City Trustees - part of Mattioli Woods



News and Media

27 February 2015

Pensions Perspective: Can I commute a small pot before April and still make contributions to pension post April under the annual allowance rules?

I have a client who has a small personal pension pot valued at just over £5,000, which he is looking to take under the current small pots trivial commutation rules. He has a larger pension plan to which he currently contributes his maximum annual allowance. I assume that if the request is made prior to April 2015 then taking this small pot as a lump sum will not affect the ability to make contributions in the future?

The small pots rule currently allows members aged 60 and over, and who have an available lifetime allowance, to fully commute for cash up to three pots worth up to £10,000. 25% of the small pot is paid tax-free and the remainder is taxed as earned income. The exception to this is when the pot is in respect of crystallised funds. In this scenario, the pot is all taxed as earned income and there is no further test against the lifetime allowance unless the pot was crystallised before April 2006 and there have been no BCEs for the member since A day.  Trivial commutation is only available until 5 April 2015; thereafter members will be treated as flexibly accessing their pension (and subject to the lower money purchase annual allowance rules) if they receive any of the following on or after 6 April 2015:

  1. A payment from a flexi-access drawdown fund, including a payment from a capped drawdown fund that would breach the cap.
  2. An uncrystallised funds pension lump sum (UFPLS).
  3. A payment under a flexible annuity contract. Any person who had a valid notification for flexible drawdown before 6 April 2015 will be deemed to have flexibly accessed their rights on 6 April 2015.
  4. A payment of a money purchase scheme pension where the scheme has fewer than 11 other pensioner members and they became entitled to the scheme pension on or after 6 April 2015.
  5. A stand-alone lump sum from a money purchase arrangement where the individual was entitled to primary protection but not enhanced protection.

If your client fully completes the transaction and receives payment prior to 6 April 2015, they will have taken the funds under the small pots rules and will still be able to maintain contributions up to the annual allowance. However, you need to be aware that there are no transitional arrangements for payments that are requested before 6 April 2015 but not paid until after this date. As such, if your client's application for a small pots trivial commutation is received prior to 6 April 2015, but the provider's payroll system does not process the payment by 5 April 2015, the payment will be treated as an UFPLS and the member will be restricted to the money purchase annual allowance going forward.

Therefore, if your client is considering taking a small pot commutation, they should proceed as soon as possible and check with the provider the position regarding payroll payments. Alternatively, your client should consider merging the two pension pots and accessing the funds as a partial tax-free lump sum from the larger pot, if the provider's contract will allow this.

 

Pension Perspective is a weekly feature from City Trustees, covering questions that our experienced sales and technical teams have received from advisers. The Q&A covers a range of subjects including property, pension contributions, protection, auto-enrolment and more.

City Trustees operates a free technical helpline for advisers for support with pension challenges. Tel: 0116 240 8731 or email: technicalhelp@citytrustees.co.uk.

 

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