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Adviser  >  Technical Central  >  Information & guidance  >  Benefit options  >  Trivial lump sums

Trivial lump sums

In certain circumstances it is possible for a member of a registered pension scheme to take all of their benefits as a one off lump sum using the trivial lump sum rules. There are 2 different types of trivial lump sum, one when the member reaches age 60 and one when a scheme winds-up. The 2 different scenarios are explained below.

Trivial lump sums after age 60

When the member reaches the age of 60, if the combined value of all of their registered pension scheme benefits is less than 1% of the standard lifetime allowance, 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 of the standard lifetime allowance (SLA) available
• the total value of all the member's benefits is not more than 1% of the SLA in force at that point  
• the member is between ages 60 and 75
• after the payment the member has no rights left in the scheme.

Nomination date and 12 month commutation period
When the 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 less than 1% of the SLA. The member then has up to 3 months from the nomination date to start to take 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 still below 1% of the SLA. The nomination date cannot be earlier than 3 months before the member’s 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 date
It is only possible for benefits to be taken using triviality if the combined value of all of the member’s pension benefits, including pensions in payment, is less than 1% of the SLA.

In certain circumstances it will not be obvious if a member's benefits value exceeds the 1% of the SLA limit. The following table sets out how the benefits should be valued:

Taxation
The member can receive up to 25% of the trivial lump sum tax-free, with the balance being taxed through the member’s PAYE.

If the member would have been entitled to more than 25% of their benefits value as a pension commencement lump sum 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. unsecured income) and some or all of the pension commencement lump sum has already been taken, then the amount of the trivial lump sum that can be taken tax-free will reduce. None of the trivial payment in respect of the pension in payment will be tax-free. 

Contributions or benefits accrual after the payment of a trivial lump sum
If a contribution is paid or benefits accrue for the member after the nomination date, these benefits cannot be included in the trivial commutation lump sum payment. This is because these pension rights were not in existence on the nominated date and therefore not included in the original calculation to check that the member’s benefits were less than 1% of the SLA. The member can only have one 12-month commutation period in their lifetime.

Winding-up lump sum

If a member is in an occupational pension scheme that is in the process of winding-up the member may commute their benefits under that scheme on the grounds of triviality. Unlike the trivial lump sum payments at retirement, there is no minimum age before the benefits can be commuted. There are however several conditions that must be met before a payment is made, they are:

• the scheme is winding-up
• the total of the member’s benefits value under that scheme is not more than 1% of the SLA in force at that point 
• after the lump sum payment the member has no benefit rights left in that scheme
• the employer is not making contributions under any other registered pension scheme in respect of the member, and the employer agrees not to make any contributions during the period of one year from the date the lump sum is paid. The Finance Act 2007 amended the definition of employer. It is somebody who employs the member at the time when the lump sum is paid, and who has made contributions under the pension scheme in respect of the member within the period of 5 years ending with the day on which the lump sum is paid
• the member must have some of the standard lifetime allowance (SLA) available
• the payment is made before the member's 75th birthday.

Lifetime allowance
Before the lump sum can be paid the member must have some of the lifetime allowance left. This is not to check whether a lifetime allowance charge is due, it is to make sure that scheme members don’t use this payment method to avoid the lifetime allowance charge where the member has already used up all of their lifetime allowance.

Valuing the benefits
It is only possible for benefits to be taken using triviality if the value of all of the member’s benefits under that scheme is less than 1% of the SLA. Any benefits that the member has under other pension schemes can be ignored.

In certain circumstances it will not be obvious if a member’s benefits value exceeds the 1% of the SLA limit. The following table sets out how the benefits should be valued:

Taxation
This is exactly the same as the taxation on the trivial lump sum at retirement. The member can receive up to 25% of the trivial lump sum tax-free, with the balance being taxed through the member’s PAYE.

If the member would have been entitled to more than 25% of their benefits value as a pension commencement lump sum, the amount that they can take tax-free 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. unsecured income) and some or all of the pension commencement lump sum has already been taken, then the amount of the trivial lump sum that can be taken tax-free will reduce. None of the trivial payment in respect of a pension already in payment will be tax-free.

The Registered Pension Schemes (Authorised Payments) Regulations 2008 - draft regulations

In May HMRC published draft regulations that provided details on the proposed new triviality rules. The new rules are split into 2 different categories – small stranded pots and scheme specific commutation. Both are explained below:

Small stranded pots

• a payment of no more than £500, which is not a contribution or a transfer, that is received unexpectedly after the member's benefits have been transferred to another registered pension scheme or to a qualifying recognised overseas pension scheme. The payment must be made within 3 months of receipt
• a payment of no more than £2,000, which is not a contribution or a transfer, that is received unexpectedly after the purchase of a scheme pension or lifetime annuity for the member. The payment must be made within 3 months of receipt
• a compensation payment of no more than £2,000 made under the Financial Services Compensation Scheme
• a payment of no more than £2,000 made to or in respect of a member who has reached age 75 and at that date was untraceable, and had not been heard from for at least 5 years prior to discovery of their whereabouts or death. The payment must be made within 12 months of discovery.

A payment from any of the above must extinguish the member's entitlement to benefits under the scheme. In addition to the above the following also applies:

• a payment to a member in receipt of a lifetime annuity which would be a trivial commutation lump sum but for ongoing payment of a lifetime annuity if:
  • the payment is made before the end of the trivial commutation period, or
  • the member had not previously received either a trivial lump sum or a payment that was an authorised payment and the value of the member’s pension rights immediately before the payment, does not exceed 1% of the standard lifetime allowance.

Scheme-specific trivial commutation rule

The new scheme-specific trivial commutation rule (applicable only to occupational pension schemes) is described as a de minimis rule. The conditions are:

1. A payment by an occupational pension scheme if:
   • the member has reached the age of 60, but has not reached the age of 75
   • the member is neither a controlling director of a sponsoring employer of that or any related scheme, nor a person connected to such a person
   • every other related scheme (if any) makes a payment to the member*
   • the total value of the payments made by all related schemes does not exceed £2,000*
   • all the payments are made within a one month period*
   • the payments extinguish the member’s entitlement to benefits under all the related schemes
   • no recognised transfer has been made out of any of the related schemes in during the last 3 years
2. For the items marked with a * above the condition is deemed to be satisfied in relation to a scheme if—
   • before the payment is made the member provides the scheme administrator with a declaration, made in writing and signed by him, confirming that the condition concerned will be satisfied if the payment is made by a specified date; and 
   • at the time the payment is made there are no reasonable grounds for the scheme administrator to disbelieve the declaration.
3. A declaration may be provided in respect of more than one condition.

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.

In addition, the information provided is also based on our current understanding of the relevant Finance Acts and the draft 'The Registered Pension Schemes (Authorised Payments) Regulations 2008'.

Published 17 August 2006

Updated 11 August 2008