Under current UK pension rules, the trivial commutation lump sum rules allows an individual to access certain benefits from age 55 (MPA) or from age 57 after April 2028, as a complete one-off lump sum payment.
As long as their total benefits across all their schemes don’t exceed £ 30,000 in total.
So what are the the key points or considerations !
Your pension plan must met certain criteria:
- Your total sum across all schemes must be less than £ 30,000
- On crystallising or accessing, 25% of the amount is tax-free, with the balance being taxed at source by your pension provider.
- Since April 2015, unfortunately trivial rules don’t apply to Defined contribution (DC) pensions, It has been replace by flexible options such as Uncrystallised pension fund lump sum (UFPLS), or acting under small lump sums.
So who can access benefits under these rules !
- If an individual is aged over the minimum pension age currently 55.
- You have serious ill-health health
- Your scheme has a protected age, so can access from age 50,
- You may have inherited a pension plan.
The respective sum will be paid out by the relevant pension provider, into their respective bank account within a matter of a few weeks. It can be seen as as simple procedure but you have to initiate the process directly with the pension provider.
Other key points to consider !
- You must not of had any other lump sums within the past 12 months.
- All of your benefits must be taken at the same time.
- They aren’t classed as benefit crystallisation events and therefore not tested against the new lump sum amount (LSA) set at £ 268,275 and lump sum and death benefit allowance (LSDBA) set at £ 1,073,100.
- Your total pension benefits across DB & DC must not exceed £ 30,000 in total.
- You will lose the rights to any future benefits within the scheme.
- You must have some unused allowance left.
Do I have to act within a certain timeframe !
When somebody decides to access their funds or benefits under the trivial lump sum rules. they will select a date upon which value their benefits. This is called “the nomination date”.
This is to ensure that on the specific date that your assets are below the threshold level. They must must act within 3 months to make a decision to access such designated funds.
If they fail to act within the 3 month timeframe, then. new date will have to be selected. The process will start again and the assets will then be recalculated. Their nomination date cannot be more than 3 months before their 55th birthday.
If they fail to choose a specific or selected date, then the provider will determine a default date. Which will become the date of the payment. Once the 1st payment is made, an individual then has a 12 month period to take the rest of the pension pot. This is known as “the commutation period”. Once this period has passed, they can no longer withdraw and further commotion lump sum payments.
How are my payments taxed !
Under normal pension rules you can receive 25% of the total pot value as a tax-free lump sum amount. Unfortunately, the rest is taxed at source by your provider. Their is normally no requirement to involve an accountant or complete self-assessment forms. But the sum will be added to any other earnings that you receive in that current tax year.
If the lump sum relates to a pension already in payment, it will be taxed under PAYE rules.
In the result of no previous tax code being used it may be done at basic rate of 20%
However, if the individual isn’t a UK resident, then emergency tax may apply. The provider can rebalance on your behalf at the end of the tax year, or you can reclaim via GOV.uk, in a quicker timeframe normally within 30 days.
How are the benefits valued !
Types of benefit: Uncrystallised defined benefits pot:
Your pension provider would normally times the annual pension due by 20 times.
Uncrystallised money purchase pension:
The market value of the assets held within the pension scheme.
Cash balance arrangement:
Total value of the benefits offered by the scheme rules.
Annuity in payment – pre 2006 (Pensions A-day):
Your provider will multiply annual income as of 6th April 2006 by 25 times.
Income drawdown – pre 2006 (Pensions A-day)
You will multiply the relevant GAD maximum withdrawal as of 6th April 2006 by 25 times.
After A- day (post 2006)
For both annuities or drawdown, the value of benefits at time of accessing or crystallisation.
So a simple example if an annuity was going to give you £ 1,000 per annum , it would be valued at £ 20,000 or £ 25,000 depending on the date. (pre / post A day)
Do I trigger the Money Purchase Annual Allowance (MPAA) !
No, the MPAA isn’t triggered if you act under the trivial commutation lump sum rules. The MPAA is triggered if you access a fixed term annuity, flexible income via drawdown or UFPLS. Or if you cash a DC pot in completely over £ 10,000 which isn’t classed as a small pots pension.
Do I need to get financial advice !
It all depends if are you happy making your own decisions or do you need somebody to assist you. As the subject of pensions and personal finance can appear to be very complicated.
There is no legal requirement to use a financial adviser, unless your pot is over £ 30,000 and it has has special features, guarantees, defined benefits and you move it to a new provider. Or you cash it in completely.
If you do need advice, you can find an IFA via the FCA register: http://www.fca.org.uk, or you use the free and impartial website being: http://www.moneyhelper.org.uk which has lots of free advise about pensions, savings, debts etc.
You could even get a appointment with Pension Wise, https://www.moneyhelper.org.uk/
which lasts around 1 hour, to. discuss your options when accessing a DC pension.
Remember !
If you like this blog post and found it useful and informative, check out my other posts on https:moneyminted.co.uk, which covers savings, investing, pensions and investment books that I recommend. So you can your investment knowledge, financial education, so you too can reach you financial goals in future.
It’s not a get rich quick journey, but you will get their in the end if you create a plan and think long term.
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