What is a Trivial Commutation Payment? After you receive the one-off cash lump sum you will receive no future pension payments from your pension scheme and, in the event of your death, your dependants and family will also not receive any future payments from your pension scheme. In practice it is unlikely that compensation payments in respect of many pre 6 April 2006 policies would count as a payment from a registered pension scheme: Regulation 10 and 11 The Registered Pension Schemes (Authorised Payments) Regulations 2009 - SI 2009/1171. HMRC: Trivial commutation lump sum—content PTM063500. These are all things that an independent financial adviser can help you with. All content is available under the Open Government Licence v3.0, except where otherwise stated, Small lump sum payments made after transfer-out, Small lump sum payments made after the purchase of scheme pension or lifetime annuity, Payments under the Financial Services Compensation Scheme, Payments under occupational or public service pension schemes, Payments under larger occupational or public service pension schemes, Payments under a scheme that is not an occupational or public service pension scheme, Coronavirus (COVID-19): guidance and support, Transparency and freedom of information releases, there has been a recognised transfer out of a registered pension scheme (the originating scheme) in respect of a member (the transferred member), and, the recognised transfer was to another registered pension scheme or to a qualifying recognised overseas pension scheme, and, a payment is made into the originating scheme in respect of the member for whom the transfer-out was made (this will typically apply to money purchase benefit rights), and / or, there is a further allocation of value to the “member’s arrangement” above the value which the administrator had expected the sums and assets held for the purposes of that arrangement to be worth when the transfer-out was made - as might occur for example, with a corrective revaluation of sums and assets (again, this will typically apply to money purchase benefit rights), and / or, the scheme administrator becomes aware for the first time, of the member’s entitlement to a further benefit, in circumstances where they could not reasonably have been expected to be aware of it at the time of the transfer out - for example following a court judgment relating to a defined benefits arrangement, or as might occur when implementing revised legal conclusions on the application of overriding sex equalisation legislation where the retrospective effect may lead to small additions to original benefit entitlements, and, a payment is then made from the originating scheme to the transferred member (or in respect of the transferred member if that person has since died) (the payment out), and, the payment extinguishes the transferred member’s entitlement to benefits under the originating scheme, and, 6 months after the ’relevant accretion’ occurred, and, the payment does not exceed (for payments made before 27 March 2014) £2,000, or (for payments made on or after 27 March 2014) £10,000, and, the amount of the increase in the value of the of the sums and assets held for the purposes of the arrangement receiving the further allocation of value, or. As one of the conditions is that the payment extinguishes the member’s entitlement to benefits under the arrangement from which the payment is made but not necessarily their entitlement under the scheme as a whole, a member can take a small lump sum under Regulation 11A even though they may still have an entitlement to benefits under another arrangement under that scheme. This means that FSCS can pay compensation if a firm is unable, or likely to be unable, to pay claims against it. He said the scheme-specific threshold for a trivial commutation was £10,000. This is known as Trivial Commutation. Under certain circumstances, it is possible to commute a pension for a LGPS member, their survivor’s, eligible children or pension credit members provided that certain criteria are met. Factors and guidance for classic section” dated 9 March 2015. 1. A later correction in the valuation could result in there being further rights in the scheme relating to the member whose benefits had previously been secured with the insurer. When can a trivial commutation lump sum death benefit be paid? Pensions Tax Manual. If a member has a small amount of benefit rights in a registered pension scheme, and that scheme is either: it is possible for those benefit rights to be paid as an authorised member payment in the form of a one-off lump sum to the member without the need for that lump sum to satisfy the tougher test for a trivial commutation lump sum. The HMRC rules for paying a trivial commutation lump sum state, as one of the conditions, that all of a member’s crystallised and uncrystallised rights under any type of pension arrangement are taken in to account when testing the £30,000 commutation limit. There is a little overlap where one of the ’small lump sum’ provisions modifies the ‘trivial commutation lump sum’ conditions: see Small lump sum payments made after the purchase of scheme pension or lifetime annuity below to understand when this occurs precisely. Her Majesty’s Revenue and Customs (HMRC) rules only allow this if the gross trivial commutation amount does not Post 6 April 2006, members may be entitled to take their entire pension as a trivial commutation lump sum as long as certain criteria are met. An example of this would be where dividends or other structured payments, are received from an investment that had related to the member. If a member has a small amount of benefit rights (whether the rights are uncrystallised or comprise a pension in payment) in a registered pension scheme, and that scheme is not a public service pension scheme or an occupational pension scheme, it is possible for those benefit rights