Small pots and triviality

A small pot is defined at arrangement level, not scheme or policy level. One arrangement counts as one small pot. The maximum value a small pot can be is £10,000 at the time of payment.

1.Rules for non‑occupational pension arrangements

These include personal pensions and other non‑occupational registered schemes.

Key conditions

• Maximum of three small‑pot payments.
• Each arrangement must be worth £10,000 or less.
• The member must be at least the minimum pension age
• Payments can be made from crystallised or uncrystallised funds, provided the entire arrangement is extinguished.
• The small pot payment must extinguish the arrangement

2.Rules for occupational pension schemes

Occupational pensions operate under a slightly different set of rules as they apply at scheme level rather than arrangement level. This section only deals with occupational schemes that have less than 50 members. The rules for larger schemes can be found here.

Key conditions

• The value of the scheme must be £10,000 or less.
• The payment must extinguish all rights under that scheme.
• The member must be at least the minimum pension age
• There is no limit to the number of occupational small‑pot payments a member may receive.
• The member must not be a controlling director (or connected to one) of the sponsoring employer.
• No transfers out must have been made out of the scheme or related scheme in the last three years.
• Payments can be made from crystallised or uncrystallised funds, provided the entire scheme is extinguished.

3.Tax and allowance treatment

A small‑pot payment from uncrystallised funds will be:

• 25% tax‑free
• 75% taxed as income

A small‑pot payment from uncrystallised funds will be:

• Fully taxed as income

Providers will generally apply a 20% emergency tax rate unless a current tax code is held. The member must reclaim or settle any difference directly with HMRC. 

• These payments do not trigger the Money Purchase Annual Allowance (MPAA)
• These payments do not trigger a Relevant Benefit Crystallisation Event.
• They do not use any of the individual’s lump sum allowances (LSA or LSDBA).

4.Impact on fixed and enhanced protection

Creating new arrangements to facilitate small‑pot payments may affect members with fixed or enhanced protection, if that protection was applied for and gained after 15 March 2023.

5.How Quilter handles small‑pot payments

Quilter can create a separate arrangement from a member’s main pot. This enables a compliant small‑pot payment while ensuring the member’s remaining benefits stay intact, and the extinguishment requirement is fully satisfied.

6.What is triviality?

Triviality allows a member of a defined benefit scheme, or a member already receiving a money purchase pension, to take their benefits as a lump sum. Each lump sum taken under this rule is called a trivial commutation lump sum.

Eligibility Conditions

• The total value of all trivial commutation lump sums cannot exceed £30,000.
• The member’s total pension wealth must be £30,000 or less on the nominated date. This includes all pensions and any amounts already taken.
• The member must have reached the normal minimum pension age.

Time Limits and Usage

• Once triviality is requested, all trivial commutation lump sums must be taken within 12 months of the nominated date.
• A member can only use triviality once in their lifetime.

Tax Treatment

• From uncrystallised funds:
  • 25% is tax free.
  • The remaining 75% is taxable as income.
• From crystallised funds:
  • The entire amount is taxable as income.

Lump Sum Allowance

• A trivial commutation lump sum can only be paid if the member has some lump sum allowance available.
• The allowance does not need to equal the lump sum amount.
• Taking a trivial commutation lump sum does not reduce the member’s lump sum allowance.