Pensions - Triviality

It is now permitted that commutation of small benefits including benefits in payment will be allowed up to a total of 1% of the lifetime allowance i.e. £15,000 in 2006/07 provided that the member’s aggregate pension rights do not exceed this limit.  Up to this aggregate limit any number of schemes or annuities may be commuted provided all such commutations take place within a single 12 month period, no earlier than age 60 and before age 75, and extinguish all the member’s rights under the scheme or annuity.

All Pension Schemes

The £15,000 rule (2006/2007) applies to all schemes whether personal or occupational whose funds must be notionally amalgamated first when determining if triviality is available. Any pensions in payment can be notionally valued using £25 capital for every £1 per annum gross pension, increased in line with any growth in the Lifetime Allowance since A Day (or the date the pension came into payment, if later).

Trivial commutation payments will count towards a member’s lifetime allowance.  Where the benefits are not yet in payment, 25% of the payment will be payable tax free with the remainder taxed as pension income, otherwise the whole payment will be taxed as pension income.

Where schemes commute members’ trivial benefits on wind up, such commutations can be ignored for the purposes of the members’ entitlement to effect other voluntary commutations – see below. Trivial commutations of vested benefits on wind up will be taxed as income.  Where unvested benefits are commuted 25% may be paid tax-free.

The HMRC technical pages go on to clarify a slight difference to the post A Day rules where an occupational scheme is winding up. One presumes this is to help trustees in discharging liabilities and timescales.

Where a scheme winds up, a member under the age of 60 may be able to commute benefits on grounds of triviality, providing the following two conditions are met. The conditions are that any employer who has made contributions under that scheme in respect of the member

1. Is not making contributions under any other registered pension scheme in respect of the member, and
2. Undertakes to HMRC not to make such contributions during the period of 1 year from the date the lump sum is paid.

Note: How point 2 above will be satisfied is under consideration. Further information will be provided by HMRC in due course.

Where such a scheme wind up is ‘trustee driven’, there is no minimum pension age and benefits for a 24 year old for example, could be commuted on these grounds.

What is meant by employer

The above restrictions apply to an employer, current or former, who has made contributions to the scheme which is being wound up.

Other conditions

As with the payment of all trivial commutation lump sums, the payment must also

• be paid only where the member has available lifetime allowance (although the payment is not tested against the member’s available lifetime allowance, this requirement is there to discourage the use of this payment method to avoid the lifetime allowance charge by preventing amounts being commuted this way where the member has exhausted their lifetime allowance),
• extinguish the member’s entitlement to benefits under the scheme and be paid before the member’s 75th birthday.