to be paid as an authorised member payment in the form of a one-off lump sum to the member without the need for that lump sum to satisfy the test for a trivial commutation lump sum. The conditions are: the member must have reached age 60 If a compensation payment does count as a payment from a registered pension scheme, then providing the above conditions for a ‘small lump sum’ are met, the payment will qualify as an authorised member payment. Considerations relevant to a trivial commutation exercise Less... HM Revenue & Customs (HMRC) recognises that schemes could incur disproportionate costs in providing small pensions under registered pension schemes, so the legislation allows small or trivial pension benefits to be commuted and paid as a cash lump sum. Limit 3: GMP underpin . Explain the significance of HMRC de-minimis amount and how it can help pension If you do not complete a Self Assessment tax return , HMRC may ask you to complete a second form P53 after the end of the tax year to show actual figures and will make any necessary adjustments thereafter. Both law and HMRC practice will change from time to time and our interpretation may be subject to challenge by the HMRC or other regulatory body. However, there are exceptions, for example, a payment is made into the scheme at a later date which relates to a member whose benefit rights had previously been fully secured with an insurer. These rules apply when a member has only a very small pension entitlement, and trustees are allowed to pay a one-off lump sum instead of having to make trivial regular pension payments. The excessively complicated rules governing trivial commutation of benefits (triviality) result in a very common type of unauthorised payment. Pensions Hot Topics—Pension Triviality: Tolley's Guide Aside from this overlap, the payment of any ‘small lump sums’ will not present any implications for ‘trivial commutation lump sums’ where the nominated date for valuation under the trivial commutation lump sum rules occurs after the ‘small lump sum’ is paid. However, the payment does get taxed in the same way as a trivial commutation lump sum would be. Any BCE that applied to the earlier crystallisation of the pension being commuted will not be affected by the later payment of the commuted lump sum. The Scheme will initially deduct tax under Pay As You Earn (PAYE) from the lump sum at the time of making the payment to you. Trivial commutation is an option available to some members of pension schemes. If your pension scheme has asked Xafinity to help with trivial commutation speak to an expert member of … See PTM027000. pre-27 March 2014 the limit was £18,000), the trivial commutation lump sum will be an unauthorised payment. The option is available to people aged 55 and over. The way in which a ‘small lump sum’ is taxed is explained later below. I fully understand the first 2 options, the 3rd one is understood despite the odd name given to it by HRMC, I am not in receipt of any pensions at the moment but I have a deferred final salary pension payable at 65, its well over the allowed capital value of £30,000 allowed by HRMC. These rules apply when a member has only a very small pension entitlement, and trustees are allowed to pay a one-off lump sum instead of having to make trivial regular pension payments. Such a ‘small lump sum’ will be an authorised member payment providing the following conditions are met (subject to the proviso at the end). Workplace pension schemes are provided by employers; The benefits that you receive could be based on your earnings and length of membership of the scheme (defined benefits schemes), on the amount that has been paid in, the length of time it’s been invested and investment performance (defined contribution schemes), or on a combination of the two (cash balance plans). Trivial Commutation Under £30,000. TRIVIAL COMMUTATION WILL CEASE FROM APRIL 2015 This page is full of information on Trivial Pensions and the rules surrounding them. Since April 2015, trivial commutation of all pension benefits has only been relevant to defined benefit pension schemes. Here, if as a result of GMP equalisation, the member’s entitlement is greater than the trivial commutation lump sum limits applicable at the time of initial payment (eg. A later correction in the valuation could result in there being further rights in the scheme relating to the member who had transferred out. From 27 March 2014 the commutation limit was amended to a fixed amount of £30,000 therefore where the capital value of all a members’ The tax legislation provides for benefit rights to be commuted and paid as a one-off lump sum in certain circumstances. The lump sum will not cease to be an authorised payment purely because further entitlement is later created that could not have been known about at the time of the initial payment, for example, through a pay revision. Regulation 8 The Registered Pension Schemes (Authorised Payments) Regulations 2009 - SI 2009/1171. Unlike the trivial lump sum payments at retirement, there is no minimum age before the benefits can be commuted. To help us improve GOV.UK, we’d like to know more about your visit today. This is the case provided the ultimate payment to the member is made ‘in connection’ with the policy that was purchased by the registered pension scheme. My Trivial Commutation Lump Sum (20,000) To give up all future pension benefits. HMRC PTM063600: Winding-up lump sum. A member may have a large number of arrangements (say 100 or 1000) under the same registered pension scheme where each arrangement contains well under the commutation limit under this regulation. Trivial commutation The A-Day trivial commutation requirement is that benefits under all schemes must be taken into account. (The requirements for a trivial commutation lump sum are set out in PTM063500). The total value of these pensions is £27,500. The tax treatment of any