This is how part of your pension can be converted to a lump sum.
The standard package of retirement benefits under the Local Government Pension Scheme (LGPS) Back to top
This is as follows:
For membership up to 31 March 2008
- a retirement pension of 1/80th of final pay for each year of membership – this is an annual amount which is paid in 12 instalments over each year
- a lump sum retirement grant - this is a single lump sum payment made shortly after retirement and is usually an amount equal to 3 times the annual pension
- death benefit cover for a surviving spouse or civil partner (or for a nominated cohabiting partner if you have been a LGPS member on or after 1 April 2008 and have made a valid nomination). There is also cover for any eligible children and possibly a death grant, depending upon how long the pension has been in payment
For membership between 1 April 2008 and 31 March 2014
- a retirement pension of 1/60th of final pay for each year of membership – this is an annual amount which is paid in 12 instalments over each year
- death benefit cover for a surviving spouse or civil partner, or for a nominated cohabiting partner. There is also cover for any eligible children and possibly a death grant, depending upon how long the pension has been in payment
For membership after 1 April 2014
- a retirement pension of 1/49th of pay for each year of membership (or 1/98th if you have been a member of the 50/50 Section) – this is an annual amount which is paid in 12 instalments over each year
- death benefit cover for a surviving spouse or civil partner, or for a (nominated) cohabiting partner. There is also cover for any eligible children and possibly a death grant, depending upon how long the pension has been in payment
Varying the standard package Back to top
However, on retirement, you can vary this standard package. You have the option to give up part of your retirement pension in order to provide a lump sum retirement grant (or larger lump sum retirement grant if you have membership before 1 April 2008). This is called 'commutation'.
Each £1 of your annual pension that you give up would provide you with £12 lump sum.
The benefit figures issued to you with this retirement pack will show both the standard package of benefits and the benefits that would be payable if you elect to give up the amount of pension needed to achieve the maximum lump sum retirement grant allowable.
HM Revenue and Customs (HMRC) set a limit on the amount of retirement grant you can be paid; it must not exceed 25% of the capital value of your pension rights as assessed in line with guidance issued by the government actuary. Within this limit, it is normally tax-free. However, HMRC also impose limits on the amount of retirement benefits which may be accrued each year and over a lifetime. If these limits are exceeded, tax may be due.
It may be that you would like an apportionment of pension and lump sum which differs from the figures you have been quoted. You may have a particular amount of lump sum or pension in mind (but remember the tax limit mentioned above). If so:
- to provide a particular amount of lump sum you would need to work out the difference between that figure and the standard lump sum, then divide that difference by 12 to find out how much pension you would need to give up
- to reduce your pension to a certain amount, multiply by 12 the difference between that and the standard amount to find out how much extra lump sum you would get
Mr A receives the following illustration of the benefits payable to him on retirement:
Benefits after maximum commutation
This shows that if he gives up £1,720 of his standard pension (£8,760 - £7,040) he can get the maximum lump sum retirement grant allowable as part of his benefit package.
He decides he would like a lump sum retirement grant of £36,000.
This is £9,720 more than the standard lump sum. On the basis that he gets £12 extra lump sum for every £1 of pension he gives up: £9,720 ÷ 12 = £810
If he reduces his standard pension by £810 he will receive:
- Pension: £7,950 a year (£8,760 - £810)
- Lump sum: £36,000 (£26,280 + (£810 x 12))
He decides he would like to take a pension of £8,000 and to convert the difference between that and the standard pension to an additional lump sum retirement grant.
He would be giving up £760 of his pension. If he proceeds with this, he will receive:
- Pension: £8,000 a year (£8,760 - £760)
- Lump sum: £35,400 (£26,280 + (£760 x 12))
Points to consider before making your decision Back to top
- If you do choose to commute part of your retirement pension in order to provide a bigger lump sum it will not affect the death benefit cover for a surviving spouse, civil partner or nominated cohabiting partner.
- Your lump sum retirement grant is normally paid tax free, whereas your pension is treated as taxable income.
- Your pension is inflation proofed in line with Pensions Increase Acts and Orders to help maintain its value.
- If you have been paying additional voluntary contributions (AVCs) into an arrangement set up by the Staffordshire Pension Fund - e.g. with Scottish Widows, Standard Life, or Utmost (previously known as Equitable Life). Please read the notes accompanying your benefit illustration before making a decision regarding commutation of your LGPS pension.
Your decision should be notified to Pension Services by completing the section of the single page retirement form entitled "choice of pension" or, if you have received multiple separate pages of retirement forms, the enclosed form "commutation of part of pension to provide (additional) lump sum".
Please note: for tax reasons, an election to commute cannot be accepted after receipt of either of the 'lifetime allowance: declaration of benefits from all sources' forms A or B. Consequently if you wish to receive further illustrations of yourcommutation options, please get in touch with us right away so that you have all the information you need before completing any of the forms.
If you need any further information about the areas covered by these notes, please contact us.
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