PTM063700 - Member benefits: lump sums: small pension payments
Source: gov.uk (2025-11-11)


As of 6 April 2024 there is no longer lifetime allowance. If you are looking for information about protections, enhancement factors and the lifetime allowance charge please see these pages on The National Archives (https://webarchive.nationalarchives.gov.uk/ukgwa/20240305022829/https:/www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm090000). If you are looking for information about the principles of lifetime allowance and benefit crystallisation events please see these pages of The National Archives (https://webarchive.nationalarchives.gov.uk/ukgwa/20240305022836/https:/www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm080000).

Glossary PTM000001 (https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm000001)

When benefit rights may be commuted

Section 164(1)(f) Finance Act 2004

The Registered Pension Schemes (Authorised Payments) Regulations 2009 - SI 2009/1171

The tax legislation provides for benefit rights to be commuted and paid as a one-off lump sum in certain circumstances.

Firstly, where all of the conditions for a trivial commutation lump sum are satisfied. The full conditions are set out on page PTM063500 (https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm063500).

In addition, the conditions for when a further range of small lump sums are set out in regulations. Typically, these involve the discovery and correction of certain errors, unanticipated rights or certain unresolved obligations to make payments through the scheme (as described later below).

There is a little overlap where one of the ’small lump sum’ provisions modifies the ‘trivial commutation lump sum’ conditions: see Small lump sum payments made after the purchase of scheme pension or lifetime annuity (#IDAEGEIC) below to understand when this occurs precisely. Aside from this overlap, the payment of any ‘small lump sums’ will not present any implications for ‘trivial commutation lump sums’ where the nominated date for valuation under the trivial commutation lump sum rules occurs after the ‘small lump sum’ is paid.

The way in which ‘small lump sums’ are taxed is explained further below.

Crystallised rights

A pension once in payment may normally only cease or be reduced in certain circumstances (for example, see PTM062340 (https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm062340)).

However, where the pension in payment is being commuted for a ‘small lump sum’ or ‘trivial commutation lump sum’, any normal anti-pension-reduction provisions in the tax rules (such as those at PTM062340 (https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm062340)) do not apply when that pension stops.

Any RBCE that applied to the earlier crystallisation of the pension being commuted will not be affected by the later payment of the commuted lump sum. The tax treatment of any previous pension commencement lump sums linked to the pension now being commuted to provide the lump sum will also not be disturbed by the later payment of that ‘small lump sum’ or ‘trivial commutation lump sum’.

Small lump sum payments made after transfer-out

Section 164(1)(f) Finance Act 2004

Regulations 6 and 7 The Registered Pension Schemes (Authorised Payments) Regulations 2009 - SI 2009/1171

The tax rules for registered pension schemes provide for recognised transfers to be classed as authorised member payments. Broadly speaking, a recognised transfer occurs whenever sums or assets (marking a member’s benefit rights) are moved from one registered pension scheme to another, or to a qualifying recognised overseas pension scheme. Pages PTM100010 (https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm100010) onwards, give more details about recognised transfers.

Transferring all of a member’s rights out of a given scheme will usually end that scheme’s involvement with the member. However, there are exceptions, for example, a payment is made into the originating pension scheme at a later date which relates to a member who previously transferred out. An example of this would be where dividends or other structured payments are received from an investment that had related to the transferring member. Late payments might also be received from an insurance company, say, in the case of unit-pricing problems relating to a policy investment under the scheme, or from a fund manager, or the receipt of a payment may have been overlooked.

A scheme might also find that it holds extra rights for the member without there actually being a payment-in, for example some rights that, for whatever reason, had not been correctly identified at the time of the transfer, perhaps where there had been a valuation error in a money purchase arrangement, which had caused an investment that provided part of the transfer value to be undervalued. A later correction in the valuation could result in there being further rights in the scheme relating to the member who had transferred out.

