Your Industry  

Who should consider trivial commutation?

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

Those who were above the old thresholds but are below the new thresholds - provided they are aged at least 60 - should consider trivial commutation now, Sharon Mitchell, head of UK administration operations at JLT Employee Benefits, says.

She adds companies that want to discharge small pensions and reduce scheme administration and, in DB schemes, liabilities, could consider a trivial/small pot commutation exercise.

From a monetary point of view, Andrew Tully, pensions technical director of MGM Advantage, says advisers need to consider the current value of the annual income, after tax, available from the best annuity the client could get on the open market, and compare that to the net lump sum the individual will receive from triviality.

Article continues after advert

But Mr Tully says the individual’s circumstances will also play a key part, for example if they have expensive debt, the impact on state benefits of taking the income or lump sum and whether the customer has dependants.

For many people, Ed Wood, Chartered Financial Planner at Saunderson House, says trivial commutation may not be an option, or it may be unsuitable, but the key thing is to understand how trivial commutation works and when it can be advantageous.

He says: “It is very important to understand what benefits would be lost, through trivial commutation. It is also important to understand if this is the best use for pension capital.

“Though annuity rates may seem low at present, a guaranteed income for life can be very valuable. For an individual who may have other income, perhaps due to spouse’s pensions or other assets, trivial commutation can be attractive.

“This is also the case for anyone with a low life expectancy, though impaired annuities can offer value.”

However, David Brooks, technical consultant at Broadstone Corporate Benefits notes the annuity income from pots that could otherwise be taken under the triviality rules will be small, mostly less than £1,000 a year. So often Mr Brooks says having a lump sum is preferred.

Conversion of ongoing pension for lump sum, be this trivial or tax-free cash by commutation, however can be assessed by a few factors, Mr Brooks says:

1) Conversion (loss of income) for the lump sum and the net of tax position.

2) How long the person expects to live.

3) Where is the break even point where the income receipts are higher than the lump sum? Is this point suitably far enough in the future for the individual to conclude the acceleration in income (and tax) is warranted?

Being able to take up to £60,000 as cash and not providing a retirement income under the revised rules needs very careful consideration, says Tim Gosden, head of strategy for Legal & General’s Individual Retirement Solutions Business.

Mr Gosden says: “It is vital to review a person’s individual needs and priorities as well as reviewing other investments which could potentially provide them with a retirement income.

“Care also needs to be given to any guaranteed annuity rates, (GARs) that may exist under the person’s pension contract. Protected tax free cash could entitle them to more than 25 per cent of their cash sum being tax free.