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Cashing in a small final salary pension fund: how the ‘trivial pension’ rules can benefit you

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If you have a small final salary or other salary-related pension, you may be able to cash it in and take it all as a lump sum. These are called ‘trivial commutation’ or ‘trivial lump sum’ rules and apply to pensions worth less than £30,000.

When can you take your pension as cash?

If you want to use the ‘trivial lump sum’ rules, you must be aged at least 55 and your final salary pensions (otherwise known as defined benefit pensions) cannot add up to more than £30,000 in total. Any one pension you have cannot be worth more than £10,000 in total.

SAVVY TIP: You may be able to take your final salary pensions as cash earlier than age 55 if you are retiring early due to ill health. These trivial lump sum rules shouldn’t be confused with the ‘pension freedom’ rules introduced in April 2015, which allow anyone who’s aged 55 or over and who has a pension pot (defined contribution) type pension to take all of it as cash.

1. The £30,000 limit applies to all your defined benefit (final salary) pensions. Many people end up with a number of different pension pots rather than having their money in one neat pile. But if you have several small final salary pensions adding up to more than £30,000 in total you can’t turn them into a cash lump sum.

SAVVY TIP: This £30,000 threshold applies on what’s called the ‘nominated date’ and this date can be any date up to three months after you start taking a lump sum.

2. You don’t have to cash in all your pensions at the same time. However, you do have to do so within a year. If you don’t do this, you lose the right to exercise the triviality rules.

3. You can only take 25% tax free. While 25% of your payout is tax free, you will pay tax on the other 75%. This is the same tax arrangement as if you were to cash in a defined contribution pension under the pension freedom rules.

4. There’s a £10,000 limit on occupational pension schemes. If you have an occupational pension scheme (or more than one), each must be worth £10,000 or less before you can cash it/them in using these small pot rules.

5. Taking the lump sum means you aren’t entitled to any more final salary payments. Once you’ve taken a lump sum using these ‘trivial pension’ rules, you aren’t entitled to any further payments from the defined benefit or final salary pension. However, you are able to keep benefits that you may have from an AVC (additional voluntary contribution).

Understanding the nomination date

If you decide you want to take your final salary pension under these rules, you can nominate a date when your pensions will be valued. In the jargon, this is known as the nomination date. You don’t have to take your pension(s) as a cash lump sum on the nomination date – in fact you have up to three months in which to do this.

SAVVY TIP: If you don’t pick a nomination date, then it will automatically fall on the date of your first payment.

Why would you want to turn your pension into cash?

The main benefit of turning a small pension into cash is to have control over the money and to get it all in one go.

SAVVY TIP: Always make sure you know exactly what you’d be giving up if you were to turn your pension into a cash lump sum.

Using trivial pension rules if the pension scheme member dies

If your husband, wife, civil partner or another relative dies who is a member of a final salary pension scheme and you’re entitled to receive a pension payment, you can use the trivial pension rules to take the payment as a lump sum rather than as a monthly pension. If the person who died started to receive their pension after April 5th 2015, you can take their pension as a lump sum if it’s worth up to £30,000 when the person died, or if it’s worth up to £18,000 if they started receiving pension payments up to and including April 5th 2015.

SAVVY TIP: In this case, you wouldn’t receive a tax-free cash lump sum. Instead you would (potentially, at least) have to pay tax on the the whole lump sum.

Related articles:

Complaining to the Financial Ombudsman Service

If you’ve moved jobs make sure you get the most from your pensions

The 55% tax charge on your pension – how does it work and what’s changed?

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