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In addition to the announced changes regarding pension commencement lump sums in the Finance Bill 2008, the pension triviality rules are to be relaxed so that more people can take small pension pots as lump sums in future.

The current pension triviality rules only allow individuals to have small pension pots paid as a lump sum if the value of their rights under all registered pension schemes is less than 1% of the lifetime allowance (£16,500 for tax year 2008/2009). This has frustrated the original aim of the rules, as it still forces many people to buy pensions with ridiculously small pots.

For example, someone with a Self-Invested Personal Pension (SIPP) worth £250,000 and an old Executive Pension Plan worth £1,000 cannot use the current triviality rules to wipe out the small pot. Forcing annuity purchase in these circumstances clearly isn’t in anyone’s best interests. Most providers’ minimum purchase price is well above this, leaving the only viable option to transfer the SIPP in this instance.

Thankfully, the Government has consulted with providers and advisers and taken this on board. The Bill introduces new powers allowing authorised payments to be made in a wider range of circumstances and Her Majesty’s Revenue & Customs (HRMC) have announced that they will use these powers to permit other triviality payments on top of those allowed by the existing rules.

For occupational schemes, any fund worth less than £2,000 will be allowed to be taken as a lump sum on triviality grounds – regardless of any other pension savings the member has.

Where personal pensions are concerned, HMRC hope to make similar changes to allow small stranded pension pots to be paid as lump sums. This will, however, be subject to anti-abuse controls, e.g. to stop fragmentation of larger pots into a number of small pots. The details of this are still awaited at the time of writing.

As with other triviality payments, 25% will be tax-free with the balance taxed as income.

Date of Article: 7th May 2008