Many of the above kinds of situation, which cause there to be further member rights under an arrangement in the scheme, will be classed under the tax rules as a ‘relevant accretion’. Where a scheme holds such further small value rights, the scheme may pay a one-off small lump sum to the member (or in respect of the member, if the member has since died). Such a ‘small lump sum’ will be an authorised member payment providing the following conditions are met (subject to the proviso at the end). The conditions are:
- there has been a recognised transfer out of a registered pension scheme (the originating scheme) in respect of a member (the transferred member), and
- the recognised transfer was to another registered pension scheme or to a qualifying recognised overseas pension scheme, and
- after that transfer, there was a ‘relevant accretion’ in the scheme for the member (whether still living or dead), meaning:
- a payment is made into the originating scheme in respect of the member for whom the transfer-out was made (this will typically apply to money purchase benefit rights), and / or
- there is a further allocation of value to the 'member’s arrangement' above the value which the administrator had expected the sums and assets held for the purposes of that arrangement to be worth when the transfer-out was made - as might occur for example, with a corrective revaluation of sums and assets (again, this will typically apply to money purchase benefit rights), and / or
- the scheme administrator becomes aware for the first time, of the member’s entitlement to a further benefit, in circumstances where they could not reasonably have been expected to be aware of it at the time of the transfer out - for example following a court judgment relating to a defined benefits arrangement, or as might occur when implementing revised legal conclusions on the application of overriding sex equalisation legislation where the retrospective effect may lead to small additions to original benefit entitlements, and
- a payment is then made from the originating scheme to the transferred member (or in respect of the transferred member if that person has since died) (the payment out), and
- the payment extinguishes the transferred member’s entitlement to benefits under the originating scheme, and
- the payment is made between 1 December 2009 and the later of:
- 1 June 2010, and
- 6 months after the ’relevant accretion’ occurred, and
- the payment does not exceed (for payments made before 27 March 2014) £2,000, or (for payments made on or after 27 March 2014) £10,000, and
- the payment does not exceed the value of the ‘relevant accretion’, where the value is:
- the amount of the payment in, or
- the amount of the increase in the value of the of the sums and assets held for the purposes of the arrangement receiving the further allocation of value, or
- the value of the further benefit to which the administrator becomes aware the member is entitled,
as appropriate. However, a payment made in these circumstances will only be an authorised member payment if the ’relevant accretion’ was:
- not a contribution into the scheme and
- not a recognised transfer-in, nor any other transfer into the pension scheme of any sums or assets held for the purposes of, or representing accrued rights under, another pension scheme (including from a scheme that is not a registered pension scheme).
The way in which such a ‘small lump sum’ is taxed is explained later below.

The reference to extinguishing the member’s entitlement to benefits under the scheme is to all the rights that could reasonably have been known about at the time of the payment. The lump sum will not cease to be an authorised payment purely because further entitlement is later created that could not have been known about at the time of the initial payment, for example, through a pay revision.

Where specifically identifiable contingent beneficiary's benefits/rights exist, these must be extinguished along with the member's own entitlement to benefits.

Small lump sum payments made after the purchase of scheme pension or lifetime annuity

Section 164(1)(f) Finance Act 2004

Regulations 6 and 7 The Registered Pension Schemes (Authorised Payments) Regulations 2009 - SI 2009/1171

There are a number of ways in which a registered pension scheme could have secured a pension with an insurance company:
- purchasing a scheme pension payable by an insurer chosen by the scheme administrator (see PTM062310 (https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm062310))
- purchasing a lifetime annuity (see PTM062400 (https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm062400)) from an insurance company chosen by the member
- an insured annuity was purchased before 6 April 2006 and continues in payment now that the scheme is a registered pension scheme.
PTM062310 (https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm062310) provides more detail about how to secure a pension.

Securing all of a member’s rights in one of the ways bulleted above, will usually end that scheme’s day-to-day involvement with the member. However, there are exceptions, for example, a payment is made into the scheme at a later date which relates to a member whose benefit rights had previously been fully secured with an insurer. An example of this would be where dividends or other structured payments, are received from an investment that had related to the member. Late payments might also be received from an insurance company, say, in the case of unit-pricing problems relating to a policy investment under the scheme, or from a fund manager, or the receipt of a payment may have been overlooked.

