SAM110270 | Repayments: issue repayment: in-year repayments - small pension taken as a lump sum payment (formerly known as trivial commutations) and Flexible Pension Payments

A customer may choose to change a small pension into a lump sum in certain situations or to flexibly access part, or all, of their pension pot.

In-year repayment requests for small pension payments taken as a lump sum

Many individuals who receive small pensions taken as a lump sum payment will have little or no other taxable income and because of the facts that

• from 6 April 2013, all new small pensions taken as lump sums, that are not yet in payment, will be taxed at Basic Rate (BR) on a non cumulative basis

and

• all pensions that are already in payment, that are now taken as a lump sum, will be taxed using the tax code that is already in place

the tax deducted from the small pension taken as a lump sum payment may exceed the actual liability.

From April 2009 onwards, SA customers can request, and receive, early repayments in small pensions taken as lump sum payment cases as long as the appropriate information has been provided. Where a small pension taken as a lump sum payment claim is made by the customer, and the customer is resident in the UK for UK tax purposes, a form P53 should be issued.

The form P53 can be obtained from the SEES menu under Forms and Letters. Customers can also download the form from the HMRC website.

In-year repayment requests for flexibly accessed pension payments

From 6 April 2015, scheme members with money purchase pension savings in defined contribution schemes, are able to access those pension savings as they wish, providing they have reached normal minimum pension age (currently age 55). Most payments, apart from the right to 25 per cent tax free, will be subject to their marginal rate of tax.

Scheme members can choose a number of options on how to take their pension benefits, although not all pension schemes will offer the flexibility options which could be as one or more payments a year for a number of years, several payments a year over a shorter time frame or the full value of the fund in one payment.

The two main options under the flexibility rules are

• an uncrystallised funds pension lump sum (known as UFPLS) paid direct from uncrystallised rights: that is, 25 per cent of each payment is tax free and the balance is taxed at the members marginal rate

• flexi-access drawdown where funds can be designated into drawdown to be accessed as required. The scheme member can choose to take as little, or as much, as they want to each year.

All payments from the flexi-access drawdown fund are taxed at the member’s marginal rate, but when funds are first designated into the drawdown fund, a pension commencement lump sum can be paid at the same time.

The normal PAYE rules apply to the taxable element of flexibly accessed payments. This means that the tax due on the payments received will be collected via a PAYE code. If the scheme administrator does not hold details of the code, they will deduct tax using an emergency code on a Week 1/ Month 1 basis.

Individuals who reside in the UK and receive pension flexibility payments in a year can complete and submit the following forms (available to download from )to claim a repayment:-

• P50Z – where they have exhausted their pension pot and have no other source of income other than state pension

• P53Z – where they have exhausted their pension pot and have other sources of income

• P55- where they have not exhausted their pension pot and may, or may not, have other sources of income

Non- UK residents are also able to claim an in-year repayment but will need to determine whether to make a claim for Double Taxation treaty relief. If no relief is due, they should complete for R43 ‘Claim to Personal allowances and tax repayments by an individual not resident in the UK if UK Personal allowance due’.

Schemes can choose if they want to offer pension flexibility and, if so, which options they wish to make available.