Can Anyone Explain Trival Comutation of a Pension
Discussion
Hi, my wife sadly passed away 7 weeks ago and i have just been contacted by one of her pensions and they have offered me a figure for an annual pension, paid monthly or a trivial comutation, where i can take the whole sum and thats it. The whole lump sum will be subject to normal taxation, however would it only be taxable on 75% of that sum assuming it would include the first 25% tax free?
I have tried looking on the Gov website but there very little mention of any tax free part.
I have tried looking on the Gov website but there very little mention of any tax free part.
Firstly, sorry to hear about your wife. Secondly, why is it subject to any taxation? It's part of her estate that can be inherited by a spouse tax free. In fact, I thought pensions were ringfenced against IHT anyway, until you hit 75?
Had she had known she was going to die, she could have got the whole lot out tax free, which you can do when you have a terminal diagnosis with under 12 months live
Had she had known she was going to die, she could have got the whole lot out tax free, which you can do when you have a terminal diagnosis with under 12 months live
Edited by TwigtheWonderkid on Tuesday 5th July 10:48
TwigtheWonderkid said:
Firstly, sorry to hear about your wife. Secondly, why is it subject to any taxation? It's part of her estate that can be inherited by a spouse tax free. In fact, I thought pensions were ringfenced against IHT anyway, until you hit 75?
Twig, thanks for your kind words.The letter i received includes this,
"You will have to pay tax on the ‘trivial commutation’ lump sum. We will provide details of the tax when
we pay the lump sum."
Does this make more sense to you?
phumy said:
TwigtheWonderkid said:
Firstly, sorry to hear about your wife. Secondly, why is it subject to any taxation? It's part of her estate that can be inherited by a spouse tax free. In fact, I thought pensions were ringfenced against IHT anyway, until you hit 75?
Twig, thanks for your kind words.The letter i received includes this,
"You will have to pay tax on the ‘trivial commutation’ lump sum. We will provide details of the tax when
we pay the lump sum."
Does this make more sense to you?
InitialDave said:
Sorry to hear that, OP.
It may be helpful to confirm to people that you are in the UK, and your wife was under 75.
I am not at all familiar with the specifics of this, but I think that yes, a trivial commutation is liable for tax irrespective of the over/under 75 question.
Thanks Dave, Yes and yes.It may be helpful to confirm to people that you are in the UK, and your wife was under 75.
I am not at all familiar with the specifics of this, but I think that yes, a trivial commutation is liable for tax irrespective of the over/under 75 question.
Firstly, sorry for your loss.
To your question, trivial commutation is where the pension is too small to be worth the admin costs and hassle of paying it monthly so you can be offered a one-off lump sum instead.
I would not expect 25% to be tax-free - I would guess your wife took advantage of the tax-free cash when she retired. You are now entitled to the “reversionary” part of the pension, so it’s not part of your wife’s estate but an income due to you.
The trivial commutation lump sum you receive would be taxable as income so added to any other income you receive that year and taxed at your marginal rate.
This web page (from a quick google) summarises the issue. Hope that it is helpful.
Edited to add - have a careful look at the rate the pension scheme uses to convert the pension into a trivial commutation lump sum. In my experience, pension schemes were historically very miserly with the rates offered.
To your question, trivial commutation is where the pension is too small to be worth the admin costs and hassle of paying it monthly so you can be offered a one-off lump sum instead.
I would not expect 25% to be tax-free - I would guess your wife took advantage of the tax-free cash when she retired. You are now entitled to the “reversionary” part of the pension, so it’s not part of your wife’s estate but an income due to you.
The trivial commutation lump sum you receive would be taxable as income so added to any other income you receive that year and taxed at your marginal rate.
This web page (from a quick google) summarises the issue. Hope that it is helpful.
Edited to add - have a careful look at the rate the pension scheme uses to convert the pension into a trivial commutation lump sum. In my experience, pension schemes were historically very miserly with the rates offered.