A scheme might also find that it holds extra rights for the member without there actually being a payment-in, for example some rights that, for whatever reason, had not been correctly identified at the time the member’s rights were secured with the insurer, perhaps where there had been a valuation error in a money purchase arrangement, which had caused an investment that provided part of the value used to secure benefit rights with the insurer, to be undervalued. A later correction in the valuation could result in there being further rights in the scheme relating to the member whose benefits had previously been secured with the insurer. Another example might be where some remaining age-related contracting out rebates may be due to be paid into the scheme by HM Revenue and Customs, but it was considered expedient to purchase an annuity ahead of their receipt, perhaps because of favourable prevailing annuity rates.

Many of the above kinds of situation, which cause there to be further member rights under an arrangement in the scheme, will be classed under the tax rules as a ‘relevant accretion’. Where a scheme holds such further small value rights, the scheme may pay a one-off small lump sum to the member (or in respect of the member, if the member has since died). Such a ‘small lump sum’ will be an authorised member payment providing the following conditions are met (subject to the proviso at the end). The conditions are:
- a pension has been purchased for the member by the scheme, with an insurance company in one of the ways bulleted at the top of this page, and
- after that pension was purchased, there was a ‘relevant accretion’ in the scheme for the member (whether still living or dead), meaning:
- a payment is made into the scheme in respect of the member for whom the pension was purchased (this will typically apply to money purchase benefit rights), and / or
- there is a further allocation of value to the 'member’s arrangement' above the value which the administrator had expected the sums and assets held for the purposes of that arrangement to be worth when the pension was purchased - as might occur for example, with a corrective revaluation of sums and assets (again, this will typically apply to money purchase benefit rights), and / or
- the scheme administrator becomes aware for the first time, of the member’s entitlement to a further benefit, in circumstances where they could not reasonably have been expected to be aware of it at the time of the pension was purchased - for example following a court judgment relating to a defined benefits arrangement, or as might occur when implementing revised legal conclusions on the application of overriding sex equalisation legislation where the retrospective effect may lead to small additions to original benefit entitlements,
- and a payment is then made from the scheme to the member (or in respect of the member if that person has since died) (the payment out), and
- the payment extinguishes the member’s entitlement to benefits under the scheme, and
- the payment is made between 1 December 2009 and the later of:
- 1 June 2010, and
- 6 months after the ’relevant accretion’ occurred, and
- the payment does not exceed (for payments made before 27 March 2014) £2,000 or (for payments made on or after 27 March 2014) £10,000, and
- the payment does not exceed the value of the ‘relevant accretion’, where the value is:
- the amount of the payment in, or
- the amount of the increase in the value of the of the sums and assets held for the purposes of the arrangement receiving the further allocation of value, or
- the value of the further benefit to which the administrator becomes aware the member is entitled,
as appropriate.

However, the payment made in these circumstances will be an authorised member payment only on the proviso that the ‘relevant accretion’, was:
- not a contribution into the scheme and
- not a recognised transfer-in, nor any other transfer into the pension scheme of any sums or assets held for the purposes of, or representing accrued rights under, another pension scheme (including from a scheme that is not a registered pension scheme).
The way in which such a ‘small lump sum’ is taxed is explained later below.

The reference to extinguishing the member’s entitlement to benefits under the scheme is to all the rights that could reasonably have been known about at the time of the payment. The lump sum will not cease to be an authorised payment purely because further entitlement is later created that could not have been known about at the time of the initial payment, for example, through a pay revision.

Where specifically identifiable contingent beneficiary's benefits/rights exist, these must be extinguished along with the member's own entitlement to benefits.

Payments under the Financial Services Compensation Scheme

Section 164(1)(f) Finance Act 2004

Regulation 8 The Registered Pension Schemes (Authorised Payments) Regulations 2009 - SI 2009/1171

The Financial Services Compensation Scheme (FSCS) is the UK's statutory fund of last resort for customers of authorised financial services firms. This means that FSCS can pay compensation if a firm is unable, or likely to be unable, to pay claims against it. In general, this is when a firm has stopped trading and has insufficient assets to meet claims, or is in insolvency. The FSCS is an independent body, set up under the Financial Services and Markets Act 2000.

