HMRC internal manual

Pensions Tax Manual

PTM063500 - Member benefits: lump sums: trivial commutation lump sum

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Overview of commutation of benefit rights
Conditions for paying a trivial commutation lump sum
What pension rights are measured against the commutation limit
Valuing pension rights
Example of paying a trivial commutation lump sum
Contributions or accrual after the nominated date
Taxation

This page of guidance does not apply where the 12-month commutation period began before 6 April 2015. For guidance on older trivial commutation lump sums see the archived Registered Pension Schemes Manual (RPSM09104900). Note that if the commutation period began on or after 27 March 2014 the commutation limit was £30,000 and not the amount stated in RPSM09104910 or RPSM09105085.

Overview of commutation of benefit rights

In certain circumstances the member’s rights under a pension scheme may be commuted and paid as a one-off authorised lump sum. This will be a trivial commutation lump sum if all the conditions outlined in the next section of guidance are met.

Alternatively if the payment is not more than £10,000 the lump sum may be authorised under regulations 11 to 12 of the Registered Pension Schemes (Authorised Payments) Regulations 2009 - SI 2009/1171. PTM063700 provides guidance about these types of small lump sum payments.

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Conditions for paying a trivial commutation lump sum

Paragraph 7 Schedule 29 Finance Act 2004

Only certain types of pension rights may be commuted into a trivial commutation lump sum. The next section tells you what pension rights may be commuted.

When the lump sum is paid the member must have some available lifetime allowance, and:

  • have reached normal minimum pension age,
  • the ill-health condition is met (see PTM062100), or
  • if the member has a protected pension age (see PTM062205) under the scheme paying the lump sum, they have reached that age and satisfy the conditions for using that protected pension age.

To be a trivial commutation lump sum the value of the member’s pension rights under all registered pension schemes that they belong to must not be more than £30,000. This valuation is carried out on a specified date called the nominated date. The sections What pension rights are measured against the commutation limit and Valuing pension rights below tell you which pension rights are included in this valuation and how to carry out the valuation.

All payments must be made within a 12-month commutation period.

What benefits may be commuted

Paragraph 7(1)(aa) and (d) Schedule 29 Finance Act 2004

Only the following types of pension rights may be commuted into a trivial commutation lump sum:

  • Benefits held under a defined benefits arrangement either as uncrystallised rights or in payment as a scheme pension
  • An ‘in-payment money-purchase in-house scheme pension’. This is a scheme pension which the member became entitled to under a money purchase arrangement. It must payable by the scheme administrator, not an insurance company.

If the lump sum was paid before 16 September 2016 only pension rights held under a defined benefits arrangement could be commuted into a trivial commutation lump sum.

The lump sum must extinguish all the member’s entitlement to defined benefits and in-payment money-purchase in-house scheme pensions under the scheme making the payment.

Individuals do not have to commute benefits under every scheme. They can choose to commute benefits held under one scheme, but not those under another scheme.

The reference to extinguishing the member’s entitlement to benefits under the scheme is to all the rights that could reasonably have been known about at the time of the payment. 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.

Where specifically identifiable contingent beneficiary’s benefits/rights exist under the scheme in relation to the member’s rights that are commutable as described above:

  • these must be extinguished along with the member’s own entitlement to such benefits, and
  • must be included when valuing the member’s pension rights.

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12-month commutation period

Paragraph 7(1)(a) and (2) Schedule 29 Finance Act 2004

The individual has a one-off 12-month period to commute trivial funds across all their schemes. Any commuted lump sum paid after the 12-month period has ended will not qualify as a trivial commutation lump sum.

The commutation period starts on the day the first trivial commutation lump sum is paid and ends 12 months after that day.

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The nominated date

Paragraph 7(2) and (3) Schedule 29 Finance Act 2004

A payment cannot be a trivial commutation lump sum if the total value of the member’s pension rights on the nominated date is more than £30,000. The member must have the opportunity to nominate the date when their pension rights are valued. The nominated date must fall either on the first day of the 12-month commutation period, or within the 3-month period ending on that first day. If the member fails to select the nominated date, by default the first day of the commutation period will be the nominated date.

The member can therefore plan when the 12-month commutation period will run from, and this will dictate the period the nominated date must fall within.

