I have a small private pension pot which I stopped contributing to years ago. I am now 59, and am thinking of retiring. I’m loathed to buy an annuity given the dismal annuity rates at present and the fund size. Is it possible to take the whole lot as a cash lump sum? Any help would be greatly appreciated
The answer to your question is that ‘it depends’, but it is possible to cash in small pension pots under the trivial commutation pension rule.
This enables those with ‘small’ or ‘trivial’ pension pots to take their pension fund as a cash lump sum, with 25% of it paid tax-free and the remaining 75% taxable as income in the tax year in which it is paid.
And the rules don’t just apply to pension pots not in payment. It is possible to apply the rules when a pension is already in payment but the payment is ‘small’. In this instance the entire lump sum is deemed taxable when the trivial commutation rules are applied.
However, there are certain conditions that need to met to be eligible to take a pension pot as a lump sum, namely:
- You have to be 60 or over
- One of your pension pots is £2,000 or less in value
- Or the total sum of all your pension pots are valued at £18,000 or under (which is the definition of ‘trivial’).
If your pension pot is valued at £2,000 or under there are different rules relating to cashing it in depending on whether it is a company, public or personal pension scheme (more detail here).
If once you are 60 years old you still want to cash in your small pension pot then you will need to value it to see if it is under £2,000 or your pension savings fit the ‘trivial’ definition. The method of valuing pension pots depends on whether it is a company pension or personal pension plan and whether it’s in payment or not.
If you have a personal pension contract, not yet in payment, which is based on the contributions you pay then you simply look at the capital value when making an assessment.
If you wish to cash in any pension pots then you need to contact the scheme administrator(s) to see if they allow it. If they do then they will value your pension plan(s) for you (plus they may ask for valuations of any other pension benefits you have) to see if you are eligible before facilitating any payment.
Other points to consider:
- All planned trivial commutations must be made within 12 months of the date of the first lump sum payment.
- You can’t cash in part of a pension plan.
- Whether deferring cashing in a pension will help mitigate the income tax payable on the lump sum (i.e. to a time when you are a non-tax payer)
- You can only take a lump sum under the’ £2,000 rule’ twice in your lifetime
- If you receive means-tested state benefits then any lump sum will increase your personal capital and could make you ineligible to continue claiming that benefit.
As you can see the rules surrounding trivial commutation are tricky so seek advice from an independent financial adviser before doing anything
I hope that helps