2. Triviality Commutation Cash In Rules for Defined Benefit Pension

Published / Last Updated on 15/11/2023

Many people have small, guaranteed income pensions from defined benefit or salary related pensions schemes.  There are rules that allow people to commute i.e., convert to cash in their small, defined benefit pension under ‘triviality rules’ provided that you have reached the minimum early retirement age of 55 (goes up to age 57 in 2028).  When the ‘trivial’ pension is commuted to be cashed in, 25% will be tax free in UK and the 75% balance is taxable with usually those taxes withheld and you receive the net amount.

Triviality Rules:

  • You must request a cash equivalent transfer value (CETV) for the defined benefit pension scheme.
  • The date that this value is calculated should be set as your ‘nominated date’.
  • You can only commute/convert and then cash in small defined benefit pension schemes where the total value combined of all your pension schemes is below £30,000.  For money purchase/investment linked personal and occupational money purchase pension schemes, you use the fund value at the nominated date and for other defined benefit pensions, you can multiply the projected pension income by X 20 for an equivalent value.  If, when combined, they are below £30,000 in total, your can use Triviality commutation.
  • Trivial commutation/cash in must take place within 3 months of the nominated date.
  • Any further trivial commutations for other small, defined benefit pensions must be completed within 12 months of the original nominated date.

Lifetime allowance (the maximum you can accrue in pensions throughout your lifetime) – you must have some remaining lifetime allowance to able to use Triviality commutation, but any lump sum paid out to you does not use up that same lifetime allowance.  Life time allowance technically disappears from April 2023 although tax free lumps sums are still capped at a maximum of 25% of £1,073,100.

Money purchase annual allowance (MPAA), where you and your employer cannot pay in anymore than £10,000 pa (from April 2023) into any other pension scheme after releasing some or all of the ‘taxable’ 75% element of any other pension scheme is not triggered.

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