A trivial commutation lump sum cannot be paid before the member reaches normal minimum pension age unless they either meet the ill-health condition (see PTM062100) or have a protected pension age (see PTM062205). This age is the earliest date the commutation period can start from and it follows that the nominated date cannot be earlier than 3 months before that date.

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Amount of payment

It is for the scheme to attribute a capital value to the pension benefit being commuted. The amount of lump sum actually paid may not necessarily be the same as the value attributed to those benefits as valued on the nominated date on the prescribed basis. What matters is that the benefits were valued on the prescribed basis for commutation limit purposes, did not in aggregate with rights beyond the scheme exceed the commutation limit on the nominated date and the payment otherwise satisfies the conditions for a trivial commutation lump sum.

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What pension rights are measured against the commutation limit

Paragraphs 7(5), 8 and 9 Schedule 29 Finance Act 2004

A payment cannot be a trivial commutation lump sum if the total value of the member’s pension rights on the nominated date is more than £30,000.

The total value of the member’s pension rights is the value of all their rights under every type of arrangement under every registered pension scheme that they belong to. This is the case even though not all types of pension rights can be commuted into a trivial commutation lump sum.

The valuation of the member’s pension rights includes the individual’s benefit entitlements, past and present. This includes:

  • Pensions to which the member had become entitled before 6 April 2006
  • All amounts crystallised previously for lifetime allowance purposes in respect of that member since 6 April 2006
  • Uncrystallised rights.

Any small lump sum (see PTM063700) paid before the nominated date is not included in the member’s relevant crystallised rights. For payments made after 5 April 2006, only payments that were BCEs are included in the valuation of crystallised rights. Payment of a small lump sum is not a BCE and so it will not be included in the valuation of crystallised rights for triviality purposes.

Any rights that were commuted on grounds of triviality before 6 April 2006 are not included in the calculation. This is because the valuation only looks at pensions in payment on 5 April 2006, and not lump sums paid before 6 April 2006.

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Valuing pension rights

Valuing pensions in payment on 5 April 2006

Paragraph 8(1)(a) Schedule 29 and paragraph 10 Schedule 36 Finance Act 2004

PTM088300 gives a list of the types of pension in payment on 5 April 2006 that should be included in the valuation of crystallised rights for triviality purposes.

Pensions in payment on 5 April 2006 are valued as 25 times the annual rate of the pension payable on 5 April 2006. Do not use the annual rate of the pension in payment on the nominated date.

Valuing pension rights that crystallised on or after 6 April 2006

Paragraph 8(1)(b) Schedule 29 Finance Act 2004

This is the total of the value of all benefit crystallisation events that have occurred in respect of the individual in the period beginning 6 April 2006 and ending on the nominated date.

This includes every BCE in respect of the member – not just those that occur when the member put benefits into payment. For example the BCE 8 that occurs when a member transfers to a qualifying recognised overseas pension scheme must be included in the valuation.

The section of guidance starting at PTM088600 describes when the various BCEs occur and how to value the amount crystallised at each BCE.

Any payment made after 5 April 2006 and before the nominated date that is not a BCE is not included in the valuation. Such payments include:

  • Small lump sums - see PTM063700
  • Winding-up lump sums – see PTM063600
  • Short service refund lump sums – see PTM045000
  • Refund of excess contribution lump sums – see PTM045000.

Valuing uncrystallised rights

Section 212 and paragraph 9 Schedule 29 Finance Act 2004

Any rights the individual holds under any registered pension schemes that have not crystallised for lifetime allowance purposes must be included in the pension rights valuation for trivial commutation purposes. This will include any uncrystallised rights that the member wishes to commute.

The way to value these uncrystallised rights depends on the type of arrangement holding those rights.

PTM134500 explains how the value of these uncrystallised rights is calculated for each of type of arrangement.

For the avoidance of doubt, there is no distinction for the above purposes between rights that have accrued direct in an arrangement and those that have been transferred in. The term uncrystallised rights includes all the member’s uncrystallised rights under the arrangement.

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Example of paying a trivial commutation lump sum

Catherine is 63. She has benefits held under three registered pension schemes. Catherine has not had a BCE so she has 100% of her lifetime allowance available.

As none of her pension pots are large, Catherine wants to commute her benefits and have them paid as a trivial commutation lump sum. To do this the total value of her pension rights on the nominated date cannot be more than £30,000. The nominated date her pension benefits must be valued on must fall within a 3 month period ending on the date the first trivial commutation lump sum is paid.

