3 steps to £30k

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Some people think that because trivial commutation deals with smaller amounts of pension, it should be less complex. This, unfortunately, is not true.

Even the HMRC has recognised that guidance on triviality is not easily understandable and that it has caused real difficulties. In recent times they have been working with the Low Income Tax Reform Group and Tax Help for Older People, to help everyone understand the key issues and improve the way that tax relief is applied and claimed.

That was a real-life scenario and demonstrates how the rules can be applied for the benefit of your clients. Keep it simple and stick to the 3-step approach, you won’t go far wrong

Pension payers are now required to operate trivial commutation and similar one-off lump sum payments on the basic rate tax code (operated on the non-cumulative basis) and not the old emergency code.

But, with more changes this year and new the small pots rules confirmed this year (in advance of the new flexible pension rules from April 2015), how does it work? Here’s a real life scenario and a 3-step process on how to translate the triviality rules into real world:

Client is aged 68 and is about to retire from his business and leave his son to run it when he has retired. He is currently taking state pension income and may continue to take a small consultancy income from the business as long as it can afford to pay him.

The current plans are

ABC Stakeholder current value £9,166.31

Phixma Life s226 current value £21,591.11

[ BTW – this is also how I would answer it in the CII AF3 exam; it’s a very real example and a very possible exam question]

First [Trivial lump sum up to £30k]
Client is eligible for a triviality lump sum payment up to £30k in relation to the s226:
has reached age 60;
has some unused lifetime allowance left;
Payment eliminates their rights under s226 scheme;

Second
Under small pots rules which operate in ADDITION to triviality, personal pensions are also able to commute a pot of up to £10,000 if:
Member has reached age 60,
Payment extinguishes the member’s entitlement,
Payment of this type hasn’t been made more than twice before (amx three times with PP’s),
and scheme rules allow it.

Third.
If a trivial commutation lump sum (which also includes small pots) is paid from uncrystallised rights up to 25% of the lump sum can be paid tax free.

The balance of the fund is taxed as part of the member’s ‘earned’ income for the tax year in which the lump sum is paid and the basic rate tax code operated on the non-cumulative basis is applied.

That was a real-life scenario and demonstrates how the rules can be applied for the benefit of your clients. Keep it simple and stick to the 3-step approach, you won’t go far wrong.

If anyone tells you that the CII AF3 exam (or any other pension exam, for that matter) doesn’t apply to real life client questions, tell them to take a hike and stick to mortgages.
The CII AF3 pension planning exam is an exam where you need to know the detail. But, most importantly, you need to be able to apply it to client scenarios – just like the real live client scenario we started this with.

This could be your client tomorrow.

In 2013, half of all annuities were worth less than £20,000*. Some of them might be interested in the new triviality rules.

* https://www.abi.org.uk/~/media/Files/Documents/Publications/Public/2014/Pensions/The%20UK%20Annuity%20market%20Facts%20and%20Figures.ashx

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About Author

John Reynolds

Dubbed by friends and colleagues “The Pensions Professor”, John Reynolds is widely acknowledged as one of the country’s leading experts in the financial services education sector. He has spent 20 years teaching, consulting, mentoring and writing on the subjects of pensions and investments. John’s unique ability to take his years of experience and technical knowledge and present it in an easy to understand format, has resulted in his talents being very much in demand. His portfolio of corporate clients include CII, Lloyds, Scottish Widows, Santander and Wesleyan; as well as numerous IFA clients whom he provides technical consultancy, mentoring and training on client case studies and staff training.. He has put his extensive expertise (and heart and soul!) into developing the expertpensions (EPL) proposition. EPL is a structured and interactive technical exam training programme for IFAs. It's designed to give financial advisors the required technical knowledge, study strategy and exam technique to confidently sit and pass the AF1, AF3, AF4 and AF5 exams. Its online, it's fully supported, structured and designed to help advisers reach Chartered Financial Planner status quicker. It's ready to help your advisers reach chartered status

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