We will assume you are ok with this, but you can opt-out if you wish.
Trivial commutation is an option available to some members of pension schemes. It enables people above a certain minimum age and who have relatively small pensions to exchange their regular pension payments for a one-off cash lump sum. The option is available to people aged 55 and over.
Once the one-off cash lump sum has been paid you cannot change your mind. After you receive the one-off cash lump sum you will receive no future pension payments from your pension scheme and, in the event of your death, your dependants and family will also not receive any future payments from your pension scheme.
How Does Trivial Commutation Work For Pensions Worth Between £10,000 and £30,000?
If you have a pension worth between £10,000 and £30,000 you may be able to exchange it for a cash lump sum as long as you meet a few eligibility criteria. One of the main criteria relates to the value of any other pension benefits you receive.
You can only exchange your pension for a cash lump sum if the total value of all of your pensions is less than £30,000.
Joe has two pensions. One is worth £15,000 and the other is worth £12,500. The total value of these pensions is £27,500. Because this is less than £30,000 then Joe should be able to exchange his pensions for a cash lump sum.
Pete on the other hand has three pensions, each worth £12,000. The total value of these pensions is £36,000. Because this is more than £30,000 Pete is not able to exchange his pensions for a cash lump sum.
If the value of your pensions means that you are eligible for trivial commutation there are a number of things for you to consider. Whilst a cash lump-sum will appear to be attractive, there are certain things you need to be aware of, including:
No Future Pension Benefits
If your pension is exchanged for a one-off cash lump sum you and your family will not receive any other benefits from the pension scheme in the future, and you will cease to be a member of that pension scheme once the lump sum has been paid.
Impact On Means-tested Benefits
If you receive income-related or means-tested benefits from the Government, receiving a lump sum from your pension scheme could impact on those benefits. If you receive any such benefits from the Government you should check with the relevant Government body.
The Payment Is Subject To Tax
The lump sum payment is treated as income (as is your pension) and you will have to pay income tax on it. The amount of tax you pay will depend on your total income in the year:
The pension scheme will deduct some income tax
For many people this will be the right amount of tax. However if, for example, you dont pay income tax, it might be too much. So, you'll need to reclaim the tax from the Government. If you pay a higher rate of income tax, the tax deducted might be too little (in which case you'll need to pay additional tax to the Government).
Reclaiming over-paid tax from the Government is straightforward, although it does take a little time. We would be happy to talk you through the options if you contact us.
How Long Do You Expect To Live?
On the face of it, a one-off cash lump sum is often attractive compared to receiving a relatively small regular pension payment. Whether or not the lump sum is good value compared to the pension alternative depends on how long you expect to live. If you live a particularly long time, for example, it may be that you would be better off keeping the pension rather than taking the cash lump sum.
These are all things that an independent financial adviser can help you with. Click here for details of where to find an independent financial adviser.