Catherine chooses 1 March 2015 as her nominated date. On that date Catherine’s benefits were:

  • Scheme A - £600 scheme pension paid under a defined benefits arrangement that started to be paid before 6 April 2006. However on 5 April 2006 the annual rate of the pension was £510, so it is valued at £12,750 (£510 x 25) for the purposes of the trivial commutation limit.
  • Scheme B – uncrystallised defined benefits valued at £11,700 held under two separate defined benefits arrangements and uncrystallised money purchase rights valued at £800
  • Scheme C – uncrystallised defined benefits valued at £4,700 held under one arrangement.

The total value of Catherine’s rights on the nominated date is £29,750 (£12,750 + £11,700 + £800 + £4,500). Catherine therefore has the option of commuting her benefits, as her total pension rights are less than the commutation limit of £30,000.

Catherine can commute the following rights and have them paid as a trivial commutation lump sum:

  • The £600 scheme pension in payment from scheme A
  • The uncrystallised defined benefits under scheme B of £11,700
  • The uncrystallised defined benefits under scheme C of £4,500

The £800 uncrystallised money purchase rights under scheme B cannot be paid as a trivial commutation lump sum. However they may be paid as an authorised one-off lump sum (an uncrystallised funds pension lump sum – see PTM063300).

To be a valid valuation, the first trivial commutation lump sum payment must be paid before 1 June 2015 (within 3 months of the valuation). Catherine does not have to take all her benefits as trivial commutation lump sums from each scheme. She may choose to take her benefits under one or two of the schemes and not the other(s). But it must be an all or nothing decision in relation to all forms of benefits that may be commuted as a trivial commutation lump sum under each scheme. So for scheme B Catherine must either trivially commute both defined benefits arrangements or none of them.

Catherine decides to commute her scheme pension under scheme A and all her defined benefits under scheme B as trivial commutation lump sums.

The benefits under scheme A are paid out as a trivial commutation lump sum on 2 May 2015. Her commutation period starts from that date and runs to 1 May 2016. Any payment from scheme B must therefore be paid by that later date, and that payment must represent all her rights under the defined benefits arrangements.

The whole of the lump sum paid from scheme A is taxable as pension income in 2015-16 as it represents commutation of crystallised rights.

The benefits under scheme B are paid on 5 June 2015 (within the commutation period). As this payment represents commutation of uncrystallised rights, 25% is tax free whilst the remaining 75% is taxable as pension income in 2015-16.

Catherine decides to leave the benefits held under scheme C. She can change her mind and decide to fully commute these benefits up until 1 May 2016. But after this date the chance to commute those benefits as a trivial commutation lump sum is lost.

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Contributions or accrual after the nominated date

Any

  • contributions made by or on behalf of the member, or
  • pension rights that accrued

after the nominated date cannot be commuted and paid as a trivial commutation lump sum.

This is because those contributions or rights represent new pension rights that were not in existence on that nominated date and were not included within the pension rights valuation.

Any increase in the value of any commutable rights (that is, defined benefits or in-payment money-purchase in-house scheme pensions) held on the nominated date may however be included in the payment of the trivial commutation lump sum.

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Taxation

Section 636B Income Tax (Earnings and Pensions) Act 2003

The tax treatment depends on whether or not any of the lump sum is paid from uncrystallised rights. Where part or all of the lump sum comes from uncrystallised rights, 25% of the value of the uncrystallised rights is not taxable, whilst the remainder is taxable as pension income. PTM134500 explains how to value uncrystallised rights for these purposes. Where all of the lump sum is paid from crystallised rights the whole lump sum is taxable as pension income. Tax is due in the tax year in which the lump sum is paid, and PAYE should be operated on the lump sum.

The 25% deduction is given to reflect that, if the trivial commutation lump sum was not paid and normal benefit rules applied, the member would (generally) be entitled to a tax-free pension commencement lump sum, representing 25% of the capital value of the benefits coming into payment. No extra deduction is given where the member is entitled to a pension commencement lump sum of more than 25% due to the transitional protection of such an entitlement held before 6 April 2006.

Guidance on how to operate PAYE correctly on these lump sums can be found in CWG2 - Employer’s further guide to PAYE and NICs.

Application of the lifetime allowance

The payment of a trivial commutation lump sum is not a BCE, so it does not trigger a lifetime allowance test.