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Small Pots and Triviality

Introduction

This briefing sets out the circumstances under which retirement benefits can be taken as a lump sum under the ‘small pots’ or trivial commutation rules. 

Core considerations  

  • The legislation allows some small pensions to be taken as a single lump sum if they meet the required conditions.
  • An individual can take up to three separate small pension lumps sums worth up to £10,000 each (small pots) from personal pension arrangements.  
  • Similar rules apply to defined contribution occupational scheme – the same £10,000 limit applies but there is no limit on the number of pots. 
  • The trivial commutation rules may allow pension benefits of up to £30,000 to be paid as a single lump sum, however, these are now only available from defined benefit schemes and scheme pensions already in payment.   
  • Trivial commutation payments can only be made where all of the members benefits in all schemes are worth no more than £30,000 whereas the small pots limit of £10,000 just considers the payment in isolation. 
  • HMRC provides detailed guidance regarding small lump sum payments in section PTM063700 and trivial commutation lumps sums in section PTM063500 of the Pensions Tax Manual. 
     

Contents


Small pension lump sums from personal pensions

An individual’s personal pension arrangement can be commuted and paid as a lump sum where the payment meets the following conditions: 

  • The client has reached the normal minimum retirement age, currently age 55 rising to 57 from 6 April 2028, unless the member is taking benefits early due to ill health or because they have a protected pension age.  

  • The payment does not exceed £10,000.  

  • The payment extinguishes the member’s entitlement to benefits under the arrangement. 

  • The individual can take a maximum of three small pension pots from personal pension arrangements in their lifetime.  

The small pots payments can be paid regardless of the value of the individual’s other pension benefits. If there is more than one arrangement in the member’s pension plan, they could potentially take up to three arrangements of up to £10,000 under the small pots rules while leaving the rest.  

For defined contribution schemes the value payable will be the market value of that arrangement. Cash Balance schemes will be valued in line with the scheme rules.  

The £10,000 limit applies to the actual lump sum paid, where the market value increases above £10,000 since the application was made then the small pot may no longer be available.  

For example

If the member makes a request for a payment when the arrangement is worth £9,800. If by the time the payment is made it has subsequently increased to £10,200 because of a sudden rise in the value of the investments, it would not meet the conditions and cannot be paid as a small pot. 
 

 

Taxation of small lump sums

Where a small lump sum is paid from uncrystallised rights then 25% of the payment is tax-free with the remaining 75% taxed at basic rate when paid, but ultimately is taxed at the client’s marginal rate.  

Small lump sums can be paid from crystallised rights such as drawdown funds, or to commute an annuity, the above restrictions still apply. The whole payment is taxed at basic rate when paid and ultimately taxed at the client’s marginal rate.  

If clients have overpaid tax, they can complete a P53 form during a tax year for an assessment, or HMRC will complete an assessment following the end of the tax year.  
 

Small pension lump sums from defined contribution occupational schemes

Similar rules apply to small pension lump sums from defined contribution occupation schemes. However, there are a number of additional considerations: 

  • The payment does not exceed £10,000. 

  • The client reached the normal minimum retirement age (or the member is taking benefits early due to ill health or because they have a protected pension age).  

  • There is no limit on the number of payments that can be made.  

  • The payment must extinguish the member’s entitlement under the whole scheme rather than just a single arrangement.   

  • Any payments from occupational schemes do not count towards the three-payment limit from personal pensions.  

  • The member must be ‘at arm’s length’ from the sponsoring employer.  

  • In the three years before the day of the payment there must be no recognised transfers out for that member from that scheme or any related scheme.  

Lump sums from occupational schemes are taxed in the same way as described above. 
 

Advantages of using the small pots rules

Since the introduction of pension freedoms members can take all their benefits as an uncrystallised funds pension lump sum (UFPLS) but there are advantages of using the small pots rules where available: 

  • Small pots payments do not trigger the money purchase annual allowance whereas a UFPLS payment does.  

  • Small pots payments are not relevant benefit crystallisation events (RBCEs) so do not use up the lump sum allowance (LSA), where UFPLS will.   

