Trivial lump sums
- A number of conditions must be met before a payment is made, including the total value of all benefits being no more†than £30,000. For commutation periods that began before 27 March 2014 different limits applied:††
- From 6 April 2006 to 5 April 2012 the total value of all benefits had to be less than†1% of the lifetime allowance.
- From 6 April 2012 to 26 March 2014 the total value of all benefits had to be no more†than £18,000.†
- Member can nominate a date at which all of their benefits are valued
- For different types of benefit, there are different methods for calculating how the benefits should be valued
- Assuming it's an uncrystalised amount that is being commuted, 25% of the trivial lump sum is tax-free, with the balance being taxed through the memberís PAYE.
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When†a member reaches the age of 60, if the combined value of all of their registered pension scheme benefits is not more†than £30,000, they can take all of their benefits as a lump sum. This must include the value of any pensions in payment. Before the benefits can be taken on the grounds of triviality all of the following must apply:
- no previous trivial lump sum can have been paid more than 12 months ago, but trivial payments made before 6 April 2006 can be ignored
- all of the benefits under the scheme have to be taken at the same time
- the member must have some lifetime allowance (LA) available
- the total value of all the member's benefits can't be more than £30,000
- the member has to be at least aged 60, but there is no maximum age†
- after the payment the member has no rights left in the scheme.
Nomination date and 12 month commutation period
When†a member decides that they would like to take some or all of their benefits as a trivial lump sum they can nominate a date at which all of their benefits are valued. This is called the 'nomination date'. The combined value of all of the member's benefits at the nomination date is used to ensure that the total benefits value is no more†than £30,000. If the commutation period began before 27 March 2014 the total benefit value must be no more than £18,000. The member 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 that the benefits value is no more than†£30,000. The nomination date cannot be earlier than 3 months before the memberís 60th birthday. A default nomination date will be used if the member does not nominate a specific date, this will be the date of the first payment.
The member is not obliged to take all of their benefits as a trivial lump sum, but once the first lump sum is paid the member only has 12 months in which to take any other trivial 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 trivial benefits can be taken.
Trivial commutation lump sum payments may be paid in respect of different schemes, but all payments must be made within a single 12 month period.
Valuing the benefits at the nomination dateIt is only possible for benefits to be taken using triviality if the combined value of all of the memberís pension benefits, including pensions in payment, is no more†than £30,000.
In certain circumstances it will not be obvious if a member's benefits value exceeds £30,000. The following table sets out how the benefits should be valued:
Type of benefit
Calculation of benefits value
Defined benefit scheme
Multiply the memberís annual pension before commutation by 20.
Money purchase scheme
The total market value of the funds/assets held, unless a scheme pension is paid, in which case a factor of 20:1 is used.
Cash balance plan
The value of the benefits as calculated in line with the scheme rules.
Annuity in payment before 6 April 2006
Multiply the memberís annual annuity by 25.
Income drawdown in payment before 6 April 2006
Multiply the relevant GAD maximum withdrawal by 25.
Annuities/scheme pensions/ income drawdown in payment after 6 April 2006
The†value of benefits at†crystallisation.
The Registered Pension Schemes Manual (RPSM)†contains examples of how benefits should be valued.
Trivial commutation lump sums where a lifetime annuity is continuing
This is possible where the payment would fall under the normal trivial commutation rules were it not for a continuing lifetime annuity provided by the scheme.
If the member is also a member of another registered pension scheme, the†benefits in the other†registered pension scheme must also be taken as triviality. In addition, all benefits being taken on triviality grounds must be†taken before the end of the commutation period triggered by the first triviality payment.
If they arenít a member of another registered pension scheme, the requirements are that:
- they havenít previously received a trivial commutation payment; and
- the value of the memberís rights before the payment (i.e. including the value of the lifetime annuity) doesnít exceed £30,000.
The member can receive up to 25% of the lump sum tax-free. The rest is payable at the memberís 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. 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.
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.
If the member would have been entitled to more than 25% of their benefits value as tax-free cash at retirement, the amount that they can take tax-free on payment of a trivial 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 lump sum (e.g. capped drawdown)†then none of the trivial lump sum will be tax-free.
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.
Published 17 August 2006
Updated†28 March 2014
For professional advisers only