Before 6 April 2006, any pension valued at £260 pa or less could be commuted for triviality, scheme rules permitting and subject to certain conditions. The Finance Act 2004 increased this threshold initially to £750 (expressed as 1% of the Standard Lifetime Allowance with pensions capitalised at 20:1). The limit is now £900, or a fund value of £18,000. From 6 April 2012 it will be frozen at this level.

There is a catch, though: all the member's pension rights under all registered pension schemes must be valued and taken into account. So under the 1% of LTA rule a pension which is in itself trivial - and may even have been trivial under the pre-A Day rules - isn't commutable if the member has another pension elsewhere which takes the total benefits above the threshold. Simply obtaining the necessary information from the member can be difficult.

Scheme-specific alternative

For occupational schemes wishing to reduce administration costs, an alternative solution was made available from 1 December 2009 under the Authorised Payments Regs (SI 2009/1171). A scheme can pay a trivial commutation lump sum (TCLS) of up to £2,000 - subject to complicated conditions being met.

Not for PPs

Personal pensions were deliberately excluded from the Regs, because the Treasury perceived an unacceptable risk of abuse by individuals setting up lots of PPs with different providers. Many conditions have to be met, however (for a start, invariably for trivial commutation the member must have attained age 60).

In its response to the recent consultation on "Early Access", the Government recognised that there is widespread support for aligning the trivial commutation rules for occupational and personal pensions, and pledged to explore solutions. One might be to limit the number of single pot commutations allowed for individuals in their lifetime.

Raise the limit

The industry has also been pressing for the £2,000 scheme-specific threshold to be raised to £5,000, to reflect the level at which annuity provision becomes practical. The Government knows that the open market option (OMO) is generally accessible above this threshold. Although all money purchase schemes are required to give members the right to choose an annuity provider, many do not exercise the OMO because their fund is too small.

For comparison, if the pre-A-Day scheme-specific limit of £260 was revalued from the date it came into force (20 July 1992) in line with RPI and capitalised on the 20:1 basis, today's equivalent would be £8,665. This is very nearly 0.5% of the current LTA, which some think should be the limit rather than a fixed amount.

Make transferring easier

It would be helpful if it were made easier to aggregate small funds. The difficulty of vesting small pots is exacerbated by the present barriers to transfers. The prohibitive cost of advice is a factor, especially where transfer from a defined benefit scheme is involved.

With the rise of DC and in particular GPP arrangements, many individuals changing jobs are accumulating more and more small pots with different providers. There is no provision in the law for a refund of contributions from contract-based schemes, however small their fund. Providers who are keen to retain funds under management may not be supportive of any initiative to make it easier to combine small funds, however.

Refunds under threat

Occupational pension scheme rules can provide a refund if the member leaves with less than two years pensionable service. The Government has recently consulted on possibly banning refunds altogether, or restricting availability to members who leave within a year.

This would further increase the number of small funds and make the problem a great deal worse, unless the trivial commutation rules were relaxed and at the same time transfers made easier. One suggestion is that the rules of NEST be changed so it can accept transfers, although whether it would want to do this is another question. Personal pension providers lobbied hard to secure this ban.

Taxation of TCLSs