Various restrictions on the trivial commutation of pensions are imposed by both the pension taxation regime and contracting out legislation. Administrators should ensure that the payment of a lump sum in lieu of a small pension is compliant with these restrictions as well as with the scheme regulations.
Please note that the factors in this guidance should be applied to total pension, including any accrued Guaranteed Minimum Pension (GMP). Separate factors for GMP are not required.
In the case of a small pension in payment to a member the lump sum payable should be determined as follows:
Lump sum payable = (Pm × Fm) + (Ps × Fs)
where:
Pm = annual pension in payment to a member
Ps = annual survivor's pension payable upon member's death
Fm = factor for pension in payment to a member
Fs = factor for contingent survivor's pension
Factors for members of the 1988 scheme should be taken from Table 1. Factors for members of either the 2006 or 2015 schemes should be taken from Table 2.
The survivor's pension to be used in the calculation is the pension that would actually be payable to the member's dependant if the member died on the day of the calculation. Please note that survivor's pension elements should be included whether or not the member has an eligible dependant at the date of the calculation.
The 'annual pension in payment' is the pension that would otherwise be paid if trivial commutation were not to proceed. Therefore, this pension is the pension after any reduction due to commutation for tax-free cash if relevant.
In the case of a small pension in payment to the surviving eligible dependant of a member the lump sum payable should be determined as follows:
Lump sum payable = Pw × Fw
where:
Pw = annual pension in payment to a surviving dependant
Fw = factor for pension in payment
Factors for this calculation should be taken from Table 3.
In the 1988 scheme, the lump sum paid to a surviving spouse is subject to an underpin calculated as follows:
Lump sum payable = Annual pension in payment × 11
If this underpin is higher than the sum calculated using the formula shown in the Surviving dependant section then the underpin amount should be paid instead.
The underpin will bite if the factor Fw is less than 11. When this occurs, the lump sum payable to surviving spouse or civil partner is calculated as Pw × 11.
There is no equivalent underpin in the 2006 or 2015 schemes.
The 'annual pension in payment' is the pension that would otherwise be put into payment if trivial commutation were not to proceed.
