Is it possible take a small pension early as a lump sum?

3 April 2012

Q

My wife worked for our county council for a time, but has had to stop to care for me as I am ill. She has a very small pension with the council, which is expected to pay out about £800 a year when she retires.As the pension is so small, she requested she be eligible to take it as a lump sum as it would cost more to administer it. However, the council has refused my wife's request, saying she does not meet the criteria for taking her pension early and says it isn't aware of any rules allowing her to take the pension as a lump sum.I know there was a loophole allowing people with small pensions to take the money as a lump sum as I did it a few years ago when I started to become ill. Does the loophole still exist, or is the council's pension team correct?
From
RN/Essex

A

It is possible for those with low levels of pension savings to take their pension as a lump sum. These are the 'trivial commutation' rules and they allow those with total pension funds worth no more than 1% of the current lifetime allowance to be paid as a lump sum.

The current lifetime allowance is £1.8 million and so this would apply for those with pension savings of £18,000 or less.

However, the link with the lifetime allowance disappeared from 5 April 2012 when £18,000 became the maximum allowable figure.

There are other requirements that need to be satisfied but this is the most important.

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I don't know the value of your wife's pension, but if it is greater than £18,000 then it cannot be paid as a lump sum under these rules. However, as her pension is from the county council, it is likely to have some guarantees and future escalation built in. If that is the case, then the total fund value required to provide a starting pension of £800 each year would be significantly more than £18,000.

I recommend that your wife seeks independent financial advice to make sure she can't claim the lump sum, but if my assumptions about the value of her pot are correct that seems unlikely.