Edited by Zigster on Tuesday 5th July 16:23
Zigster said:
Firstly, sorry for your loss.
To your question, trivial commutation is where the pension is too small to be worth the admin costs and hassle of paying it monthly so you can be offered a one-off lump sum instead.
I would not expect 25% to be tax-free - I would guess your wife took advantage of the tax-free cash when she retired. You are now entitled to the “reversionary” part of the pension, so it’s not part of your wife’s estate but an income due to you.
The trivial commutation lump sum you receive would be taxable as income so added to any other income you receive that year and taxed at your marginal rate.
This web page (from a quick google) summarises the issue. Hope that it is helpful.
Edited to add - have a careful look at the rate the pension scheme uses to convert the pension into a trivial commutation lump sum. In my experience, pension schemes were historically very miserly with the rates offered.
My wife did not take the 25% tax free lump, not sure if that's an option for me to take now if I decided to take the whole amount now?To your question, trivial commutation is where the pension is too small to be worth the admin costs and hassle of paying it monthly so you can be offered a one-off lump sum instead.
I would not expect 25% to be tax-free - I would guess your wife took advantage of the tax-free cash when she retired. You are now entitled to the “reversionary” part of the pension, so it’s not part of your wife’s estate but an income due to you.
The trivial commutation lump sum you receive would be taxable as income so added to any other income you receive that year and taxed at your marginal rate.
This web page (from a quick google) summarises the issue. Hope that it is helpful.
Edited to add - have a careful look at the rate the pension scheme uses to convert the pension into a trivial commutation lump sum. In my experience, pension schemes were historically very miserly with the rates offered.
Edited by Zigster on Tuesday 5th July 16:23
phumy said:
My wife did not take the 25% tax free lump, not sure if that's an option for me to take now if I decided to take the whole amount now?
There isn’t always 25% to take tax free. If her pension was from a FS scheme then there is a lump sum that can be taken tax free but it it wasn’t taken then that opportunity has gone. She would have had a slightly higher pension through not taking anything tax free.A commutation if a trivial pension is always taxable.
craig1912 said:
Yep Zigster is correct.
Not sure you can do anything about the commutation rate though
Not exactly. But I don’t think they can make you take the lump sum, can they? If you thought the commutation factor was too far below fair value you could choose to take the (admittedly by definition small) income instead?Not sure you can do anything about the commutation rate though
phumy said:
My wife did not take the 25% tax free lump, not sure if that's an option for me to take now if I decided to take the whole amount now?
Bearing in mind that I don’t have all the details so I could be missing something important…I wouldn’t expect you to have the option to take tax-free cash now. The tax-free cash option is often know as the “pension commencement lump sum” or PCLS. That is, it’s an option when the pension first comes into payment (to the member not the spouse).
craig1912 said:
phumy said:
My wife did not take the 25% tax free lump, not sure if that's an option for me to take now if I decided to take the whole amount now?
There isn’t always 25% to take tax free. If her pension was from a FS scheme then there is a lump sum that can be taken tax free but it it wasn’t taken then that opportunity has gone. She would have had a slightly higher pension through not taking anything tax free.A commutation if a trivial pension is always taxable.
Zigster said:
craig1912 said:
Yep Zigster is correct.
Not sure you can do anything about the commutation rate though
Not exactly. But I don’t think they can make you take the lump sum, can they? If you thought the commutation factor was too far below fair value you could choose to take the (admittedly by definition small) income instead?Not sure you can do anything about the commutation rate though
phumy said:
I have had Power of Attourney for my wife for the last 10 years and her pension has never contacted her/me to ask if she wanted to take 25% tax free lump.
She may not have been entitled to a lump sum. The 25% relates to a defined contribution pension (eg. Personal pension, SIPP, employer money purchase etc). Defined benefit schemes don’t have a 25% TFC option but most (not all) have the option to give up some pension for tax free cash (based on a predefined commutation rate), and then some just pay a pension.
Unfortunately unless you give more information on the type of pension then nobody can give you answer without some guesswork.
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