  • Small pots payments can still be paid where a client has no LSA remaining, where UFPLS cannot.  

  • Finally, the tax deducted at source is at basic rate rather than under the ‘month 1’ basis that would usually apply to a UFPLS payment. Though a higher or additional rate taxpayer would still have to pay further tax and non-taxpayers can reclaim the 20% deducted.  
     

Small lump sum after scheme specific tax-free cash

Where a scheme retains a right to scheme specific tax-free cash (where tax-free cash on 5 April 2006 exceeded 25% of the pension value), then after the scheme-specific tax-free cash is paid if the residual pension does not exceed £10,000 then it can be taken as a small lump sum. In this scenario there is no requirement for a relevant pension to be setup for the tax-free cash to continue to be authorised. There are a number of conditions: 

  • Some of the lump sum allowance (LSA) or lump sum and death benefit allowance (LSDBA) must be available.  
  • The small lump sum is not a RBCE, so will not use up the LSA or LSDBA.  
  • The payment must extinguish the member’s entitlement under the whole scheme rather than just a single arrangement.   
  • The small lump sum must be paid in connection with the scheme specific tax-free cash. 
  • The lump sum must be paid within 1 month of the tax-free cash.  
  • The whole of the lump sum is taxable as pension income at the members marginal rate of tax.  
     

Trivial commutation lump sum

With the introduction of pension freedoms, the ability to pay trivial commutation payments has been limited to benefits in defined benefit schemes and scheme pensions in payment from defined contribution schemes. These types of benefits can be commuted as a trivial commutation lump sum if the following conditions are met: 

  • The client has reached the normal minimum retirement age, currently age 55 rising to 57 from 6 April 2028, unless the member is taking benefits early due to ill health or because they have a protected pension age.  

  • The value of all the individual’s pension benefits do not exceed £30,000 on a nominated date. The value of all pension rights including crystallised benefits are included in the £30,000 valuation. 

  • Clients must have some available lump sum allowance at the time of the payment. 

A client has a one-off commutation period of 12 months which starts when the first trivial commutation payment is made. All trivial commutation lump sums must be paid within this 12-month window. An individual can only have one commutation period in their lifetime. Any benefits not commuted within this window must then be paid as a different retirement option.   

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. Where no nominated date is chosen then the first day of the commutation period will be the nominated date.  

The amount paid may increase from the value on the nominated date when the value assessment was completed. This can mean that the total payment may exceed £30,000, so long as the valuation on the nominated date is completed correctly, then this is permitted.  

The trivial lump sum must extinguish all pension rights or payments from the scheme concerned. Clients with benefits in different schemes do not have to commute the benefits from every scheme.  

Trivial commutation lump sums are not relevant benefit crystallisation events so do not use up the lump sum allowance (LSA).   

For payments in respect of uncrystallised benefits, 25% of the commuted fund is paid tax free with the rest taxed as income. Trivial commutation of benefits in payment must be taxed in full as income under PAYE. Where a trivial lump sum is paid from a scheme which included scheme specific tax-free cash then tax-free cash is still limited to 25% of the uncrystallised value.  
 

Trivial commutation lump sum death benefit

A trivial commutation lump sum death benefit could be paid if a dependant or beneficiary has an entitlement to a small dependant’s or member’s pension which continues to be paid under a pension guarantee. The lump sum can be paid from a defined benefits, cash balance or other money purchase arrangement and must extinguish all the dependant’s entitlement under the scheme. 

Where the value does not exceed £30,000 the individual can take a lump sum rather than a continuing pension. A trivial commutation lump sum death benefit is not tested against the LSDBA because it is not regarded as a relevant benefit crystallisation event. The lump sum is taxable as pension income of the person who receives it. The scheme administrator must apply PAYE to the lump sum payment before paying it.   

Trivial commutation lump sum death benefits are valued per scheme or annuity contract, the £30,000 cap applies to the maximum that can be paid on each commutation. Dependants that become entitled to a number of small pensions under pension guarantees may commute multiple pensions even where the total value commuted exceeds £30,000. 

 

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