April 2015 saw the introduction of one of the biggest changes to pensions ever seen with the introduction of flexible benefits affecting elements such as taking benefits and death. This is potentially changing the fundamental concept of a pension and what it can be used for.
The statement above covers the headline changes; however, there are many other impacts these legislative changes will have. For example, there will be changes to the operation of small pots and triviality payments under the new legislation. These are outlined below.
This article is a summary of the general position only and not in depth and should be read in conjunction with other articles published.
Small Pots
Most small pots legislation came into force from April 2014 with small amendments being made to reflect the subsequent changes in pensions legislation.
- The maximum value of a small pot is £10,000. This value is at the date of payment.
- Small pots legislation can be used for three individual small pots.
- A “pot” is represented at arrangement level and not scheme or policy level – so one arrangement represents one small pot.
- The member must be over the age of 55 (but will rise to 57 in April 2028).
- These payments do not get tested as a Relevant Benefit Crystallisation Event. The tax-free element of a small pot payment will not use up ILSA or ILSDBA. There is no requirement for availability of either allowance for a small pot.
- Small pots can be taken from crystallised and uncrystallised funds as long as the pot represents one complete arrangement only.
- 25% of the small pot payment represents tax free cash (if available) and the residual funds are taxed as income. Obviously, all crystallised funds are taxed.
- Income tax will automatically be taken by the provider at a rate of 20% unless they already hold a tax code for the member. It is then the members responsibility to account for any additional tax due or reclaim excess tax from HMRC.
- Taking the small pots must extinguish all the member’s rights under that arrangement.
Quilter, for the purposes of small pots create an arrangement from the existing main scheme, so out of a larger pot, we can create small pots (arrangements), and legitimately say that all rights under this new arrangement will be extinguished. This may be an issue for those members with fixed or enhanced protection, depending on when this protection was granted. Following legislative changes to lifetime allowance charges and protections, there is potential to lose fixed and enhanced protections.
- If a member has fixed or enhanced protection which was in force prior to 15th March 2023, the member can create a new sub arrangement as described above without losing their protection and so can still benefit from any protected PCLS and make pension contributions.
- If a member was granted any form of fixed or enhanced protection on or after 15th March 2023 and then tried to utilise small pots by the creation of a new arrangement, they would lose any protection they had.
Triviality
Triviality rules have been in force for a long time with the last major amendments made in 2014 to increase the amount which could be taken under these rules to £30,000.
- The member would need to take the value of all their pensions into consideration, both uncrystallised and crystallised pensions.
- The total combined fund values on a nominated date need to be at or below £30,000 – but could be higher at the date of actual payment.
- The nominated date can be up to three months before the first trivial payment.
- All benefits must be taken within 12 months of the nominated date. If not taken in this time frame they will not be able to use the triviality rules in the future.
- The triviality rules can only be used once for a member’s benefits in their lifetime.
- The tax-free element of a trivial commutation lump sum payment will not use up ILSA or ILSDBA. However, in order to take a trivial commutation lump sum you must have some of each allowance available. It does not need to be enough to cover the lump sum, so could be as little as £1.
- The payment must extinguish all rights under the scheme.
- Triviality is only available from in-house money purchase schemes that are in payment.
- In-payment money-purchase in-house schemes are a scheme pension which the member became entitled to under a money purchase arrangement that is not a collective money purchase arrangement. This must be paid by the scheme administrator and not an insurance company.
- Triviality will however still be available from final salary schemes – and these would then take into consideration all money purchase schemes.
- The age for triviality is 55 (but will rise to 57 in April 2028).
Updated March 2024