Trivial commutation of UK pensions: calculation changes, again

Regulations issued on 7 October 2024 will change (again) the requirements for calculating whether a member may be paid a trivial commutation lump sum (TCLS).  The Pensions (Abolition of Lifetime Allowance Charge etc) (No. 3) Regulations 2024 will come into force on 18 November 2024 and will have retrospective effect from 6 April 2024.

This article explains how the TCLS calculations differ:

• Before 6 April 2024 (L-Day);  
• From L-Day to 17 November 2024; and
• From 18 November 2024. 

Trivial commutation lump sum limit before 6 April 2024: a reminder

A member may only be paid a trivial commutation lump sum (TCLS) if the total value of their benefits already taken (“relevant crystallised pension rights”) plus their uncrystallised rights under any registered scheme is not more than £30,000. 

Before the abolition of the lifetime allowance on 6 April 2024 (L-Day), an individual’s relevant crystallised pension rights were, broadly, the sum of:

• The value of any rights taken before 6 April 2006 (A-Day); and
• The amounts crystallised on any “benefit crystallisation events” (BCEs) between A-Day and L-Day.

Becoming entitled to most benefits (pensions or lump sums) from a registered pension scheme constituted a BCE.  However, there were some exceptions: for example, no BCE occurred if the member became entitled to a winding up lump sum (WULS); small pot lump sum; or a short-service refund lump sum.

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Valuing relevant crystallised pension rights: TCLS paid from 6 April 2024 to 17 November 2024

Current legislation (in force from L-Day) values a member’s “relevant crystallised pension rights” for TCLS purposes as being, effectively, the total of:

• Any previous pension commencement lump sum (PCLS) x 4;
• Any previous uncrystallised funds pension lump sum (UFPLS) (assuming that 25% of the UFPLS was paid tax-free); plus
• The tax-free part of any previous serious ill health lump sum (SIHLS).

No account is taken of the capital value of any benefits taken in pension form (scheme pensions, income drawdown or from a lifetime annuity).   An individual who had previously taken a scheme pension with no tax-free cash (PCLS) and no other benefits would therefore have “relevant crystallised pension rights” of zero, regardless of the size of the scheme pension.

These provisions are due to be changed on 18 November 2024, with retrospective effect to L-Day.  However, a transitional provision means that any TCLS paid under current rules between L-Day and 18 November this year will still be treated as a TCLS.

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Valuing relevant crystallised pension rights from 18 November 2024: further complication

The LTA No. 3 Regulations will amend the calculation of a member’s relevant crystallised rights for TCLS purposes to be the total of:

• The value of any rights taken before 6 April 2006 (A-Day);
• The capital value of any pension (scheme pension, income drawdown or lifetime annuity) taken post-A Day (being, broadly, 20 x initial scheme pension; the amount designated for drawdown; or the annuity purchase price); plus
• The value of any lump sum from a taken from a registered pension scheme after A-Day.

As drafted, the legislation requires all post-A Day lump sums to be counted, including sums which were not previously BCEs, such as a WULS or small pot lump sum.  It is not clear whether this is HMRC’s intended policy.  If so, the new legislation may cause further headaches for administrators wishing to pay a TCLS, as they will have to seek confirmation of whether any non-BCE lump sums were paid to the member, about which the member may no longer have any record – in contrast to payment of a lump sum which was a BCE, when the administrator would have told the member to keep a record of the payment for lifetime allowance purposes. 

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