Cashing-in Pensions (Triviality)

If the value of your pension rights is below a certain level, it may be possible to give up those rights in exchange for a cash sum.

From 6 April 2006, this option is only possible where the total of all your pension rights does not exceed 1% of the Lifetime Allowance. For the tax year 2011/12, this will equate to £18,000.

From 6 April 2012, the link to the Lifetime Allowance is to be removed.

Age Limit

The option to cash-in a small pension can be exercised from age 60.  There is no upper limit (although there was an upper age limit of 75 before 6 April 2011).

Valuing Existing Pension Rights

There are different ways of valuing existing pension rights to test against this threshold.

Pension rights (not yet in payment) from a defined benefit scheme (including final salary and career average schemes)

The accrued pension is valued using a factor of 20:1.For example, if you have a pension of £10,000, its value is £200,000 (£10,000 x 20).

Pension rights (not yet in payment) from a defined contribution scheme (including money purchase schemes, personal pension plans and stakeholder schemes)

The market value of the fund is used.

Pension already in payment before 6 April 2006

The pension in payment as at 5 April 2006 is valued using a factor of 25:1 and then up-rated against the Lifetime Allowance in the year of the test.  For reference, the Lifetime Allowance is £1.5m for the 2006/07 year and rises to £1.6m (2007/08), £1.65m (2008/09), £1.75m (2009/10) and £1.8m (2010/11 and 2011/12).

For example, you start receiving a pension of £1,200 in 2001.  As at 5 April 2006, it has increased to £1,500.  Its value at 5 April 2006 is £37,500 (£1,500 x 25). If the test for triviality purposes is carried out in 2011/12, when the Lifetime Allowance is £1.8m, its true value is £45,000 (£37,500 x £1.8m/£1.5m).8m/£1.5m).

Pension put into payment on or after 6 April 2006

The pension is valued against the Lifetime Allowance in the year of payment.  That value is then assessed against the Lifetime Allowance in the year the triviality test is carried out.  For reference, the Lifetime Allowance is £1.5m for the 2006/07 year and rises to £1.6m (2007/08), £1.65m (2008/09), £1.75m (2009/10) and £1.8m (2010/11 and 2011/12).

For example, you receive a lump sum of £2,000 and a pension of £500 a year in May 2006.  The value of these benefits is £12,000 (£500 x 20 for the pension and £2,000 for the lump sum).  That is 0.8% of the Lifetime Allowance in that year. If the test for triviality is carried out in 2011/12, when the Lifetime Allowance is £1.8m, its true value is £14,400 (0.8% x £1.8m).

Change Coming Into Effect From 6 April 2012

From 6 April 2012, the Lifetime Allowance is reducing from £1.8m to £1.5m.  Using the rules above, this would reduce the threshold for cashing-in pensions from £18,000 to £15,000.

But the government has announced that the link to the Lifetime Allowance will be removed from 6 April 2012.  This means the threshold will continue to be £18,000 from 6 April 2012.

Time Limit

If you wish to cash-in more than one pension, assuming you meet the qualifying criteria above, you must do so within 12-months of cashing-in the first one.  You will not be able to cash-in any pensions after that 12-month period has expired.

Tax

If you do cash-in a pension under triviality rules, a quarter of the cash paid is tax-free with the remainder treated as taxable income in the year it is received.

The cashing-in of rights under an occupational scheme will be subject to the agreement of the scheme's trustees.