Trivial commutation rules are similar to those applying to small pots, however is only in relation to final salary pensions (also known as defined benefit pensions). Before 2015, this was not the case.
A trivial commutation payment is basically a lump-sum payment, made to a pension scheme member in lieu of (and to effectively replace) the benefits from said scheme.
To access trivial commutation, you must:
- You must have reached the legal minimum pension age (currently 55) – or meet the definition for ill-health retirement if earlier.
- The payments must then leave no benefits behind. In other words, the payment must extinguish all remaining benefits in that scheme.
- The value of all members rights to ALL pensions must be less than £30,000 total on the “nominated date”. The nominated date can be any date not exceeding 3 months of the start of the “commutation period”.
- You cannot have been paid a trivial commutation payment previously unless it was taken within THIS commutation period.
- You should have sufficient “Lifetime allowance” to cover the payment.
Taxation of Trivial payments
This will depend on whether your pensions are what we call “uncrystallised” or “crystallised”!
Uncrystallised – is usually paid in the normal manner, meaning 25% (or one-quarter) is tax-free with the remaining taxable as income.
Crystallised – tax is usually paid on the entire amount
Other points to consider
- You may be able to trivially commute a pension in payment (subject to scheme rules)
- Death benefits can also be trivially commuted by dependents (subject to scheme rules)
Still confused? Contact your local experts for advice on all things pensions and guarantee your very own Financial Fortress!