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EXCHANGING PENSION FOR ADDITIONAL LUMP SUM
An option to take an additional amount of lump sum to the automatic amount already payable, has to be made in writing before your benefits are paid. So that you have plenty of time to make up your mind and seek financial advice if you wish, it is important you contact your employer well in advance of your intended retirement date so you can be provided with an estimate of these amounts.
Estimates are an important tool in planning for your retirement. They can be used to decide whether to retire or not, to make financial arrangements for retirement and make informed decisions when given important options.
When converting annual pension to lump sum there are three key elements that have to be considered:
- the capital value of your LGPS benefits
- the maximum lump sum you can take
- the ratio of annual pension given up for lump sum received
The Capital Value of your LGPS Benefits
You can take a tax-free lump sum by giving up some of your annual pension. You can take up to 25% of the capital value of your LGPS benefits as a lump sum. This is how you can calculate your capital value:
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Annual Pension x 120/7 |
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+ Automatic Lump Sum x 10/7 |
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= Total Capital Value |
This is how you calculate the maximum tax-free lump sum you can take:
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Total Capital /4 |
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= Total Maximum Lump Sum - Initial Lump Sum |
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= Maximum Additional Lump Sum |
The ratio of annual pension given up for lump sum received:
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£1 of Annual Pension gives you £12 of Lump Sum
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 Example: Peter
Retiring at 65
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Peter retires on his 65th birthday with an Annual Pension of £7,000 and automatic Lump Sum of £9,000. He wants to exchange the maximum amount of his Pension to give him the maximum Lump Sum possible:
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£7,000 x 120/7 |
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+ £9,000 x 10/7 |
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= £132,857.14 Total Capital Value |
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£132,857.14/4 |
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= £33,214.29 - £9,000 |
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= £24,214.29 Maximum Additional Lump Sum |
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£24,214.29/12 |
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= £2,017.86 Annual Pension Given Up |
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Peter's Benefits are now: |
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Annual Pension = £4,982.14 |
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Lump Sum = £33,214.29 |
| Please Note | |
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The initial pension figures used in the above example are for illustration purposes only. To use this formula to determine your own potential benefits, you should use your own expected pension figures.
The above method is intended only as a guide and your final benefits may vary from the amounts derived from this formula.
The above example illustrates the maximum possible conversion of pension into lump sum. You may, however, only wish to give up a smaller amount of pension, in which case you should indicate the amount to be given up in section 3 of the LGP1B form.
Please note, the Fund is obliged to pay a Guaranteed Minimum Pension and in some cases this may restrict the amount of pension that can be given up.
Any reduction to your own pension in order to give yourself a tax-free lump sum will NOT reduce any subsequent dependant's pension which may become payable upon your death.
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