Cashing in small pots, or 'Trivial Commutation'
From March 27th 2014, any member receiving a pension from any scheme, who is over age 60 and meets either of the following criteria, can convert their pension to a one off cash lump sum.
- The member’s amount of total pension wealth across all their pension schemes, excluding state pension, is equal to or less than £30,000
- The value of one of their single pension pots, regardless of total pension wealth, is equal to or less than £10,000. Up to three pots can be converted to cash under this rule.
These rules apply to both defined contribution and final salary schemes and can benefit members who may prefer a lump sum over a small pension. There are also some benefits for sponsors of final salary schemes in members commuting small pensions, for the following reasons:
- the scheme can reduce administration costs, through fees and levies based on membership numbers being reduced.
- there can be a small increase in a scheme’s funding position as a result of a member taking their pot as cash. This is because the amount paid out to the member is typically less than the funds that a final salary scheme needs to hold for the member, and the contributions the sponsor needs to make in respect to support these funds.
- having less small pension payments can make a scheme more attractive to insurers for buy-out or buy-in terms and so carrying out an exercise to cleanse the scheme of small pots prior to buy-out or buy-in can potentially save costs in the longer term.
The Mazars team has carried out a number of one off exercises to spring clean schemes of their small pensions. Our service includes reviewing and amending scheme rules and processes to ensure these one off lump sum payments can be made, identifying members who may be eligible for a cash lump sum as well as preparing draft communications to these members setting out their options and where more information can be found.