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Updated on 6 April 2024

Small pensions

Some small occupational pensions can be cashed in under what are called the ‘trivial commutation’ rules.

Also, pensions with small values may, in some cases, be cashed in as a lump sum under different rules (the ‘small pots’ rules) than the flexible pensions rules. If you want to take money out of pensions but think that you might wish to contribute to them again in future, it is important to find out which rules apply as ‘small pots’ do not trigger the money purchase annual allowance

Below we explain first the trivial commutation rules, then about small pots. 

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Trivial commutation – overview

Trivial commutation only applies to:

  • salary-based (defined benefit) pension plans. These are pensions provided by an employer from which the pension paid out to you is based upon how long you were with the scheme and how much you earned; or
  • certain employers’ defined contribution schemes (those that built up a pot of money) where a small pension is already being paid out to you. Note that the pension scheme has to be paying you the pension direct (called ‘in house’) – that is, the pot of savings has not been used to buy an annuity.

When you first become entitled to your pension, many pension providers offer the opportunity to convert the whole (100%) of a ‘small’ pension into a one-off cash payment. This is known as ‘trivial commutation’ and the cash received as a ‘trivial commutation lump sum’.

Usually, a quarter (25%) of the value of most pension schemes can be converted into tax-free cash when the pension starts to be paid. This is the same for trivial commutation lump sums. A quarter (25%) will be free of tax and the remaining three quarters (75%) will be taxable as normal income in the year in which it is paid.

If a trivial commutation lump sum is paid in exchange for a pension already in payment (see second bullet point above), all of it will be taxable as normal income in the year in which it is paid.

In all cases, there are rules about how much you can receive as a trivial commutation lump sum, and when you can receive it.

Trivial commutation - rules

You need to think about these rules of trivial commutation:

  • trivial commutation now applies only to defined benefit pensions or certain other employer small pensions that are already being paid out (as explained above);
  • the minimum age is 55, unless you meet certain ill-health conditions, or have a protected pension age due to your occupation – in which case, you may be able to get the money earlier;
  • all of your pensions must be worth £30,000 or less. We explain more about this below.
  • you have 12 months from the date of taking the first trivial commutation lump sum to take any others. If you have had a trivial commutation payment in the past and more than 12 months has passed since, you cannot have another.
  • you do not need to cash in all of the pensions you have, but you must cash in the whole of any one pension that is being commuted. That means you could not, for instance, take £20,000 out of a £29,000 pension pot and leave the rest.

The £30,000 limit

To work out whether you can have a trivial commutation payment from a defined benefit pension, you have to work out whether all of your pensions – from any type of pension scheme, including personal pensions – are within the £30,000 limit. This includes valuing previous lump sums you have received from pensions, or pensions that are already being paid out to you as regular income.

However, in working out the £30,000 limit, you can ignore past lump sum payments you have taken under the ‘small pots’ rules (discussed later).

The date at which all of your pensions are valued can be up to three months before you take the first commutation payment.

How to work out whether your pensions are within the £30,000 limit depends on whether you are already receiving income from the pension or not.

For pensions not yet in payment

You can get a valuation for defined benefit pensions from the scheme’s administrators. You should say that you need it for trivial commutation.

For pensions already in payment

As long as you meet the overall trivial commutation criteria, you can take a lump sum from an employer’s ‘in house’ pension scheme that is already in payment. To work out whether you are within the £30,000 limit, you will also need to value any other pensions already being paid.

To test against the £30,000 limit, pensions being paid are valued at 20 times the annual pension income. For example, a pension of £750 a year would be valued at £15,000 (20 x £750). If you received a tax-free lump sum when the pension commenced, the amount of the lump sum is added to this value. See the example of Mel below. Please note that this valuation is for testing against the limit for tax purposes only and may not be the same as the commercial value of the scheme.

Example – total pension rights worth more than £30,000

Mel, who is 58 in the tax year 2024/25, has defined benefit pensions not yet in payment from schemes X, Y and Z with capital values of £4,000, £12,100 and £13,000 respectively (£29,100 in total) on 5 April 2024.

She also receives a pension of £1,000 from scheme W, which started in the 2015/16 tax year. At the time the scheme pension started Mel was also paid a tax-free lump sum of £2,400.

Her pension rights from scheme W are valued at £22,400 (20 times £1,000 plus £2,400).

This means Mel’s total pension rights are worth £51,500 (£29,100 and £22,400) on 5 April 2024 and this is much more than the commutation limit of £30,000. So none of Mel’s benefits under scheme Y or Z may be commuted and paid as a trivial commutation lump sum, nor can her pension in payment from Scheme W be commuted.

Mel should, however, be able to commute her pension under scheme X under the £10,000 ‘small pots’ limit.

