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Alternatives to trivial commutation

This article is part of
Guide to Trivial Commutation post-Budget

Annuitisation is the main alternative to trivial commutation, the experts FTAdviser spoke to agreed.

While a lump sum may be useful in paying off debt, or for one-off expenses, Andrew Tully, pensions technical director of MGM Advantage, warns some may prefer the guarantee of a regular income for the rest of their life rather than the temptation of money to spend now.

If so, Mr Tully says it is crucial they shop around for the best possible income, taking into account their health and lifestyle.

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But some providers of scheme pensions or lifetime annuities will not quote for very small pension pots, warns Sharon Mitchell, head of UK administration operations at JLT Employee Benefits. She says waiting until April 2015, when complete flexibility will be available for DC savings, is another consideration.

An unauthorised payment can also be considered but Ms Mitchell says this is subject to high tax rates of at least 55 per cent.

Simply doing nothing - leaving the pension fund ‘uncrystallised’ with the intention of taking money at a later date - is always something to contemplate, Ed Wood, Chartered Financial Planner at Saunderson House, says.

He says this may be very attractive for an individual who is still working and who would be subject to high rate tax if they took pension benefits through trivial commutation.

Mr Wood says: “Leaving the fund unvested may allow it to be withdrawn in future with less tax incurred as a result.”

Drawdown pensions may also be an alternative, Mr Wood notes, though for smaller pension funds costs may be prohibitive.