Trivial commutation of £39000

Sue_S

I've just received a statement from a work pension from years ago. I only worked for the company for 2 years (32 years ago) and hadn't even realised I had a pension! My puzzlement arises because they've quoted me £39K as a trivial commutation lump sum. I thought the maximum was £30K? Can anyone shed any light for me?

jamesd

Do they use the exact words "trivial commutation"? There are other types of lump sum that can be paid, including a "winding up lump sum".

I assume that this is a final or average salary pension. They could also be offering to pay you a lump sum to eliminate your benefits under the pension, this isn't a trivial commutation lump sum.

If you have already started to be paid by the pension it's possible that 20 times the annual payment is below [STRIKE]£30,000[/STRIKE] £18,000 and that this allows them to pay a winding up lump sum. Then the true value as cash may be over [STRIKE]£30,000[/STRIKE] £18,000 and still be a winding up lump sum.

PensionTech

I think the above confuses trivial commutation and winding up lump sum.

A trivial commutation lump sum can be more than £30,000. This is because the pension (whether in payment or not) may be less than £1,500 as an annual amount (and so the 20x value used for trivial commutation is less than £30,000), but the rate at which the scheme chooses to convert the pension into a lump sum can be more than 20 and so the actual amount payable could be over £30,000.

To put it a different way and to be clear, the limit of £30,000 is based on a notional value of 20x the annual pension. The amount that the scheme actually pays is calculated differently and is irrelevant to whether it counts as a trivial commutation lump sum or not, as long as they deem it to extinguish all of your benefits. It therefore can indeed be more than £30,000.

A winding up lump sum is still set at £18,000. Here, it is the amount of the payment that matters, not 20x the pension it relates to. It is also only payable when the scheme is going into wind-up. The amount you've been offered will therefore not be a winding up lump sum.

kidmugsy

OP, is this sum being offered as an alternative, or as the sole option?

Sue_S

kidmugsy wrote: »

OP, is this sum being offered as an alternative, or as the sole option?

It's being offered as one of 3 choices. Full pension, tax free lump sum plus reduced pension, trivial commutation lump sum.

I phoned the company who are dealing with this and it seems that PensionTech has got it exactly right (thanks PT). I was told that the capital value of the pension must be below £30K but the trivial commutation lump sum may be larger.

Just to further complicate matters I've now asked for a transfer value as I'm hoping to pay it into another pension plan I've got which I'll then convert to drawdown and therefore reduce/avoid paying tax.

jamesd

It is worth checking what the pension income level, inflation linking and other benefits like spousal pension would be. That might actually turn out to be a better deal. perhaps not if say your life expectancy is lower than normal.

woolly_wombat

Sue_S wrote: »

It's being offered as one of 3 choices. Full pension, tax free lump sum plus reduced pension, trivial commutation lump sum.

I phoned the company who are dealing with this and it seems that PensionTech has got it exactly right (thanks PT). I was told that the capital value of the pension must be below £30K but the trivial commutation lump sum may be larger.

Just to further complicate matters I've now asked for a transfer value as I'm hoping to pay it into another pension plan I've got which I'll then convert to drawdown and therefore reduce/avoid paying tax.

You say you left 32 years ago so I'm guessing that most of your pension will consist of Guaranteed Minimum Pension (GMP).

Assuming you are female then your GMP will become payable at age 60 and sadly won't include anything for a spouse if you go first.

Be wary and check current annuity rates to determine whether they are offering a fair transfer value (and bear in mind that annuity rates appear currently to be on a one-way trend - downwards).

PensionTech

Just to further complicate matters I've now asked for a transfer value as I'm hoping to pay it into another pension plan I've got which I'll then convert to drawdown and therefore reduce/avoid paying tax.

If the transfer value is above £30,000, you'll have to pay for financial advice before you will be allowed to transfer it to a DC plan. That might cancel out any tax or valuation basis advantage.

jamesd

And in case you were wondering, yes, you really can be in a situation where you can take the whole lot as a winding up lump sum or transfer that without advice but you can't transfer without advice if you transfer based on a transfer value.

jamesd

One thing to know is that it is probably a bad idea to use the transfer value and a good idea to take the winding up lump sum.

The reason is tax relief.

If you take the winding up lump sum, 25% is paid out tax free and the rest taxed as normal income. You can then pay that back into a pension and get tax relief on it, including on the 25%. If you transfer you don't get that extra tax relief, it goes in at just the transfer value (which might be higher or lower than the winding up lump sum value).

So if you can pay the required amount into a pension in a reasonably small number of years, taking the winding up lump sum is likely to be the best choice. But we don't know for sure until we know all of the numbers.

Sue_S

jamesd wrote: »

One thing to know is that it is probably a bad idea to use the transfer value and a good idea to take the winding up lump sum.

The reason is tax relief.

If you take the winding up lump sum, 25% is paid out tax free and the rest taxed as normal income. You can then pay that back into a pension and get tax relief on it, including on the 25%. If you transfer you don't get that extra tax relief, it goes in at just the transfer value (which might be higher or lower than the winding up lump sum value).

So if you can pay the required amount into a pension in a reasonably small number of years, taking the winding up lump sum is likely to be the best choice. But we don't know for sure until we know all of the numbers.

Wow! This is clever! Definitely worth thinking about.