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Triviality, Fund Remnant and Salary Sacrifice Conditions

Isle of Man Pension Triviality Conditions

Age of the member

A trivial commutation lump sum can only be paid when the member has reached age 55, but has not reached age 75. Trivial commutation lump sums cannot be paid before age 55, even if the scheme could pay a pension earlier.

Commutation limit

Pension funds that are below the commutation limit can be paid as a trivial commutation lump sum. The commutation limit with effect from 6 April 2018 is £100,000. The valuation of the pension fund is the full amount of fund available to pay all pension benefits (including tax-free lump sums) to the member. A defined benefit scheme may be considered to be a trivial pension if the amount of the annual pension multiplied by 20 is less than the commutation limit.

Multiple schemes

Regulations allow pension schemes to be looked at individually. Therefore, the triviality option can be exercised in respect of one or more schemes provided the total value of the funds being commuted is less than the limit and within a 12 month period. The commutation limit will reduce with each successive commutation, and it is possible a small pension will not qualify because the commutation limit remaining after earlier commutations is too low. Commutation of a pension which is not within the commutation limit would constitute an unauthorised payment and will be subject to income tax at the higher rate.

Commutation period

A client who is a member of more than one scheme, triviality may be exercised in respect of one or more of those schemes; but it can only be exercised during the commutation period. The commutation period starts on the date on which the first trivial commutation lump sum is paid and ends 12 months later. All triviality claims must be made within the 12 month commutation period. This is a one-off opportunity; therefore, if multiple triviality claims are likely, the member should consider all claims at the time the first claim is made. All trivial commutation lump sums must be paid before the member reaches 75. Commuting a trivial pension after the commutation period will constitute an unauthorised payment.

Income Tax

Up to 30% of the trivial fund can be paid free of income tax; the remaining part of the trivial commutation lump sum is liable to tax through the ITIP system. When triviality or fund remnant benefit payments are made the appropriate issued tax code should be used. If the administrator does not have a tax code linked to the triviality or fund remnant benefit being paid, then the SB code should be used for residents and the HR code used for non-residents. Any tax free allowance and 10% bands (if applicable) should be restricted to the weekly free pay and allowance tables before tax is deducted.

Isle of Man Pension Fund Remnant Conditions

Age of the member

Fund remnant payments cannot be paid before the member reaches age 55.

Commutation limit

The commutation limit with effect from 6 April 2018 is £100,000. However, the valuation of the pension fund is the full amount of fund available to pay all pension benefits (including tax-free lump sums, if applicable) to the member

Income Tax

Up to 30% of the fund can be paid free of income tax if no tax free lump sum has previously been taken then a pension scheme valued at £142,857 can utilise the fund remnant rules. i.e. £142,857 less 30% Pension Commencement Lump Sum (which is tax free) = £100,000. The remaining part of the fund remnant is then liable to tax through the ITIP system. When fund remnant benefit payments are made the appropriate issued tax code should be used. If the administrator does not have a tax code linked to the fund remnant benefit being paid, then the SB code should be used for residents and the HR code used for non-residents. Any tax free allowance and 10% bands (if applicable) should be restricted to the weekly free pay and allowance tables before tax is deducted.   

Fund remnant is available for separate schemes however if a large scheme fragments in order to pay multiple fund remnant payments this would be treated as an unauthorised payment and subject to penalties. 

Salary sacrifice pension arrangements-Isle of Man occupational pension schemes

Under a salary sacrifice pension arrangement, an employee voluntarily gives up the right to receive part of their salary or wages by altering the terms of their contract of employment.

The sacrifice is made in return for the employer agreeing to provide a pension contribution into the employees’ pension fund.

An element of the employee’s sacrificed remuneration redirected into their pension scheme is a forgoing of their salary and is not a personal pension contribution on which they can claim personal tax relief.

The forgone salary is paid into the employees’ pension scheme by the employer and as such becomes an employer’s contribution.

The National Insurance contributions paid by both the employee and employer will be reduced to reflect the reduction in salary or wages, as will the tax paid by the employee.

Approval required before commencing salary sacrifice pension arrangement

A new contract of employment must be set up for the salary sacrifice claim to be valid.

Should the employer wish to cancel the arrangement, the Division should be contacted in order to clarify the income tax position.

Any arrangement that is entered into without approval will be considered to be void and the arrangement will be unpicked back to the position prior to the salary sacrifice.

Conditions

To enter into such an arrangement the following conditions must be met:

  • The pension scheme should be able to accept employer pension contributions
  • The contract of employment between the employee and the employer must be changed well in advance of the date on which the first payment is due to be made to the employee, in order to demonstrate that the employee has agreed to give up the right to receive the original higher amount of salary
  • The revised contract of employment must show that the wage or salary has genuinely and permanently been reduced in exchange for the provision of a pension contribution by the employer
  • The amended contract of employment cannot let the employee opt in or out of the arrangement. The employment contract must be changed for a minimum of one year and the salary sacrifice claim must be agreed and signed off by the employers section of the assessor’s office in order to make that claim valid

Approval should be sort from the Income Tax Division prior to entering into such an arrangement.

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