Where a small lump sum is paid by a registered pension scheme by way of compensation under the FSCS, to or in respect of a member, it will be an authorised member payment providing the following conditions are met:
- the payment is made on or after 1 December 2009, and
- the ‘small lump sum’ payment does not exceed £10,000 (£2000 for payments made before 27 March 2014), and
- the payment extinguishes the member’s entitlement to benefits under the registered pension scheme.
The way in which this lump sum is taxed is explained in later below.

The reference to extinguishing the member’s entitlement to benefits under the scheme is to all the rights that could reasonably have been known about at the time of the payment. The lump sum will not cease to be an authorised payment purely because further entitlement is later created that could not have been known about at the time of the initial payment, for example, through a pay revision.

Where specifically identifiable contingent beneficiary's benefits/rights exist, these must be extinguished along with the member's own entitlement to benefits.

Payment - Post-5 April 2006 Policies

Section 161(3) Finance Act 2004

The tax legislation takes a broad view of what can count as a ‘payment’ by a registered pension scheme and will include cases where the payment is made directly from an insurer or even directly from the FSCS. This is the case provided the ultimate payment to the member is made ‘in connection’ with the policy that was purchased by the registered pension scheme. The point to note is that the physical payment does not have to be made by the scheme itself (see PTM026000 (https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm026000)).

Payment - Pre-6 April 2006 Policies

Article 2 The Taxation of Pension Schemes (Transitional Provisions) Order 2006 - SI 2006/572

Where the policy was purchased before 6 April 2006, the question of whether the payment counts as one from a registered pension scheme will depend on the facts of the case in the light of Article 2 of The Taxation of Pension Schemes (Transitional Provisions) Order 2006.

In practice it is unlikely that compensation payments in respect of many pre-6 April 2006 policies would count as a payment from a registered pension scheme:
- if a compensation payment does not count as a payment from a registered pension scheme, then there can be no question of the payment being unauthorised
- if a compensation payment does count as a payment from a registered pension scheme, then providing the above conditions for a ‘small lump sum’ are met, the payment will qualify as an authorised member payment.
Payments under occupational or public service pension schemes

Section 164(1)(f) Finance Act 2004

Regulation 10 and 11 The Registered Pension Schemes (Authorised Payments) Regulations 2009 - SI 2009/1171

For payments made before 6 April 2015, this guidance applies, but reading the minimum age at which the lump sum can be paid as 60 not 55 (the normal minimum pension age will increase to age 57 from 6 April 2028).

If a member has a small amount of benefit rights in a registered pension scheme, and that scheme is either:
- a public service pension scheme
- an occupational pension scheme
it is possible for those benefit rights to be paid as an authorised member payment in the form of a one-off lump sum to the member without the need for that lump sum to satisfy the tougher test for a trivial commutation lump sum. (The requirements for a trivial commutation lump sum are set out in PTM063500 (https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm063500).) The conditions that need to be met instead, for such a small lump sum to be an authorised member payment under regulation 11 are that:
- the payment is made on or after 1 December 2009, and
- the payment is made to a member who has reached the age of 55 (age 57 from 6 April 2028) or is entitled to take their benefits before age 55 (age 57 from 6 April 2028) because they either meet the ill-health condition (see PTM062100 (https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm062100)) or have a protected pension age (see PTM062210 (https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm062210)), and
- the member is at ‘arm’s length’ from any sponsoring employer of:
- the scheme paying the small lump sum, and
- any other scheme that is both an occupational pension scheme and a registered pension scheme, which relates to the same employment as the paying scheme relates to (any ‘related scheme’), and
- the ‘small lump sum’ payment does not exceed £10,000 (£2000 for payments made before 27 March 2014), and
- the member’s benefit rights under the scheme paying the small lump sum and any related scheme, have a combined commutation value that does not exceed £10,000 (£2000 for payments made before 27 March 2014) (in this context, ‘combined commutation value’ means so much as would have to be paid by the scheme in order to extinguish the member’s entitlement to benefit under the scheme), and
- the payment extinguishes the member’s entitlement to benefits under the paying scheme (where the member also has rights in a related scheme, those other rights do not have to be paid as a one-off lump sum as well) except that from 6 April 2015 an annuity already in payment by the scheme may continue in payment provided the member has not already received a payment by that scheme under any of regulations 11, 11A and 12, and
- in the 3 years before the day the small lump sum is to be paid out, there have been no recognised transfers-out relating to the member, from either:
- the scheme paying the small lump sum, nor from
- any ‘related scheme’ (which in this case includes both occupational pension schemes and public service pension schemes - so long as they are registered pension schemes relating to the same employment as the paying scheme).
A member is said to be at ‘arm’s length’ from a sponsoring employer as described at PTM063270 (https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm063270).

