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Trivial commutation of £39000

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  • 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.

    Interesting.

    I see that, according to your earlier link, you can be paid "additional payments of up to £30,000 on the winding up of a pension scheme" in addition to the £30,000 limit for trivial commutation lump sum payments.

    Under what circumstances can a winding up lump sum be paid?
  • Some (rather extreme) opposing views on DB transfer offers:
    http://www.ftadviser.com/2016/02/18/pensions/personal-pensions/lawyer-reports-increase-in-db-transfer-offers-302Oc8OXC3XSccbexsUVZJ/article.html

    Marcus Fink, a partner at law firm Ashurst:

    "the default position has got to be that a DB transfer is not going to be in a member’s best interests, unless maybe you have taken a loan out from a shark who is going to break your legs.”


    Dan Farrow, director of Essex-based SBN Wealth Management:

    "Some of the enhancements on some of these defined benefit schemes for transferring out can be pretty generous."
  • jamesd
    jamesd Posts: 26,103 Forumite
    Part of the Furniture 10,000 Posts Name Dropper
    Under what circumstances can a winding up lump sum be paid?
    When an occupational pension scheme is being wound up and the value of benefits is no more than £18,000. See PTM063600 Member benefits: lump sums: winding-up lump sum. The original link I gave got some details wrong, including the amount threshold.
  • PensionTech
    PensionTech Posts: 711 Forumite
    edited 4 March 2016 at 3:11PM
    I see that, according to your earlier link, you can be paid "additional payments of up to £30,000 on the winding up of a pension scheme" in addition to the £30,000 limit for trivial commutation lump sum payments.

    Not really, for several reasons:
    • As jamesd acknowledges, that link has the wrong threshold - it's £18k.
    • You can't really choose when to take a winding-up lump sum. If your scheme happens to go into wind-up, which is quite rare, and certain complex criteria are met (e.g. any employer who paid into the scheme in the last 5 years can no longer be paying into any other scheme in respect of you, etc.), and the scheme decides to offer you a winding-up lump sum (which they don't have to do), and the total amount of your benefits in that scheme can be commuted for a payment within that limit, then you may be able to take a winding-up lump sum, when the scheme gets around to settling benefits, which could be months or years after wind-up starts. Otherwise not. So it's not really a viable strategy for retirement planning.
    • Whether or not you can take trivial commutation depends on the value of your benefits in all schemes. If you were to take a trivial commutation lump sum of the maximum £30k (or of benefits with that value) from one scheme, it would necessarily indicate that you don't have any benefits elsewhere, because those would put you over the £30k limit. So you couldn't then take a winding-up lump sum of £18k from another scheme, because its very existence means that you wouldn't have qualified for trivial commutation in the first place. You could do it the other way around: take a winding-up lump sum, if available, and small pots of under £10k each (limited to a total of three if talking personal pensions or section 32s; unlimited otherwise), and then if all of your leftover benefits are under £30k total, you could take trivial commutation of what remains. This is because, unlike most types of pension benefit, winding-up lump sums and small pots are essentially ignored for all other purposes after they are paid. But that is again quite a particular set of circumstances.
    • Whether you're talking about a winding-up lump sum, a small pot, or trivial commutation (all very different), one thing always holds true: you can only take it if it extinguishes all of your benefits under that particular scheme. So this again limits availability to people with a very particular set of circumstances, such as the OP who spent a really short amount of time in that pension scheme.

    For all those reasons, I wouldn't start integrating trivial commutation, winding up lump sums or small pots into your retirement plan, unless you know that you're one of the minority of people with the special circumstances that these rules were designed to cater for.
    I am a Technical Analyst at a third-party pension administration company. My job is to interpret rules and legislation and provide technical guidance, but I am not a lawyer or a qualified advisor of any kind and anything I say on these boards is my opinion only.
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