If you started receiving your pension before 6 April 2006, these are normally valued at 25 times the annual pension income as it was on 5 April 2006, and you do not need to add on any previous lump sums.

If you get a formal offer of commutation from a pension provider, you must get formal offers of commutation for all of the pensions you wish to commute within three months of the date of that first offer, and the first of them must actually be cashed in within that three-month period. 

Example – total pension rights less than £30,000

Kim, age 62, has pensions not yet in payment under three registered defined benefit pension schemes A, B and C, which are worth £3,000, £12,500 and £14,000 respectively. Kim is not in receipt of any pension in payment.

The rules of all three of her pension schemes allow the commutation of trivial pensions.

Kim wants to commute her benefits as soon as possible in the 2024 calendar year and in order to do this her pension benefits must be valued within a three-month period ending on the date the first trivial commutation lump sum is paid.

Kim’s pension rights are valued on 5 May 2024 at £29,500. To be a valid valuation, the first trivial commutation lump sum payment must be paid before 5 August 2024, within three months of the valuation.

Kim does not have to take her benefits as a trivial commutation lump sum from each scheme. She may choose to take her benefits under one or two of the schemes and not the other(s). But it must be an all-or-nothing decision in relation to each of the schemes, that is, all the arrangements within an individual scheme – A, B or C – must be paid as a trivial commutation lump sum, or none of them.

Kim decides to draw all her benefits under scheme B (£12,500) and C (£14,000) as trivial commutation lump sums. The benefits under scheme B are paid out as a trivial commutation lump sum on 2 June 2024.

The date this first payment is made will be the first day of the 12-month commutation period. Kim must draw any further trivial commutation lump from her remaining registered pension schemes before the end of the day on 1 June 2025.

Any payment from scheme C must therefore be paid by that date and must represent all her rights deriving from any number of policies under that scheme.

The benefits under scheme C are actually paid on 5 March 2025, within the commutation period.

If you do not cash in the first pension within three months of the first offer, you will have to get new offers and valuations (start the whole process again). Bear in mind, however, that many scheme administrators will not provide another valuation within 12 months.

Payments just outside the lump sum limits

Usually your pension provider will not make a payment which takes you over the limit. But be very careful, because if, as a result of receiving several trivial commutation payments, your total lump sum exceeds the £30,000 limit then all of the trivial commutation lump sum payments you receive may become subject to a penalty rate of taxation of 40% or even 55%. This is particularly important to be aware of when commuting several pensions on separate occasions within the 12-month commutation period. We understand that insurance companies are unlikely to reverse a commutation once paid unless you can show error on their part.

Small pots

As explained above, the trivial commutation rules apply only to certain occupational pensions.

However, there are ‘small pots’ rules which can also apply to both these and other occupational and personal pensions in which you build up a pot of value (called money purchase or defined contribution schemes).

If you are a member of occupational pension schemes, any number of ‘small pots’ can be paid out as a lump sum to you, as long as the schemes are each valued at £10,000 or less. If the value of a single pot is over £10,000, and the scheme qualifies, the trivial commutation rules might instead apply.

For personal pensions, up to three pots worth up to £10,000 each can also be cashed in under the ‘small pots’ rules.

As with trivial commutations, if you take lump sums under the ‘small pots’ rules, you must take the whole value from each pension pot at once – you cannot take it in stages. If you do not want to take the whole value at once, the pensions flexibility rules might be more appropriate for you.

The key point to the encashments being treated as ‘small pots’ rather than pensions flexibility payments is that you will not then be restricted to the money purchase annual allowance of £10,000 a year on future pension contributions.

Other types of lump sum pension payments

Some other payments can be taken from pensions without incurring penal tax charges:

  • payments which are made to rectify an error;
  • additional payments of up to £18,000 on the winding up of an occupational pension scheme or of up to £30,000 to a beneficiary on death of the person entitled to the pension where the beneficiary is entitled to a dependant’s pension or is entitled to inherit the pension of the deceased in part or in whole. These additional payments are not subject to the condition that they must be taken on or after your 55th birthday nor do they have any impact on any other trivial commutations which you may take;
  • certain lump sum payments made in the event of serious ill-health.

More information can be found in HMRC’s Pension Tax Manual.

Using pension flexibility instead

You might be able to use the pension flexibility rules instead for private sector defined benefit pension plans if you first transfer the value to a defined contribution scheme. You will have to get advice before doing so unless your transfer value is under £30,000. See the government’s MoneyHelper website for information on choosing a financial adviser.

But if you are a member of a public sector defined benefit scheme, except for a local government scheme, transfers to defined contribution schemes will be restricted, although such transfers may be allowed in very limited circumstances.

You will need to talk to your pension provider to establish the exact position in relation to the scheme that you are a member of.

