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Taking a small pension as a cash lump sum

You may be able to take the whole of your pension as cash, whether your pension is defined benefit or defined contribution. Taking cash in this way is called taking a 'trivial commutation' or 'trivial lump sum'.

In some circumstances you may be able to take the whole of your pension as cash, whether your pension is defined benefit or defined contribution. Taking cash in this way is called taking a 'trivial commutation' or 'trivial lump sum' for defined benefit schemes and is capped.

There are flexible rules for taking defined contribution schemes and there is also the option of taking up to three small pots of £10,000 or less.

Rules on taking a small pension as a cash lump sum

You may be able to take the whole of your pension as a trivial commutation lump sum if:

  • You’re aged at least 55, or you’re retiring at an earlier age because of ill-health; and the value of all your pension benefits (including defined contribution pensions and pensions already in payment, but ignoring any State Pension) when added together do not exceed £30,000 in total.

You may be able to take the whole of your pension as a small pot if:

  • you’re aged at least 55, or you are retiring at an earlier age because of ill-health; and
  • the value of your pension arrangement does not exceed £10,000.

Unlike trivial commutation, you do not have to take into account any other defined pension benefits you may have, when giving up a pension for a small pot. The Government will allow you to give up three pension arrangements under the small pots rule. 

Valuing your defined pension before you have started to take it for trivial commutation purposes

The value is your annual pension entitlement, multiplied by 20 plus any separate tax-free cash sum. 

 

Valuing your pension before you have started to take your benefits for small pot purposes

If you’re in a defined contribution scheme, the value is simply the amount of money in your pension pot. If you’re in a defined benefit scheme, the value is the amount the pension scheme places on the pension benefit you have with them plus any separate tax-free cash sum.

 

What happens if I have more than one defined pension for trivial commutation purposes?

If you can give up more than one pension for trivial commutation purposes, you do not have to take them all at the same time. You have a period of twelve months from the date you were paid the first lump sum payment to commute the rest. If you fail to do so, you lose this option.

 

Tax treatment of taking a trivial commutation lump sum and/or a small pot

If benefits are not in payment, you should have the option to take 25% of the pension value as a tax-free cash sum. The remainder is added to the rest of your taxable income in the tax-year in which you take it when determining any income tax liability

If benefits are in payment, the lump sum value of your pension will be added to the rest of your taxable income in the tax-year in which you take it when determining any income tax liability.

Click here to find out more about tax and cash lump sums.

 

Frequently asked...

Where can I find out more?

If you need more information, please contact us. A pension specialist from our team will be happy to help with whatever pensions-related question you have. Our help is always free.

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