Trivial pension lump sum – take care!

When you reach age 60, it may be possible to withdraw your pension as a trivial lump sum.  That is, you can take the whole lot out in one go.

However, care needs to be exercised with this, as you need to be sure you are allowed to take the pension in one lump sum.

Here’s a specific example of a client who I met this week….

My client visited me to get my advice on how to fill in the forms to take out the pension in one go.  They had read that if you have a pension pot of less than £18,000 that you could withdraw the whole sum, having 25% paid as tax free cash, and the rest is added to other income for the tax year and taxed at your highest marginal tax rate.

All the paperwork was in hand, some of it filled out already before we met.  We started discussing their circumstances and I quickly identified that my client was already in receipt of an occupational pension of £8,000 per annum.

Unfortunately for my client, I advised they were not allowed to withdraw the pension under triviality rules, due to having other pension funds which also need to be included when calculating eligibility for a trivial lump sum.  The £8,000 pension must also be valued and included in the calculation (the £8,000 pension was valued at £200,000 for the purposes of the calculation!) .  For this client, we have to look at an alternative way of drawing the pension income, but they are still able to take 25% of the fund as tax free cash.

Had my client not taken my advice, they may have faced a HMRC penalty of up to £3,000 for negligently or fraudulently obtaining an unauthorised pension payment.

Therefore, it pays to take expert financial advice.

Jeremy Phelps is a Chartered Financial Planner at Financial Solutions Wales.  If you would like advice on taking your pension as a trivial lump sum, we can assist and take care of all the paperwork on your behalf.  Our fee for this is usually £199.

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