previous pension commencement lump sums linked to the pension now being commuted to provide the lump sum will also not be disturbed by the later payment of that ‘small lump sum’ or ‘trivial commutation lump sum’. An example of this would be where dividends or other structured payments are received from an investment that had related to the transferring member. The point to note is that the physical payment does not have to be made by the scheme itself (see PTM026000). How a person is ‘connected’ with another person is set out in section 993 of the Income Tax Act 2007. If a compensation payment does not count as a payment from a registered pension scheme, then there can be no question of the payment being unauthorised. A pension once in payment may normally only cease or be reduced in certain circumstances (for example, see PTM062340). The circumstances under which such one-off payments can qualify as authorised member payments are set out earlier on this page. Lifetime allowance A trivial commutation lump sum can only be paid if the member has some lifetime allowance remaining, even though the payment of … This part of GOV.UK is being rebuilt – find out what beta means. Typically these involve the discovery and correction of certain errors, unanticipated rights or certain unresolved obligations to make payments through the scheme (as described later below). Have there been any changes to the trivial commutation rules since 6 April 2006 to cater for individuals with scheme specific protected tax free cash? The latest guidance confirms that, if schemes make further payments to the member “solely for GMP equalisation”, it can be paid as a small lump sum. The conditions that need to be met instead, for such a small lump sum to be an authorised member payment under Regulation 11A, are that: The monetary limit applies to the actual lump sum paid. We also use cookies set by other sites to help us deliver content from their services. Author: Publisher: Bloomsbury Professional Publication Date: 2020 Payments under the Financial Services Compensation Scheme Whilst a cash lump-sum will appear to be attractive, there are certain things you need to be aware of, including: No Future Pension Benefits Where specifically identifiable contingent beneficiary’s benefits/rights exist, these must be extinguished along with the member’s own entitlement to benefits. We will assume you are ok with this, but you can opt-out if you wish. A scheme might also find that it holds extra rights for the member without there actually being a payment-in, for example some rights that, for whatever reason, had not been correctly identified at the time of the transfer, perhaps where there had been a valuation error in a money purchase arrangement, which had caused an investment that provided part of the transfer value to be undervalued. As is normal with HMRC limits, the £30,000 is the amount before tax (the ‘gross’ figure). On the face of it, a one-off cash lump sum is often attractive compared to receiving a relatively small regular pension payment. Trivial commutation payments will be paid in accordance with the Rules of the ... & Customs (HMRC) to deduct tax at source and pay you the balance. The option is available to people aged 55 and over. For many people this will be the right amount of tax. Trivial Commutation enables people aged 55 and over and who have relatively small pensions to exchange their regular pension payments for a one-off cash lump sum. 25% was paid tax free with the remainder subject to BR tax per the P45 issued. Unlike trivial commutation, you do not have to take into account any other pension benefits you may have when giving up a pension for a small pot. Click here for details of where to find an independent financial adviser. Explain ‘small lump sums’ and how these can help pension schemes and members. Small lump sum payments made after the purchase of scheme pension or lifetime annuity Trivial commutation factsheet (01.2019) V6 1 NHS Pensions - Trivial commutation Background Paying small pensions as a one off payment (known as trivial commutation) is subject to HM Revenue and Customs (HMRC) rules. However, a payment made in these circumstances will only be an authorised member payment if the ’relevant accretion’ was: The way in which such a ‘small lump sum’ is taxed is explained later below. For payments made before 6 April 2015, this guidance applies, but reading the minimum age at which the lump sum can be paid as 60 not 55. If taking trivial commutation, each pension fund has to be encashed in its entirety; though if you have more than one pension you could choose to cash in one or more and leave the other(s). The conditions that need to be met instead, for such a small lump sum to be an authorised member payment under Regulation 12 are that, the scheme can satisfy at least one of the following conditions. It should be noted that Regulation 11A applies at arrangement level rather than at scheme level. The trivial commutation rules allow someone in a defined benefits scheme aged 55 or over with total pension rights of no more than £30,000 to take them as a lump sum. Basically, this means that in such circumstances, all of the payment is chargeable to income tax as pension income. From March 27th 2014, any member receiving a pension from any scheme, who is over age 60 and meets either of the following criteria, can convert their pension to a one off cash lump sum. More information about the taxation of trivial commutation lump sums and trivial commutation lump sum death benefits generally can be found in PTM063500 and PTM073700 respectively. How Does Trivial Commutation Work For Pensions Worth Between £10,000 and £30,000? We’ll send you a link to a feedback form. Joe has two pensions. In addition, the conditions for when a further range of small lump sums are set out in regulations. Pensions Hot Topics—Pension Triviality: Tolley's Guide