Trivial commutation lump sum

Sue_S

Last year I was offered a trivial commutation lump sum from a pension scheme I belonged to about 35 years ago. I decided to do nothing as I didn't need the money at the time and was told that it would increase by 8% if I left it for a year. I've now decided I'd like the lump sum as cash and have received a quote of £44K.

The fly in the ointment is that one of the declarations I have to make is "The Capital value of all my pension rights (both in payment and not in payment) do not exceed the commutation limit of £30,000."

I have two DC pots which total approx £180K but I'm only paying minimal monthly amounts into them (£160 per month). Does this mean I can't take the trivial commutation lump sum?

Any advice much appreciated.

Ganga

Sue_S wrote: »

Last year I was offered a trivial commutation lump sum from a pension scheme I belonged to about 35 years ago. I decided to do nothing as I didn't need the money at the time and was told that it would increase by 8% if I left it for a year. I've now decided I'd like the lump sum as cash and have received a quote of £44K.

The fly in the ointment is that one of the declarations I have to make is "The Capital value of all my pension rights (both in payment and not in payment) do not exceed the commutation limit of £30,000."

I have two DC pots which total approx £180K but I'm only paying minimal monthly amounts into them (£160 per month). Does this mean I can't take the trivial commutation lump sum?

Any advice much appreciated.

If the most you can take as a trivial commutation pot is £30,000 then your total of £44,000 is above this.I am sure that one of the learned posters will come along and give you chapter and verse as how to proceed,if possible.

Silvertabby

Triviality rules apply to defined benefit pensions and are nothing to do with the recent 'pension freedoms'.

It's just not possible to be offered £44K as a triviality payment. Is this figure missing a decimal point? First thing to do would be to ring the pension provider to query the trivial commutation figure. Even if we do indeed have a 'naughty' decimal point to consider, then your other DC pots take you way over the limit for a trivial commutation from any source. You will need to ask your pension provider for your other pension options.

xylophone

https://www.pensionsadvisoryservice.org.uk/content/publications-files/uploads/Taking_small_pensions_Detailed_SPOT008_V1.5.pdf

kidmugsy

What you could do is transfer just under £10k to each of three different providers of (say) SIPPs, then take each under the "small pots rule".
https://www.pensionsadvisoryservice.org.uk/about-pensions/retirement-choices/the-right-choice-for-me/taking-a-small-pension-as-a-cash-lump-sum

Then you could take the TFLS from the remaining £14k pot.

That may be the way to get as much as possible out in a hurry. In some circumstances this could all give you quite a tax bill. Have you considered getting tax-free cash just by taking TFLS from your two DC schemes?

The_Doc

Check as to whether the DB scheme will allow partial transfers. Many will not.

jamesd

Even ignoring the £180,000 you can't declare that £44,000 is less than £30,000 so you can't use trivial commutation. There was no point in sending you an impossible to use commutation quote.

However, what you might be able to do is a transfer from defined benefit to defined contribution. This would cost you perhaps £2,000 in mandatory advice charges and regardless of the advice you could then transfer at the CETV value, which might be different from the triviality value.

Once you have transferred to DC you could use the normal DC options including the one to take up to £10,000 per pot as a small pot lump sum without triggering the money purchase annual allowance reduction in your annual DC pension contribution limit to £4,000 a year, including employer contributions. You can take the £10,000 after taking the tax free lump sum. It's common for places to have a few hundred Pounds of penalty if you close a pension within a year but this would let you take out £13,333 three times in total. The amount taken has to be everything in the pot and you can use the small pots rule only three times per lifetime.

Like triviality, three quarters of the amount will end up being taxable in the year in which you take it, just added to your normal taxable income. So you'd pay at least some 40% income tax if you did it in one year. A workaround for that is to make pension contributions. Then take a 25% tax free lump sum from the pot built up by those and any other DC pensions you have. With £180k of DC already, that's easy to do. Your pension contributions are still limited to your annual pay and the annual allowance, the pension income doesn't increase the amount you can pay in.

In effect what you'd be doing is a little pension recycling. Getting a second chunk of tax relief on the same money. There are limits on tax free lump sum recycling but you'd be recycling none of that, just the taxable part.

Sue_S

Thanks to everyone for the input. I called the pension provider (which is probably what I should have done in the beginning) and was told that I couldn't take the lump sum as I have the DC pots. My options are to take the pension or to get a transfer value.

To clarify the 'trivial commutation' part. This is a very useful explanation from @PensionTech (a forum user):

"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."

jamesd

Did they tell you whether the transfer value for the advice requirement is more or less than £30,000?

Those transfer values use the CETV type of calculation value so you can have a situation where you can take triviality because it's less than £30,000 but need advice to transfer because it's worth more than £30,000. Using different rules to calculate each £30,000.

These days a CETV will normally be more than twenty times the annual pension payment. Thirty to forty times range wouldn't be surprising.