Triviality and small pots FAQs

Here are some questions that have been regularly asked since the pension flexibility changes were introduced on 6 April 2015. These FAQ are for financial advisers only. They mustn’t be distributed to, or relied on by, customers. They are based on our understanding of current legislation, which may change.

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Yes – so long as she hasn’t already used any of her three ‘non-occupational pension scheme de minimis small pots’. There are various types of small pot which have their own rules and don’t interact in any way with each other. This table shows what is allowed:

Type Limit? Lifetime allowance required? Taxation

Trivial commutation of a small pot following the payment of protected tax-free cash (i.e. more than 25%)

£10,000.

Yes

The full small pot amount is taxed at the recipient’s marginal rate*

Non-occupational pension scheme de minimis small pot

3 x £10,000. This is measured at arrangement level, so it’s possible to take a small pot from three arrangements under one pension scheme, or a small pot from three separate schemes (or two from one and one from the other).

No

The first 25% of each small pot is paid tax-free and the remainder is taxed at marginal rate*

(Note – this only applies to uncrystallised funds. The full small pot would be taxed if it is paid from crystallised funds)

Occupational pension scheme de minimis small pot

£10,000. This is measured at scheme level, so only one small pot can be paid from each occupational pension scheme a member has. However, small pots can be paid from multiple occupational pension schemes – there is no limit on how many can be paid overall.

No

The first 25% of each small pot is paid tax-free and the remainder is taxed at marginal rate*

(Note – this only applies to uncrystallised funds. The full small pot would be taxed if it is paid from crystallised funds).

* In practice, tax will be deducted at basic rate (20%), so the member will have to sort out any over or underpayment of tax with HMRC.

Each of the small pot types have their own conditions that must be met. You can read more about small lump sums here(Opens new window).

New 12-month trivial commutation periods for money purchase arrangements were abolished on 6 April 2015. However, if your client is in an open 12-month commutation period that started before 6 April 2015, they will be able to take further trivial commutation lump sums from their money purchase pension savings until that commutation period ends.

For example, Mary took a trivial commutation lump sum on 25 September 2014. The 12-month commutation period runs until 24 September 2015. She can take further trivial commutation lump sums (if she meets the conditions) from other money purchase arrangements right up until 24 September 2015.

If there is no open commutation period, she may be able to take the fund as three small pots, assuming the relevant conditions are met:

  • She has reached age 55 (or her protected pension age if she has one), or meets the ill-health conditions
  • The payment doesn’t exceed £10,000 per arrangement
  • The payment extinguishes her entitlement to benefits under each arrangement, and
  • She hasn’t had any other small pots from other non-occupational or non-public service pension schemes.

You can find more information about small pot payments here(Opens new window).

There are a number of differences. The table below highlights some of the features of both UFPLS and small pot payments:

Feature UFPLS Small pot

BCE?

Yes (BCE6)

No

Triggers the money purchase annual allowance?

Yes

No

Maximum amount that can be paid as a lump sum when the member is under age 75

Limited to the individual’s available lifetime allowance

£10,000 per small pot

Maximum amount that can be paid as a lump sum when the member is age 75 or over

No limit, as the age 75 BCE will have been done and any excess charge will already have been paid.

£10,000 per small pot

Number of times such a payment can be made?

No limit

Maximum of 3 small pots from non-occupational pension schemes

Can be taken from age 55 (or a lower protected pension age) or earlier if in ill-health

Yes

Yes

Tax-free element

25% of the remaining lifetime allowance

* 25% if taken from uncrystallised funds

* Nil if taken from crystallised funds

Overall tax position

Marginal rate

Marginal rate

While the overall tax position for UFPLS and small pots results in members paying marginal rate tax on the taxable part of the lump sum, the methods for deducting tax in practice are different. When an UFPLS is paid, 25% is normally tax free and the balance is taxed using an emergency code. Small pots from uncrystallised funds are paid 25% tax free with the balance being taxed at 20%. So those taking an UFPLS may need to reclaim tax from HMRC if they’ve overpaid, whereas members taking a small pot may have a tax liability for underpaid tax, or a claim for overpaid tax if they’re nil rate taxpayers. The end result is the same once the over/underpayment of tax is resolved.