For pensions already in payment, pension flexibility does not allow you to take a lump sum. Your only option is trivial commutation.

Tax on trivial commutation and ‘small pots’ lump sum payments

The pension payer will deduct tax under Pay As You Earn (PAYE) from the taxable part of the lump sum at the time of making the payment to you. How much tax is taken depends on your circumstances:

  1. If the lump sum comes from a pension scheme operated by your former employer – either their own scheme, or one operated for them by a specialist pension provider – the pension payer will normally deduct tax on the basis of the tax code that applied to your earnings immediately before retirement;
  2. In most other circumstances, the pension payer must deduct tax from the lump sum using a basic rate tax code. This means that the pension payer must deduct tax from the taxable part of the lump sum at a flat rate of 20%. So, let’s say your trivial commutation lump sum is £10,000, £2,500 of that is tax free and £7,500 is taxable. Using the basic rate code, tax of £1,500 will be taken off (£7,500 x 20%).

In both cases the pension payer will operate the tax code on what is called a non-cumulative basis – in other words, the tax code takes no account of any unused tax allowances or how much tax you have paid so far in the tax year. As a result, you could pay the wrong amount of tax on your lump sum. A basic rate code should give broadly the right tax deduction in many cases, but you may still need to check your position carefully.

The pension payer must provide you with a form P45, as if you were leaving a job, showing the taxable part of the lump sum and the amount of tax deducted. If you have taken a trivial commutation lump sum and your pension provider does not send you this, contact them and, if need be, refer them to HM Revenue & Customs’ (HMRC) Manuals PAYE93080, where it is confirmed that the pension provider should issue form P45 for trivial commutations.

Claiming a tax refund

You might pay the wrong amount of tax under PAYE when you receive a trivial commutation lump sum payment. Normally, HMRC will check your tax position based upon what they know about you at the end of each tax year and make any repayment due to you then. But you need to take care and check that any tax calculation and refund you receive from HMRC is correct.

If you are certain that you have paid too much tax, you can apply to have a tax refund before the end of the tax year. You can access the P53 claim form online in a number of ways:

  • Claim online – complete form P53 online if you have, or set up, a Government Gateway account;
  • Fill in a P53 online and then print out to send to HMRC; or
  • Print out a blank P53 to fill in by hand and then post to HMRC

If you are having difficulty accessing the online version, you can contact HMRC and ask them to send you a form P53 for completion.

Form P53 asks you to provide details of your taxable income for the whole of the tax year in which you receive the lump sum. This will probably require you to provide estimates of your income and tax deducted or paid for the rest of the year.

You should return the form to HMRC, together with parts 2 and 3 of the form P45 given to you when you received the lump sum.

If you do not complete a Self Assessment tax return, HMRC may ask you to complete a second form P53 after the end of the tax year to show actual figures and will make any necessary adjustments thereafter.

If you are not resident in the UK for tax purposes, for example if you have retired abroad, the above arrangements will not be applicable to you. Instead you will need form R43, which you can download from GOV.UK. If you are having difficulty getting an online version of the form, you can contact HMRC. You may be able to claim relief under a double taxation agreement. There is more information on how to do this on GOV.UK.

Other issues to consider

Trivial commutation and taking small pot lump sums can be complicated. Some further issues which you should consider are covered in the next few paragraphs.

Interaction with other tax matters, tax credits and state benefits

The issues to consider when taking a trivial commutation and small pots lump sums are the same as for pensions flexibility. See our pensions flexibility page for information about possible impacts on tax allowances, tax credits, child benefit and other state benefits.

When to take a payment

It is possible to take a trivial commutation or small pot lump sum from age 55 onwards (unless you meet certain ill-health conditions, or have a protected pension age due to your occupation – in which case, you may be able to get the money earlier – you can read more about this on our page Pension withdrawals).

Delaying the decision to take a trivial commutation or small pot lump sum to a later tax year might produce a saving in taxes, depending on your circumstances. For example, in the tax year in which you retire, you might have higher taxable income and therefore potentially fall into a higher tax band, than you might in the tax year following retirement. We would recommend you take advice – see the government’s MoneyHelper website for information on choosing a financial adviser.

If you have a number of small pension policies it may be advantageous to cash them in over two tax years, but it is important to remember the 12-month rule if you are taking them under the trivial commutation rules.

Further information and help

This can be a complex area of tax law and practice.

If you require specialist tax advice and can afford to pay for help, you may need to find a Chartered Tax Adviser. For benefits issues, you might be able to get help from an advice agency such as Citizens Advice. Find further contact details on our Getting Help page.

If you are on a low income, you might be able to seek assistance from the charity Tax Help for Older People.

For queries about the technical issues surrounding trivial commutation, for example, valuations of pension schemes, your first contact should be with your pension provider(s).

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