Trivial commutation and small pots
These FAQs are for financial advisers only. They mustn’t be distributed to, or relied on by, customers. They are based on our understanding of legislation at the date of publication.01 April 2015
Budget 2014 made a number of changes to the trivial commutation and small pots rules with effect from 27 March 2014. As a reminder:
- Trivial commutation limit - increased from £18,000 to £30,000, for commutation periods starting on or after 27 March 2014.
- Value of pension that can be taken as a small pot - increased from £2,000 to £10,000, for all payments made on or after 27 March 2014.
- Number of non-occupational pensions that can be taken as a small pot - increased from two to three, for all payments made on or after 27 March 2014.
To coincide with the introduction of the new pension flexibilities on 6 April 2015, a number of further changes were made to the trivial commutation and small pots rules from that date. These are summarised below:
For defined contribution arrangements - trivial commutation at retirement is no longer available under defined contribution arrangements, unless the 12-month commutation period started before 6 April 2015. The introduction of uncrystallised funds pension lump sums provides an alternative method for taking all funds under a defined contribution arrangement as a taxed lump sum.
For defined benefits schemes - trivial commutation is still possible under defined benefits schemes after 5 April 2015. However, the previous requirement that a trivial commutation lump sum had to extinguish the member’s entitlement to benefits under that registered pension scheme has been replaced with a requirement that it must extinguish the member’s entitlement to defined benefits under that registered pension scheme. If there are money purchase arrangements under the same scheme (typically AVCs), they need to be taken into account when testing the member’s total pension savings against the £30,000 commutation limit, but they can be left behind or dealt with in another way (for example, taken as an uncrystallised funds pension lump sum).
Minimum pension age - the minimum age for taking a trivial commutation lump sum has reduced from age 60 to normal minimum pension age (currently age 55) or a protected low pension age, if the individual has one under the scheme. Benefits may be taken earlier if the member is in ill-health.
These changes apply to commutation periods that start on or after 6 April 2015.
Trivial commutation lump sum death benefit limit - has increased from £18,000 to £30,000. This type of payment continues to be available from all types of pension arrangement, including defined contribution arrangements.
Pension guarantees - it is now possible to pay a trivial commutation lump sum death benefit in relation to the remaining instalments under a pension guarantee, provided the lump sum is not more than £30,000.
These changes apply to payments made on or after 6 April 2015.
Winding up lump sum death benefit - no schemes are allowed to make these payments after 5 April 2015. Instead, an equivalent payment is now available as a trivial commutation lump sum death benefit.
Minimum pension age - the minimum age for taking a small pension pot as a taxed lump sum, from either an occupational or non-occupational pension scheme, has reduced from age 60 to normal minimum pension age (currently age 55) or a protected low pension age, if the individual has one. Benefits may be taken earlier if the member is in ill-health. These changes also apply where a small lump sum is paid following the payment of scheme-specific (or ‘ordinary’) protected tax-free cash, that is above 25%.
Pensions Technical Services