'Trivial' Pension Funds

When you retire, or continue to work but decide to begin drawing your pension, the size of your pension fund will influence how you are entitled to receive your money. If your total pension fund is greater than one percent of the current lifetime allowance, see Lifetime limit for pension savings, you will have the option of a tax-free lump sum and be able to purchase an annuity (see Annuities) with the remainder of your fund: see Claiming your non-state pension for details. If however your total pension fund is less than one percent of the current lifetime allowance then you will be able to take your entire pension fund as a lump sum.

The current lifetime allowance for the tax year 2008/9 it is set at £1.65 million. If your total pension fund, that is, the combined value of all your non-state pensions, totals £16,500 or less then you can take all these pension funds as one lump sum. A total pension fund equal to or less than one percent of the lifetime allowance is considered a small or 'trivial' pension fund and is thus subject to different rules than larger pension funds. Taking a small pension fund as a one-off lump sum is known as trivial pension commutation. If you have a small pension fund your pension scheme administrator may advise you on trivial pension commutation, or you can ask them for advice if you are nearing retirement.

When you take your pension fund as a lump sum, you are entitled to twenty-five percent tax-free. The remaining seventy-five percent will be subject to income tax, payable at the rate appropriate to your annual income. For more information on income tax see Income Tax and Non-State Pensions. In order to qualify for trivial pension commutation, you:

• must be under seventy-five years of age
• must have a total pension fund with a value equal to or less than one percent of the current lifetime allowance
• must have a pension scheme which allows trivial pension commutation

If your pension scheme allows trivial pension commutation and you believe that you can support yourself financially without the annuity that your small pension fund could purchase, a lump sum payment may be a good idea for you. Before making any important financial decisions you should discuss your individual situation with your pension scheme advisor, or advisers, and if necessary ask an independent financial advisor to assist you.