New legislation has corrected an anomaly that has arisen in relation to trivial commutation rights for members of certain UK Defined Contribution (DC) and hybrid pension plans.
Following changes made on 6 April 2015 to the statutory definition of “trivial commutation lump sum” (TCLS), a TCLS can now only be paid from a Defined Benefit (DB) arrangement. The rationale for this was that members with DC benefits would be able to access their benefits in lump sum form by making use of the new DC pension flexibilities introduced in April 2015.
However, the reality is not so simple for members of certain DC and hybrid plans – particularly those with more complex benefit structures such as a DB contracted-out underpin. It is not always possible or cost-effective for these pension plans to enable their members to make use of the new DC flexibilities. As a result, some members with DC benefits worth less than the £30,000 triviality limit are unable to take their benefits as a lump sum – even where a DB member of the same pension plan could take a TCLS. Members may be able to transfer their DC benefits to another pension plan offering lump sum options, but this will almost certainly involve fees, which may not offer the member good value for money for a relatively small pension pot.
The Finance Act 2016, which received Royal Assent on 15 September 2016, seeks to address this potential unfairness by extending the definition of TCLS to include money purchase benefits that have been secured as in-house scheme pension. It is likely that in practice the new legislation will permit deferred members to receive a TCLS, if the transaction can be construed on the basis that the member’s benefits come into payment as an in-house pension that is then immediately commuted. This partially aligns the triviality rules for DB and DC benefits worth up to £30,000, which will come as welcome news to both members and trustees of hybrid schemes with significant volumes of these smaller liabilities. Trustees of hybrid and DC pension plans may wish to check their plan rules and retirement processes to ensure that they can give members this option to take their DC benefits as a TCLS. Rule amendments may sometimes be required, such as if the triviality rules only apply to DB benefits or if benefits are required to be secured as an external annuity.