This interesting question was posted by a recent visitor to our website. Simply the answer is yes, but there are a number of things that can either catch you out or cause you problems. These can be anything from the product provider you use, financial performance and changes to both triviality limits and rules. Therefore this must be read as a simple guide and not a guarantee of what will happen or what your product pension provider will allow.
It is also worth noting that in our experience not all providers offer trivial commutation. While Her Majesty’s Revenue and Customs (HMRC) allow for trivial commutation, we do not believe it is an absolute right and you provider is not obliged to offer it.
Moving on to the specifics of the question, to keep these examples simple and relevant we will assume that the trivial commutation limit is at its current level of £18,000 and that it stays at that amount for the foreseeable future. This of course may not be the case. In line with triviality requirements we will assume the customer only has one pension, which is not in payment and it is of course worth less than £18,000. The starting age for all examples is 60.
To take a tax free lump sum only now and take income or triviality later an income drawdown contract needs to be used.
Starting with a simple example first. John has a fund worth £12,000. He takes a tax free lump sum of £3,000 leaving £9,000 in the drawdown pot. 2 years later it is still worth £9,000. If we add the value of the fund £9,000 and add to it the tax free cash previously taken it is £12,000 under the limit so the £9,000 can be taken as a lump sum which is subject to tax.
Mary has a fund worth £16,000. She takes £4,000 in tax free cash leaving £12,000 in the income drawdown fund. Five years later at age 65, her fund has achieved 7% growth each year and is now worth £16,830. When the original tax free cash £4,000 is added to the current value it is over £18,000 therefore Mary no longer qualifies for triviality.
If you are interested in taking a tax free lump sum or to see if you qualify for trivial pension rules you can use our pension lump sum calculator. It is very easy to use and you only need answer a few simple questions. No personal information is required.
For people who are interested in trivial pension rules and would like to see further case studies as well as a more detailed technical explanation of issues affecting triviality such as taxation and pensions already in payment, we have a page especially for you. Use the link above.
If there is anything else you would like us to discuss on these pages or if you have any questions. Please feel free to contact us using the forms on this site, or just call 020 33 55 4827 where we would be happy to have a no obligation chat with you.