RPSM09104905 - Technical Pages: Member benefits: Lump sums: Trivial commutation lump sum: Overview of commutation of trivial or small benefit rights

If the lump sum was paid on or after 6 April 2011 you should first read RPSM09105085.

Overview of commutation of trivial or small benefit rights

The legislation provides specifically for trivial or small benefit rights under a registered pension scheme, to be commuted and paid as a one-off authorised lump sum in a variety of circumstances, but broadly these can be grouped under two kinds of situation:

• the first is where the payment meets all the legislative conditions required in order to qualify as a trivial commutation lump sum (pages RPSM09104910 to RPSM09105080 explain what those conditions are),
• the second concerns a range of other small lump sum payments made to or in respect of a scheme member, typically following the discovery of certain errors, unanticipated rights or to resolve certain obligations (see RPSM09105400 to RPSM09105490 for more about this second category).

Although in both instances comparatively small payments are involved, the clearest distinction might be that the first category (the trivial commutation lump sum) arises under a one year window between the ages of 60-75, when a member might, provided all the relevant conditions referenced above are met, be able to obtain one or more small commutation payments from their scheme(s). The window in time is specific to the member, and any schemes that they wish to receive such commutation payments from, have to use the same time-window.

The second category of payments that the legislation provides for are not tied to the same one year window as the first. They relate to situations when certain errors are discovered and corrected, or when certain typically unanticipated or obligatory payments are to be made through the scheme. The facility to make these latter authorised payments arises from the reality that certain benefit rights might still be due to the member under the scheme, and the amounts concerned may be too small to secure a pension on the open pensions market. This is sometimes commonly referred to as having a “stranded pot”.

A slight blurring of the distinction between the first and second category of payment arises where the ‘small lump sums’ facility (in the second bullet above) extends to modify one of the conditions laid down for ‘trivial commutation lump sums’ (the first bullet above). The modification in question arises where a member is already receiving a small annuity and there is no intention to stop it, but there are other rights under the scheme that are too small to secure a further pension and most of the usual conditions for a ‘trivial commutation lump sum’ have been met, including the fact that the overall measure of benefits remains below the usual threshold for a ‘trivial commutation lump sum’. See RPSM09105460 for more detail on this point.

The ‘small lump sum’ facility is not without limits, and such payments can only be made where all the relevant conditions outlined in the pages referenced above (second bullet) have been met. If the required conditions are not met, the payment will only be authorised if it meets the conditions for some other kind of authorised payment. HMRC has no discretion under the tax legislation to authorise other problematic types of payments that are not covered by the authorised payment rules, and unauthorised payments will be subject to tax charges as outlined in RPSM04104000.