RPSM09105410 - Technical Pages: Member benefits: Lump sums: Other small lump sum payments: When benefit rights may be commuted

When benefit rights may be commuted

In recognition of the disproportionate costs and difficulties often encountered in providing very small pensions under a registered pension scheme, the tax legislation provides for small or trivial benefit rights to be commuted and paid as a one-off lump sum in a number of cases:

• the first is where all of the conditions for a trivial commutation lump sum are satisfied. One of the more distinguishing aspects of such lump sums is that they are member-driven, involving the exercise of a once-in-a-lifetime commutation window of 12 months. Such a window does not always coincide with the needs of a scheme, and there are further conditions that may prevent a scheme making such a lump sum payment (the full conditions are set out on pages RPSM09104910 to RPSM09105080).
• Although the ‘trivial commutation lump sum’ facility resolves many of the problems that can arise with small benefit rights held in schemes, the legislation goes on to identify a range of further conditions authorising the payment of other small lump sums paid on or after the 1st December 2009. The conditions for these other ‘small lump sum’ payments are listed in regulations and cover situations not driven by member choice in the same way that a ‘trivial commutation lump sum’ would be. Typically these involve the discovery and correction of certain errors, unanticipated rights or certain unresolved obligations to make payments through the scheme (see RPSM09105420 to RPSM09105480 for more details).

There is a little overlap between the two bullets above, where one of the ’small lump sum’ provisions modifies the ‘trivial commutation lump sum’ conditions: see RPSM09105460 to understand when this occurs precisely. Aside from this overlap, the payment of any ‘small lump sums’ will not present any implications for ‘trivial commutation lump sums’ where the nominated date for valuation under the trivial commutation lump sum rules occurs after the ‘small lump sum’ is paid.

The way in which ‘small lump sums’ are taxed is explained in RPSM09105490.

Crystallised rights

Where the rights being commuted for a ‘small lump sum’ or ‘trivial commutation lump sum’ include a pension that had already crystallised, any normal anti-pension-reduction provisions in the tax rules (e.g. RPSM09101580), will not apply when that pension stops in order to provide the valid ‘small lump sum’ or ‘trivial commutation lump sum’. Similarly any BCEs that applied to the earlier crystallisation of the pension being commuted will not be altered by the later payment of the lump sum in question. The tax treatment of any previous pension commencement lump sums linked to the pension now being commuted to provide the lump sum, will also not be disturbed by the later payment of that ‘small lump sum’ or ‘trivial commutation lump sum’.