Triviality (cashing in small pension plans) and Lifetime Allowance Calculator.
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This calculator works out:
- Whether you are able to commute pension funds under the current triviality rules.
- The amount of your lifetime allowance that you have used.
If the combined value of your personal pension funds or entitlements are below a certain amount, it is possible to commute them for a cash sum instead of purchasing a pension for life. This is due to the fact that the pension would be incredibly low and probably would not provide good value.
This is only possible if:
- The sum of all your pension rights does not exceed 1% of the Lifetime Allowance. This is currently £15,000. (The Lifetime Allowance is currently £1,500,000.)
- You are aged 60 or over. (Whilst it is currently possible to take pension benefits from age 55, it is not possible to commute pension funds under triviality rules until age 60.)
- You can only commute the pension(s) between the age of 60 and 75. Whilst it is now possible to defer purchasing an annuity beyond the age of 75, it is not possible to commute a pension after the age of 75.
Changes taking place from April 2011
From April 2011, the lifetime allowance has been frozen at £1,800,000 and will reduce to £1,500,000 in the 2012/13 tax-year. However, the triviality limit will remain at £18,000, thus effectively breaking the link between the lifetime allowance.
How to value your total pension rights and use the calculator
When calculating the value of your pension rights for triviality purposes, ALL pension rights (excluding State Pension benefits) are taken into the equation. Pensions already in payment are also taken into account.
Therefore, pension rights not in payment and pensions in payment are valued according to different formulas.
Pensions right not yet in payment
- If you have any money purchase plans, such as Personal Pensions, Stakeholder Pensions, Executive Pension Plans or Occupational Money Purchase Schemes, the current market value of the fund is used. The total value of such plans should be inputted.
- Pension rights within Final Salary schemes are valued using a factor of 20:1. For example, if you have a pension of £500 per year when you retire, its value for the triviality calculation is £10,000 (£500 x 20). When you are using the calculator, input the annual value (i.e. £500) instead of the capitalised value.
Pension already in payment before 6 April 2006
Any pension in payment from before 6 April 2006, irrespective of what type of pension scheme it was derived from, is valued using a factor of 25:1 and then uprated against the Lifetime Allowance in the year of the test. For reference, the Lifetime Allowance was £1.5m for the 2006/07 year and rose to:
- £1,600,000 (2007/08)
- £1.650,000 (2008/09)
- £1.750,000 (2009/10)
- £1.800,000 (2010 until 2012)
As an example, you started to receive a pension of £1,000 per annum in 2004. As at 5 April 2006, it has increased to £1,200. Its value at 5 April 2006 is £30,000 (£1,200 x 25). If the test for triviality purposes is carried out in the current tax year 2013/2014, the Lifetime Allowance is £1,500,000, its true value is £30,000.00 (£30,000 x £1,500,000 / £1,500,000).
Pension that came into payment on or after 6 April 2006
This is similar to the calculation above, but with a few slight differences. The factor used is 20:1 and any tax-free lump sum paid is is added to this figure. It is then uprated based upon the year when the pension came into payment.
Using a similar example to the one above, you started to receive a pension of £1,000 per annum in May 2009, and also received a tax-free lump sum of £5,000. Its value is £25,000 (£1,000 x 20 + £5,000). If the test for triviality purposes is carried out in the current tax year 2013/2014, the Lifetime Allowance is £1,500,000, its true value is £21,428.57 (£25,000 x £1,500,000 / £1,750,000).
Therefore, you need to add together the totals from each calculation to check what percentage of the lifetime allowance you have used, and whether you can commute pensions under the triviality rules.
Other Points and Exceptions
Individuals with several small pensions have often assumed that they can commute several pension funds because each is valued at less than 1% of the lifetime allowance, but as described above, this can only be done if the sum total of all pensions is valued at less than 1% of the lifetime allowance.
If you wish to cash-in more than one pension, assuming you meet the eligibility rules, you have a twelve month window to do this. If you have already cashed in a pension under the triviality rules, you will not be able to cash-in any other pensions after the twelve month period has expired. To do so would incur a penalty tax charge of up to 55%.
Do not assume that the whole sum is tax-free. If you do cash-in a pension under triviality rules, 25% of the cash is paid tax-free, with the remainder taxed as income at your highest marginal rate in the year it is received.
If you were a member of an occupational pension scheme that was wound up, and your benefits were cashed in on a non-voluntary basis, this does not need to be counted against your lifetime allowance, and will not affect your right to cash in other pensions under the triviality rules.
Changes in 2009 enabled small occupational pensions to be cashed-in under triviality rules, even if the main rules have not been met. The main criteria are:
- You must be aged between 60 and 75
- You must not be a controlling director of the sponsoring employer
- The payment must not exceed £2,000
- There must not have been a transfer-out of the scheme in the 3 years preceding the date of payment
- In line with the main pension rules, the first 25% of the payment is tax-free, with the remaining 75% taxable at your highest marginall rate of income tax.
Post April 2012 changes
Ammendments to the current rules that come into force after 06 April 2012 will allow you to commute a company pension of less than £2,000 irrespective of the size of your other pension benefits or pension funds. You can do this twice in your lifetime as long as the total amount being commuted is no more than £2,000.
If you are unsure about whether you qualify under the above rules, you should contact the HMRC Pension Schemes Office and take Independent Finacial Advice.
The figures projected by the calculator are only for guidance purposes - whilst we aim to ensure the accuracy of our calculators, we can take no responsibility for the usage made of the calculations generated on this site.