When someone reaches retirement, they can take up to 25% of their pension as a tax-free lump sum (called the ’pension commencement lump sum’). The remaining 75% has usually been used to purchase an annuity, a financial product that provides them with a guaranteed income for life, or been left invested, allowing them to take a portion of their pension pot each year to provide an income – known as ’income drawdown’.

However, if their pension pot is quite small, they might feel that they would prefer to take all of it as a lump sum – this is what trivial commutation means. The entire pension pot can only be taken as a lump sum if it is below £30,000. Up to three pension pots can also be taken that are no bigger than £10,000 each as lump sums.

When someone takes or trivially commutes their pension pot, the first 25% will be tax-free; however, they will have to pay Income Tax on the remaining 75%.