Understanding triviality and commuting small pensions for cash
Up to 30 CPD minutes
Introduction
The triviality and small pots rules give a scheme member the option to commute small pensions for a lump sum. This option means that the member won’t have to receive small amounts of regular pension income and instead will receive a lump sum which may be of more use to them. Pension freedoms mean that some clients could achieve the same thing under income drawdown or as uncrystallised funds lump sums (UFPLS) - but advisers should be aware of the possible pitfalls that clients may face by using these options and how a better client outcome could be achieved by using the small pots rules instead.
This module should take around 30 minutes to complete. It includes a short self-assessment quiz to test what you’ve learned. A 30 minutes CII/PFS accredited CPD certificate can be claimed.
This module should take around 30 minutes to complete. It includes a short self-assessment quiz to test what you’ve learned. A 30 minutes CII/PFS accredited CPD certificate can be claimed.
Outcomes
On completion of this module you should be able to:
- State the different situations where small pensions can be commuted for a lump sum
- Explain the conditions for such payments to be allowed
- Describe how pension benefits are valued for these purposes
- Explain the taxation of lump sums taken under triviality or small pots rules
Learning material
This module explains the situations in which small pension funds can be commuted for cash, the valuation of pension benefits for these purposes and how they’re taxed.
Please read the learning material before attempting the self-assessment questions.
CPD minutes: up to 30
Technical guide - Triviality and commuting small pensions for cashOpens in new windowPlease read the learning material before attempting the self-assessment questions.
CPD minutes: up to 30
Post learning assessment
Question 1
Which of the following statements is FALSE about the small pot lump sum rules?
a. For personal pensions, the value of the arrangement must be £10,000 or less
b. Both crystallised and uncrystallised benefits can be commuted under these
c. Commuting a pension under small pots rules will trigger the money purchase annual allowance (MPAA)
d. There’s no limit to the number of times you can take occupational schemes under the small pot rules
a. For personal pensions, the value of the arrangement must be £10,000 or less
b. Both crystallised and uncrystallised benefits can be commuted under these
c. Commuting a pension under small pots rules will trigger the money purchase annual allowance (MPAA)
d. There’s no limit to the number of times you can take occupational schemes under the small pot rules
Question 2
George has defined benefits valued at £17,000 and a personal pension with a value of £12,500 at the ‘nominated date’. Which of the following statements are TRUE?
a. Both can be taken as trivial commutation lump sums as the total is under £30,000
b. A trivial commutation lump sum won’t trigger the money purchase annual allowance
c. A trivial commutation lump sum must be paid within two months of the ‘nominated date’
d. If the pension values increase beyond £30,000 after the ‘nominated date’, a trivial commutation lump sum can still be paid as long as it’s before the payment deadline
a. Both can be taken as trivial commutation lump sums as the total is under £30,000
b. A trivial commutation lump sum won’t trigger the money purchase annual allowance
c. A trivial commutation lump sum must be paid within two months of the ‘nominated date’
d. If the pension values increase beyond £30,000 after the ‘nominated date’, a trivial commutation lump sum can still be paid as long as it’s before the payment deadline
Question 3
One of these is NOT a condition for paying a wind-up lump sum - which is it?
a, An occupational scheme is being wound-up
b. The member is at least age 55 (minimum pension age)
c. The payment extinguishes all rights under the scheme
d. The value of benefits under that scheme doesn’t exceed £18,000
a, An occupational scheme is being wound-up
b. The member is at least age 55 (minimum pension age)
c. The payment extinguishes all rights under the scheme
d. The value of benefits under that scheme doesn’t exceed £18,000
Check your answers
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Any reference to legislation and tax is based on our understanding of United Kingdom law and HM Revenue & Customs practice at the date of production. These may be subject to change in the future. Tax rates and reliefs may be altered. The value of tax reliefs to the investor depends on their financial circumstances. No guarantees are given regarding the effectiveness of any arrangements entered into on the basis of these comments.