How a person is ‘connected’ with another person is set out in section 993 of the Income Tax Act 2007. See PTM027000 (https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm027000).

The way in which such a ‘small lump sum’ is taxed is explained later below.

The reference to extinguishing the member’s entitlement to benefits under the scheme is to all the rights that could reasonably have been known about at the time of the payment. The lump sum will not cease to be an authorised payment purely because further entitlement is later created that could not have been known about at the time of the initial payment, for example, through a pay revision.

Where specifically identifiable contingent beneficiary's benefits/rights exist, these must be extinguished along with the member's own entitlement to benefits.

Payments under larger occupational or public service pension schemes

Section 164(1)(f) Finance Act 2004

Regulation 12 The Registered Pension Schemes (Authorised Payments) Regulations 2009 - SI 2009/1171

For payments made before 6 April 2015, this guidance applies, but reading the minimum age at which the lump sum can be paid as 60 not 55 (the normal minimum pension age will increase to age 57 from 6 April 2028).

If a member has a small amount of benefit rights in a registered pension scheme, and that scheme is either:
- a public service pension scheme
- an occupational pension scheme
it is possible for those benefit rights to be paid as an authorised member payment in the form of a one-off lump sum to the member without the need for that lump sum to satisfy the test for a trivial commutation lump sum. (The requirements for a trivial commutation lump sum are set out in PTM063500 (https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm063500)). The conditions that need to be met instead, for such a small lump sum to be an authorised member payment under regulation 12 are that
- the paying scheme has 50 or more members, and
- the payment is made on or after 1 December 2009, and
- the payment is made to a member who has reached the age of 55 (age 57 from 6 April 2028) or is entitled to take their benefits before age 55 (age 57 from 6 April 2028) because they either meet the ill-health condition (see PTM062100 (https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm062100)) or have a protected pension age (see PTM062210 (https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm062210)), and
- the member is at ‘arm’s length’ from any sponsoring employer of:
- the scheme paying the small lump sum, and
- any other scheme that is both an occupational pension scheme and a registered pension scheme, which relates to the same employment as the paying scheme relates to (any ‘related scheme’), and
- the ‘small lump sum’ payment does not exceed (for payments made before 27 March 2014) £2,000 or (for payments made on or after 27 March 2014) £10,000, and
- the payment extinguishes the member’s entitlement to benefits under the paying scheme (where the member also has rights in a related scheme, those other rights do not have to be paid as a one-off lump sum as well) except that from 6 April 2015 an annuity already in payment by the scheme may continue in payment provided the member has not already received a payment by that scheme under any of regulations 11, 11A and 12, and
- no transfer of sums or assets from a registered pension scheme, or any other pension scheme, was made into the paying scheme in respect of the member in the 5 years before the day the small lump sum is paid, unless the transfer in was an ‘acceptable transfer’, and
- in the 3 years before the day the small lump sum is to be paid out, there have been no recognised transfers-out relating to the member from the scheme paying the small lump sum, and
- the scheme can satisfy at least one of the following conditions:
- the scheme was in existence on 1 July 2008, or
- where the payment is in respect of a defined benefits arrangement, the scheme holds more than half of the value of all its sums and assets for the purposes of the defined benefit arrangements (that is, it is majority funded for defined benefit provision), or
- there are at least 20 members of the scheme, whose arrangements have an individual value greater than (for payments made before 27 March 2014) £2,000 or (for payments made on or after 27 March 2014) £10,000.
A member is said to be at ‘arm’s length’ from a sponsoring employer as described at PTM063270 (https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm063270).

How a person is ‘connected’ with another person is set out in section 993 of the Income Tax Act 2007. See PTM027000 (https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm027000).

