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Trivial lump sums

Published  06 April 2024
   10 min read

In certain circumstances it is possible for a member of a defined benefit or collective money purchase pension scheme to take all of their benefits as a one-off lump sum using the trivial commutation lump sum (triviality) rules.

Key facts

Several conditions must be met before a payment is made, including the total value of all benefits being no more than £30,000.

  • An individual can nominate a date at which all their benefits are valued.
  • Assuming it's an uncrystallised amount being commuted, 25% of the trivial lump sum is tax-free, with the balance being taxed through the individual's PAYE.
  • Since 6 April 2015 the triviality rules no longer apply to defined contribution schemes. The triviality option has been replaced with the uncrystallised pension fund lump sum and small lump sums options for defined contribution schemes.

Who can take their benefits under triviality?

Generally, where an individual:

  • has reached the age of 55 (or age 57 after 6 April 2028), or earlier if they meet the ill health condition or have a protected pension age, AND
  • the combined value of all their registered pension scheme benefits is not more than £30,000

they can take all their defined benefits, collective money purchase pension benefits and any in-payment money purchase in-house scheme pension as a lump sum. This must include the value of any pensions in payment.

What are the conditions for paying benefits under triviality?

Before the benefits can be taken on the grounds of triviality the following must apply:

  • No previous trivial commutation lump sum can have been paid more than 12 months ago.
  • All the benefits under their defined benefits, collective money purchase pension schemes and any in-payment money purchase in-house scheme pension must be taken at the same time.
  • Trivial commutation lump sums are not relevant benefit crystallisation events and are not tested against the lump sum and lump sum and death benefit allowances.
  • The total value of all the individual's benefits (not just the defined benefits or collective money purchase benefits) including those in payment can't be more than £30,000.
  • The individual must be at least aged 55 (or 57 from 6 April 2028), or earlier if they meet the ill health condition or have a protected pension age, but there is no maximum age.
  • After the triviality payment has been made from a registered pension scheme the individual can have no rights left in that scheme.

What is the nomination date and 12-month commutation period

When an individual decides they would like to take some or all their benefits as a trivial commutation lump sum they can nominate a date at which all their benefits are valued. This is called the 'nomination date'.

The combined value of all the individual's benefits at the nomination date is used to ensure the total benefits value is no more than £30,000. The individual then has up to 3 months from the nomination date to start taking their benefits.

If the first lump sum is not paid within the 3-month period, a new date must be selected, and a new check carried out to ensure the benefits value is no more than £30,000. The nomination date cannot be earlier than 3 months before the individual's 55 birthday, or 57 birthday from 6 April 2028, or their protected pension age if it applies.

A default nomination date will be used if the individual does not nominate a specific date, this will be the date of the first payment.

The individual is not obliged to take all their benefits as a trivial commutation lump sum, but once the first lump sum is paid the individual only has 12 months in which to take any other trivial commutation lump sum benefits. This period is called the 'commutation period' and starts when the first payment is made. Once this commutation period has ended no further triviality benefits can be taken.

Trivial commutation lump sum payments may be paid in respect of different defined benefits schemes or collective money purchase schemes, but all payments must be made within a single 12-month period.

How do you value the benefits at the nomination date for triviality?

It is only possible for benefits to be taken using triviality if the combined value of all the individual's pension benefits, including pensions in payment, is no more than £30,000.

In certain circumstances it will not be obvious if an individual's benefits value exceeds £30,000. The following table sets out how the benefits should be valued:

Type of benefit Calculation of benefits value
Uncrystallised defined benefits or collective money purchase arrangement Multiply the individual's annual pension before commutation by 20. Where lump sums are provided otherwise than by commutation they are valued using a factor of 1:1 and are added to the above value.
Uncrystallised money purchase arrangement The total market value of the funds/assets held.
Cash balance arrangement The value of the benefits as calculated in line with the scheme rules.
Annuity in payment before 6 April 2006 Multiply the individual's annual annuity at 5 April 2006 by 25.
Income drawdown in payment before 6 April 2006 Multiply the relevant GAD maximum withdrawal at 5 April 2006 by 25.
Annuities/scheme pensions/ income drawdown in payment after 5 April 2006 The value of benefits at crystallisation.

For the purpose of valuing all an individual’s pension benefits, the following can be ignored:

  • any small lump sum, winding up lump sums, refund of excess contribution lump sums or short service refund lump sums paid after 5 April 2006 but before the nominated date, or
  • pension rights paid out as triviality before 6 April 2006

How are triviality payments taxed?

Where the triviality payment is from uncrystallised benefits, the individual can receive up to 25% of the payment tax-free. The rest (or the full amount, if already crystallised) is eventually payable at the individual's marginal rate of income tax. But depending on the individual circumstances the tax that will be deducted from the payment is as follows:

  • Where the lump sum payment is in respect of a pension already in payment the PAYE code already in operation will be used.
  • Where the pension being commuted was not already in payment the basic rate (BR) tax code will be used.
  • Where the recipient is not UK tax resident the emergency tax code will be used.

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 could push the individual into a higher income tax bracket, which could mean they need to pay more tax than they originally thought.

If an individual is entitled to more than 25% of their benefits value as tax-free cash, the amount they can take tax-free on payment of a trivial commutation lump sum will still only be 25%. The enhanced entitlement to tax-free cash will be lost.

If a pension in payment is commuted and taken as a trivial commutation lump sum, none of that trivial commutation lump sum will be tax-free.

Is a triviality payment tested against the lump sum allowance and lump sum and death benefit allowance?

No, trivial commutation lump sums are not relevant benefit crystallisation events and are not tested against the lump sum and lump sum death benefit allowances.

Does a triviality payment trigger the money purchase annual allowance?

No, the money purchase annual allowance is not triggered if the individual takes a trivial commutation lump sum.

Disclaimer

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.