If you were a member of the LGPS prior to 01/04/2008, you will receive an automatic tax-free lump sum upon your retirement. You will also have the option to commute a part of your pension to generate an extra lump sum payment.
If you became a member of the LGPS on, or after 01/04/2008, you will not be entitled to an automatic tax-free lump sum, but you will have the option to commute a part of your pension to generate a lump sum.
The maximum amount of pension the can be commuted is 25% of the capital value of your pension benefits.
Every £1 of pension that is given up will generate £12 of lump sum payment.
Calculating the capital value
The following formula should be used to calculate the maximum amount of lump sum that can be received:
Capital value = [ (120 x Pension) + ( 10 x Lump sum (if any) + ( 10 x AVC Fund (if any) ] ÷ 7
Total maximum lump sum = Capital value x 25%
If you decide to commute a part of your pension to lump sum, this will not reduce any subsequent survivor’s benefits payable in the even of your death.
Example
Samantha retires on her 65th birthday, with 30 years membership up to 31/03/2008, and 8 years membership from 01/04/2008. Her final pay is £17,000.
Her retirement benefits are:
Pension:
For membership up to 31/03/2008 = 1/80 x £17,000 x 30 = £6375.00
For membership from 01/04/2008 = 1/60 x £17,000 x 8 = £2266.67
Total Pension payable = £8641.67
Automatic lump sum:
For membership up to 31/03/2008 only: 3/80 x £17,000 x 30 = £19,125.00
Converting pension into Lump sum:
Samantha elects to commute the maximum amount of pension to increase her lump sum.
Capital value = [ (120 x £8,641.67) + ( 10 x £19,125.00) = £1,228,250.40 ] ÷ 7 = £175,464.34
Maximum lump sum = £175,464.34 x 25% = £43,866.09
To calculate the amount of pension commuted, the original lump sum should be deducted from the maximum lump sum, then divided by 12:
£43,866.09 - £19,125.00 = £24, 741.09 / 12 = £2,061.76 of pension converted to generate the maximum lump sum.
Following this calculation, Samantha’s revised benefits would be:
Pension: £8,641.67 - £2,061.76 = £6,579.91
Lump sum: £43,866.09