Trivial commutation
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If the value of all your pension funds is of a ‘trivial’ size then you can take all your pension fund as a tax-free lump sum (‘commuted’), with no need to take an income.
Your pension funds are regarded as “trivial” if they amount to less than 1% of your Lifetime Allowance (which equates to £18,000) for 2011/12. (This will reduce to £15,000 in 2012/13. However, you can only commute benefits on the grounds of ‘triviality’ between the ages of 60 and 75.
It’s important to note that it is the total value of all your pension funds added together that counts. So, if you have a small deferred pension in a company scheme with a value of £6,500, and also have a personal pension worth £12,000, you cannot commute their benefits under the ’Trivialisation‘ rules, as the two pensions added together come to £18,500, which exceeds the £18,000 limit.
Is any tax payable?
Yes - 25% of the total value of your pension fund can currently be taken tax free. The balance of your pension fund not taken as a lump sum will be taxed as income when you draw a pension from the fund. So for a basic rate taxpayer taking a 25% lump sum, 75% of the total commuted value will be taxed at 20% for a basic rate taxpayer, 40% for a higher rate taxpayer and 50% for an additional rate taxpayer (2011/12),
Will the £18,000 limit increase?
Not in the near future. The limit is set at 1% of the Lifetime Allowance, which started at £1.5m in 2006 and was systematically increased to £1.8m by 2011/12. However, the Finance Act 2011 has reversed this trend and will rebase the Lifetime Allowance limit at £1.5m from 2012/13. With this change, the trivial commutation limit falls to £15,000.
 Tax benefits of pensions |
