Contributed by MW Pensions
03 May, 2012
Contributed by MW Pensions. [www.mwpensions.co.uk]
This leaflet is solely for the use of financial and other professional advisors, members of the public should not rely upon it
When can someone commute under the Triviality rules?
Anyone who has total benefits, in all Registered Pensions Schemes of which they are a member, with an overall value of no more than £18,000 can commute the whole of their benefits for a cash sum. This was previously set at 1% of the Lifetime Allowance, but HMRC have confirmed that it remains at £18,000 after 6.4.12, even though the Lifetime Allowance fell to £1.5M from £1.8M from that date.
It is important to note that it is the benefits aggregated together that count. So if someone has a small deferred pension in a company scheme with a value of £10,000, and also has a personal pension worth £10,000, they cannot commute their benefits under the "Trivialisation" rules. Although each pension has a value of less than £18,000, the two added together exceed the £18,000 limit, so full commutation is not permitted.
Benefits in an occupational scheme with a value less than £2000 can however be commuted, without reference to benefits in other pension arrangements. This can apply to pensions in payment, even after some pension has been commuted for a tax free cash sum. It is subject to the Rules of the relevant scheme allowing such trivial commutation.
As from 6th April 2012, benefits from a personal pension scheme with a value of less than £2,000 can also be commuted in full, provided it fully extinguishes the members entitlement to benefits under the scheme and provided the member has not previously received more than one similar commutation from a personal pension scheme under the triviality rule in other words, no member can receive more than two 100% commutations from all their personal pension schemes.
Crystallised and uncrystallised benefits within the same scheme must be commuted.
Is any tax payable?
25% of the total value of uncrystallised benefits being commuted will be tax free. Any crystallised benefits and the balance of any uncrystallised benefits will be taxed as income at the members marginal rate.
Does the £18,000 limit increase?
The limit will remain at this level until at least 2015/16
When can "Trivial" benefits be taken?
At any age after 60, but not earlier. All benefits from all Registered Pension Schemes must be taken within 12 months of the date the first payment is made.
What are the practical issues?
The main problem that faces Scheme Administrators and members is establishing if a member does indeed qualify for full commutation.
Many people quite understandably forget that they might be entitled say to a small pension from a period of employment perhaps 30 or 40 years ago. Scheme Administrators can do little but rely on the memory and truthfulness of members.
It remains to be seen what action HM Revenue and Customs will take against genuine cases where someone took full trivialisation, only to discover subsequently that they had another small pension scheme that took them over the £18,000 limit.
Who is most likely to qualify?
There are probably three main categories:
- those who have for most of their lives been self-employed and who have made little pension provision (for example, many self-employed people have invested in a "buy-to-let" property portfolio, as an alternative to a pension or consider the sale of their business as their pension); and
- those who have worked for employers who have had no company pension arrangements and who have not made any pension provision themselves. This will mainly be those who have worked for a small employer and who have been earning typically no more than National Average Earnings;
- those with a small (less than £2000) pension pot..
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