23 June 2011

Trivial Pursuit of Pension Money

The aim of pension planning is generally to build up as big a pension fund as possible. But for various reasons some people don't end up with a fund which is going to provide anything meaningful in the way of an ongoing income.

For people like this, taking the whole of their pension as a lump sum may be the best option - particularly if their spouse has a good pension which will switch across to them if the spouse dies first.

This is known as "trivial commutation" and applies if you have less than 1% of the value of the Lifetime Allowance across all your pension funds (if you have more than one). Until April 2012 the Lifetime Allowance is £1.8m so that means £18,000 is the limit for trivial commutation. (The Lifetime Allowance reduces to £1.5m in April 2012, so the "trivial commutation" limit is changing to be a fixed sum of £18,000 from then rather than a percentage).

There are a number of other restrictions on trivial commutation, including that all must be done within a 12 month period, and also you must be between 60 and 75.

As with taking other pension benefits, you can take 25% of the amount tax-free, while the rest is taxed as pension income. That may mean you end up paying too much tax initially since the insurance company will deduct tax without being aware of your available allowances. So they should also issue you with a P45 as proof of tax deducted which will enable you to reclaim the overpaid tax from HMRC.

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