An ‘acceptable transfer’ is a transfer where all or part of the sums, assets and / or pension rights under a defined benefits arrangement or cash balance arrangement are transferred to form all or part of the assets of a defined benefits or cash balance arrangement under the paying scheme in respect of the member, in circumstances where:
- the transfer is made in connection with the winding up of the original pension scheme containing the cash balance or defined benefits arrangement, and the receiving cash balance or defined benefits arrangement relates to the same employment as the transferring arrangement that is being wound up, or
- where the transfer is made in connection with a relevant business transfer, or
- where the transfer is made as part of a retirement-benefit activities compliance exercise.
The 3 scenarios described above are explained more fully at PTM092420 (https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm092420).

The way in which a ‘small lump sum’ is taxed is explained later below.

The reference to extinguishing the member’s entitlement to benefits under the scheme is to all the rights that could reasonably have been known about at the time of the payment. The lump sum will not cease to be an authorised payment purely because further entitlement is later created that could not have been known about at the time of the initial payment, for example, through a pay revision.

Where specifically identifiable contingent beneficiary's benefits/rights exist, these must be extinguished along with the member's own entitlement to benefits.

Payments under a scheme that is not an occupational or public service pension scheme

Section 164(1)(f) Finance Act 2004

Regulation 10 and 11A The Registered Pension Schemes (Authorised Payments) Regulations 2009 - SI 2009/1171

For payments made before 6 April 2015, this guidance applies, but reading the minimum age at which the lump sum can be paid as 60 not 55 (the normal minimum pension age will increase to age 57 from 6 April 2028).

If a member has a small amount of benefit rights (whether the rights are uncrystallised or comprise a pension in payment) in a registered pension scheme, and that scheme is not a public service pension scheme or an occupational pension scheme, it is possible for those benefit rights to be paid as an authorised member payment in the form of a one-off lump sum to the member without the need for that lump sum to satisfy the test for a trivial commutation lump sum. (The requirements for a trivial commutation lump sum are set out in PTM063500 (https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm063500)). The conditions that need to be met instead, for such a small lump sum to be an authorised member payment under regulation 11A, are that:
- the payment is made on or after 6 April 2012, and
- the payment is made to a member who has reached the age of 55 (age 57 from 6 April 2028) or is entitled to take their benefits before age 55 (age 57 from 6 April 2028) because they either meet the ill-health condition (see PTM062100 (https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm062100)) or have a protected pension age (see PTM062210 (https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm062210)), and
- the ‘small lump sum’ payment does not exceed (for a payment made before 27 March 2014) £2,000 or (for a payment made on or after 27 March 2014) £10,000, and
- the payment extinguishes the member’s entitlement to benefits under the arrangement , and except that from 6 April 2015 an annuity already in payment by the scheme may continue in payment provided the member has not already received a payment by that scheme under any of regulations 11, 11A and 12
- for a payment made before 27 March 2014, the member has not previously received more than one payment under regulation 11A, or for a payment made on or after 27 March 2014, the member has not previously received more than 2 payments under regulation 11A.
The monetary limit applies to the actual lump sum paid. There will invariably be a time gap between the member requesting/being offered a small lump payment and the lump sum being paid. Any investment growth, contributions paid or additional benefit accrual etc. in the intervening period will count towards the limit. So, no payment can be made under regulation 11A where, for example, a lump sum of £9,990 is offered on 6 June 2014 but subsequent investment growth results in the fund increasing to £10,010 by 6 July 2014.

The last condition means that an individual can be given more than one small lump sum each not exceeding the limit that applied at the time the lump sum was paid, if all the other conditions are met. It should be noted that regulation 11A applies at arrangement level rather than at scheme level. So, the payments can be made from two/three separate registered pension schemes or from the same scheme where the payments are made from two/three different arrangements under that scheme.

As one of the conditions is that the payment extinguishes the member’s entitlement to benefits under the arrangement from which the payment is made but not necessarily their entitlement under the scheme as a whole, a member can take a small lump sum under regulation 11A even though they may still have an entitlement to benefits under another arrangement under that scheme.

