There are circumstances where people have relatively small pension plans when they get to retirement that will only pay them a pittance each year. To avoid that, the Revenue allow what is called a “trivial pension” ie the pension is so small, they let you cash the whole lot in. There are two circumstances where this is allowed and people often get the rule that apply in each case mixed up, so I am going to clarify them for you.
If the pension benefits that you are entitled to from your employer scheme is worth €330 per annum or less, then you can take a trivial pension. This is before the tax free lump sum is deducted.
For defined contribution schemes, the annuity rate used must be for a single life pension with no escalation to determine whether the fund will pay an annuity of €330 or not.
Where the pension is question is from an old employer scheme that you are no longer in, you have to wait until the scheme retirement age before taking the trivial pension. You can’t avail of this option if you are taking the benefits early.
The scheme rules will determine how much you can take as a tax free lump sum. The remainder of the pension fund is taxed at 10%.
If after taking the maximum tax free lump sum, the balance of your pension fund is less than €30,000, you can take this remainder as a once off payment. All of your pension benefits must be taken into consideration in this situation, so if you have two small pensions totalling more than €30,000 together, you cannot avail of this option.
If you do qualify for a trivial pension under this option, the once off payment is taxed under PAYE, so you may be liable to tax under the higher rate, dependent on your total income in the year in question.
If you have any questions, you can email me directly at steven@bluewaterfp.ie
Updated on 01 April 2019 as Trivial Pension amount was increased from €20,000 to €30,000