Triviality Rules Under Personal Pension And Stakeholder Schemes
The content of this page is based on our understanding of how pensions worked before A-Day, the 6 April 2006, and is provided for reference only.
To avoid the need under both personal pension (PP) and stakeholder (SHP) plans to pay small pensions it is possible, in certain circumstances, for the whole of a pension fund to be returned to the member as a lump sum. This is commonly known as ‘commutation on the grounds of triviality’. This analysis gives details of the main conditions that must be met to commute on the grounds of triviality under both PP and SHP plans.
- The member must have attained age 50 or have an earlier retirement age as a result of being treated as a special occupation e.g. age 35 for footballers. Alternatively, retirement could be early on the grounds of incapacity.
- The pension fund must not exceed £2,500.
- No previous PP/SHP fund to have been repaid on the grounds of triviality.
- He or she is not a member of another PP/SHP plan. It’s possible to meet this condition by transferring all pensions into one plan and then to consider the triviality rules.
- Member cannot be in receipt of an annuity from any PP/SHP plan.
It is important to note that the member must be aware that part of the repayment is chargeable to tax, must consent to the repayment and waive all rights under the scheme.
Conditions 1 and 2 above do not apply where protected rights are involved. In such a scenario the member:
- must have attained age 60 (even if in serious ill health), and
- the fund must be insufficient to provide an annuity of at least £260 per annum.
What tax is payable on lump sums paid out on the grounds of triviality?
As is normal under PP/SHP plans 25% of the fund value (or the fund value in excess of the protected rights) is available tax-free. The amount being paid out in excess of this is chargeable to tax under Schedule E. So, a tax rate of 22% or 40% would apply depending on the individual circumstances of the member.
The scheme administrator must deduct basic rate tax from the payment in excess of 25% of the fund. If the member doesn’t pay tax they’ll need to contact their Tax Office to notify them of this. Higher rate taxpayers will need to include the payment in their Self Assessment form.
Let’s look at a straightforward example:
Joe is 57 and has a fund value of £2,385.00 under his PP (all non-protected rights). He has no other PP/SHP plans or pension income and is a basic rate taxpayer.
Full commutation on the grounds of triviality is available to the ex-spouse on divorce provided the total fund from the Pension Credit Benefits (PCBs) is £2,500 or less. It is not necessary to aggregate the PCBs with any other PP funds which may be held.
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.
The details shown 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 05 March 2004
For professional advisers only