-occupational plans, its possible to do this three times in your lifetime.
So, Sanjit can 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 can then be commuted on triviality grounds.
More information is available in our Technical Central articles on triviality and small lump sums.
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.