Triviality and small pots

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 individual's pension savings is not more than £30,000.
• The individual has some lump sum allowance available. 
• The individual has reached at least age 55 or a lower age if the individual meets the ill-health requirement or if the individual has a protected pension age.
• After the payment the individual has no rights left in the scheme.
• 25% of lump sum will be tax-free, the balance will be taxed at the individual's marginal rate.

HMRC Pensions Tax Manual - PTM63500: Trivial commutation lump sum (opens in a new window)

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

HMRC Pensions Tax Manual - PTM063300: Uncrystallised funds pension lump sum (UFPLS) (opens in a new window)

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. 

If the lump sum is being paid from uncrystallised rights, 25% of the lump sum is payable tax-free. The rest is payable at the individual’s marginal rate of income tax. If the lump sum is being paid from crystallised rights, all of the lump sum is taxable at the individual’s marginal rate of income tax.

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 think they have paid too much or not enough tax then they will need to discuss this with HMRC.

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

HMRC Pensions Tax Manual - PTM063700: Small pension payments - Taxation (opens in a new window)

You need to 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.

HMRC Pensions Tax Manual - PTM063500: Trivial commutation lump sum - Valuing pension rights (opens in a new window)

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 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 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 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 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.

HMRC Pensions Tax Manual - PTM063700: Small pension payments (opens in a new window)

HMRC Pensions Tax Manual - PTM063500: Trivial commutation lump sum (opens in a new window)

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 (such as personal pension plans, stakeholder pension plans, s.32 transfer plans) as well as occupational schemes to be commuted if the individual 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.

• Trivial lump sums
• Small lump sums
• Winding-up lump sums

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

HMRC Pensions Tax Manual PTM63600: Lump sums: winding-up lump sum (opens in a new window)