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Future changes to trivial commutation rules

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

The government’s headline Budget announcement is the potential change to allow all pension funds to be commuted from April 2015, which was confirmed formally before the parliamentary summer recess last week.

In effect the trivial commutation rules disappear from 6 April 2015, says Andrew Tully, pensions technical director of MGM Advantage.

Any member of a defined contribution scheme will be able to cash in as much of their pot as they wish, irrespective of its value. In a similar way to the triviality rules, 25 per cent is tax-free with the remainder taxed as income, but savers will be able to take this from age 55 rather than 60.

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MGM Advantage’s Mr Tully says care needs to be taken as a large part of an individual’s pension fund could be payable in tax if they withdraw large sums in one tax year.

He says: “Even people who have been used to paying basic rate tax their whole life could find themselves paying 40 per cent tax on part of their fund.”

David Brooks, technical consultant at Broadstone Corporate Benefits, says some people may think that as the defined contribution rules are changing this is a moot point but the rules will remain for defined benefit members, at least initially.

The government is set to consult on potential future rules to allow DB members access to their pension, but in the mean time savers in final salary schemes can transfer to DC schemes to take advantage of the new freedoms.

However, caveats to this include that individuals must take professional advice in order to avoid clients unwittingly forfeiting favourable benefits, and that trustees will have the right to delay transfers or restrict the transfer value where the scheme is underfunded or the transfer would jeopardise the scheme’s overall funding position.

Ultimately whether triviality or small pot commutation is an option in the future depends on the pension schemes individual rules that are in place, says Tim Gosden, head of strategy for Legal & General’s Individual Retirement Solutions Business.

Mr Gosden says: “The regulation is not in place yet to know from April next year whether all providers must offer the new triviality rules giving customers full access to all the pension funds. We expect to get advice from HM Treasury on this during the second half of this year.”