A member may have a large number of arrangements (say 100 or 1000) under the same registered pension scheme where each arrangement contains well under the commutation limit under this regulation. In such cases, subject to what the scheme rules allow, these funds may be consolidated either by merging arrangements into a smaller number of arrangements or by a transfer of funds between multiple arrangements to allow the maximum small pot to be taken from either one or each of two/three arrangements under the scheme. A ‘reshaping’ of existing arrangements in this way either by way of merging multiple arrangements or internal 'transfers' of funds between multiple arrangements in the same scheme will not involve the setting up of a new arrangement with potential consequences for members who have valid enhanced protection, fixed protection or fixed protection 2014 (see PTM091000 (https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm091000)).

However, where a member has funds in excess of the limit in an existing single arrangement some of which are then moved into arrangements set up for the purpose of allowing a member to take one or two/three small lump sum payments under regulation 11A, this will involve the setting up of one or more new arrangements with potential consequences for members who have valid enhanced protection, fixed protection, fixed protection 2014 or fixed protection 2016.

Lump sum payments can be made under regulation 11A regardless of the individual’s total pension savings in registered pension schemes and can be made in addition to any trivial commutation lump sum payment the individual may receive. (The requirements for a trivial commutation lump sum are set out in PTM063500 (https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm063500) onwards.)

An individual may in addition have small pension pots in one or more schemes which qualify as an occupational pension scheme or a public service pension scheme. Where this is the case, they may also be able to commute those small pension pots under regulation 11 or regulation 12. The circumstances under which such one-off payments can qualify as authorised member payments are set out earlier above.

The way in which a ‘small lump sum’ is taxed is explained below.

The reference to extinguishing the member’s entitlement to benefits under the arrangement is to all the rights that could reasonably have been known about at the time of the payment. The lump sum will not cease to be an authorised payment purely because further entitlement is later created that could not have been known about at the time of the initial payment, for example, through a pay revision.

Where specifically identifiable contingent beneficiary's benefits/rights exist, these must be extinguished along with the member's own entitlement to benefits.

Taxation

Section 164(1)(f) Finance Act 2004

Regulation 3 The Registered Pension Schemes (Authorised Payments) Regulations 2009 - SI 2009/1171

Regulations authorise certain small lump sums to be paid from a registered pension scheme without having to follow the more demanding conditions for what is formally termed a trivial commutation lump sum.

Such one-off small lump sum payments are allowed as authorised member payments in relation to individual registered pension schemes, or related occupational pension schemes. The circumstances under which such one-off payments can qualify as authorised member payments are set out earlier on this page.

Where a member receives one of these small lump sum payments, the payment itself is not classed as a trivial commutation lump sum. However, the payment does get taxed in the same way as a trivial commutation lump sum would be.

This means that where the payment represents uncrystallised benefit rights, 25% of the payment is free of Income Tax, and the balance of the payment is chargeable to Income Tax as pension income. Alternatively, if the payment represents crystallised rights, all of the payment is chargeable to Income Tax as pension income. Where the payment represents a mixture of both uncrystallised and crystallised benefit rights only 25% of the part of the payment relating to the uncrystallised rights can be paid free of Income Tax.

When the one-off payment is made to someone other than the member, such as when the payment is made after the death of the member, the payment itself is not classed as either a trivial commutation lump sum, nor is it classed as a trivial commutation lump sum death benefit. However, the payment does get taxed in the same way as a trivial commutation lump sum death benefit would be. Basically, this means that in such circumstances, all of the payment is chargeable to Income Tax as pension income.

In all cases, the payer of the one-off lump sum must operate PAYE to account for the tax due on as much of the payment as is subject to Income Tax - as explained above. The operation of PAYE is outside the scope of this manual - see section 2.2.5 of the GOV.UK guidance CWG2 - Employer’s further guide to PAYE and NICs. Find links to this and other guidance under heading ‘Operating PAYE on the lump sum payment’ at PTM061200 (https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm061200).

The small lump sum payments described on this page are not RBCEs, so they do not use up any of the lump sum allowance or lump sum and death benefit allowance.

More information about the taxation of trivial commutation lump sums and trivial commutation lump sum death benefits generally can be found in PTM063500 (https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm063500) and PTM073700 (https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm073700) respectively.