Pension Triviality Rules

It is easy to work out the value of some pension pots because they simply have a fund value.

Some company schemes, however; don’t have a fund value as such because they provide an income for when you retire based on your salary and number of years membership of the pension scheme. With these types of schemes, a formula can be applied to calculate the equivalent fund value.

In addition to the above, if you have up to 3 separate pots of less than £10,000 each you can take these as a lump sum as well.

Below are some common points to know about triviality.

• You can take triviality so long as the scheme rules allow it.
• You are not allowed to have taken any previous trivial lump sums paid more than 12 months ago.
• All of the benefits under the scheme have to be taken at the same time.
• The total benefits value of your pension savings is not more than £30,000.
• You still have some lifetime allowance* available.
• You are aged at least 55 or a lower age if you meet the ill-health requirements of your pension scheme or if you have a protected pension age.
• After the payment you will have no further no rights left in the scheme.
• 25% of lump sum will be tax-free, the balance will be taxed at your marginal rate.

* The lifetime allowance is the total amount you can build up in all your pension savings without incurring a tax charge. Although there’s no limit on the amount of authorised benefits that can be provided for an individual from their registered pension schemes, there is a limit on the level of tax-privileged benefits.

The government generally considers a pension fund of less than £30,000 to be a relatively small amount, which is why these rules were introduced in the first place.

For example, if a person aged 60 has a fund of £30,000 to provide a pension for life, based on current income rates this would give him approximately £134.50 per month*.

On the other hand, if that person was to take the entire fund as a lump sum under pension triviality, it would take just over 18 years for the monthly amount to pay more. In other words, it would take 18 years before you are better off by taking the income instead of the cash sum.

Currently, as long as the total amount doesn’t exceed the current threshold of £30,000, you should be eligible.

Some occupational schemes are difficult to value because your entitlement is based on an annual income, which needs to be converted into a fund value for the purposes of testing against the maximum threshold of £30,000.

Even if you are currently receiving a very small pension, pension triviality rules can still be applied to any other pension funds that haven’t yet been taken.

If you do cash in a pension under pension triviality rules, normally a quarter of the amount paid is tax-free with the remainder potentially subject to income tax. You should remember that future rates of tax can change and actual tax treatment will depend upon your individual circumstances at the time.

If you are in receipt of any means tested state benefits, particularly the pension credit, by taking the additional taxable lump sum those benefits are likely to be affected.