Triviality - a bumpy playing field?

Minutes after Alistair Darling finished reading his first budget, I realised there was a further digging up of the pension tax level playing field. This wasn’t a surprise, but it was a disappointment.

Since April 2006, people with small pension pots totalling less than 1% of the lifetime allowance (currently £16,000, rising to £16,500 on 6 April 2008), can take these in cash when they reach retirement; known as trivial commutation. Pension tax simplification meant this applied across the board – to all types of pension arrangements.

Yesterday, the Budget included a new triviality cash level of £2,000 for each scheme, on top of the current rule. But not just for any scheme – it’s only for some occupational pension schemes. It won’t apply to contract schemes such as personal pensions. So, with one fell swoop the Chancellor has taken a spade to the level playing field by introducing different conditions for different types of schemes.    

The new triviality rule means that at retirement, members can take very small benefits from one or more occupational pension schemes in cash, and a pension from another larger pension scheme. Under the old rules, assuming a member had an occupational pension scheme fund of £2,000 and a pension fund of £25,000 from another scheme, as the total value was above the triviality level, they had to take a pension from both schemes.  The new rule means that the smaller pension fund can be cashed in, 25% of which is tax-free.  It makes sense to do this, it’s simpler to pay out these small sums as cash sums rather than as tiny pensions. And it’s probably valued more by members.

But it doesn’t make sense to limit this new rule to occupational pension schemes. The same issues apply to contract schemes, arguably, even more so. It’s more likely small funds will be built up under contract schemes as most occupational pension schemes allow members to take a refund of their own contributions if they leave within two years. This anomaly potentially excludes thousands of people.

So Darling, this is one of those rare moments where we would appreciate a u-turn! Let’s have back our level-playing field and treat all members equally.

Kate Smith
Pensions Development Consultant

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This blog provides the views of our industry lobbying team. The views are the opinion of the person writing the entry of the blog and don't necessarily represent the views of AEGON in the UK. They are based on their interpretation of industry developments and their current understanding of UK proposed and actual legislation, and should not be interpreted as recommendations or advice.