A little confused (Nuvos)

tgon

I am a deferred member of the Nuvos pension scheme. I’m trying to understand about commuting a lump sum and tax as per the Nuvos guide book. It states:

“At the time you draw your pension you can choose to give up part of your pension for a tax-free lump sum. This is called “commuting” pension for lump sum and is subject to limits set by HMRC. Currently the limit is 25% of the total notional value of your pension benefits and the formula for working out the maximum amount of tax-free cash in nuvos is pension x 30/7. Your pension will be reduced by £1 a year for every £12 you take as a lump sum.”

On the next page it provides an example:

“Jane retires with a pension of £10,000 a year. She decides to take a lump sum of £36,000. So her pension will be reduced by £3,000 a year (£36,000/12), giving her a pension of £7,000 a year.”

1. Do I take it that Jane’s notional value is £10k pa?
2. Is the £36k tax free or just £9k (25%) and Jane will be taxed on the remaining £27k as earnings in that tax year?

I don’t understand the example based on the previous paragraph. Thanks in advance.

p00hsticks

If you look at the same area of the corresponding online guide
(https://www.civilservicepensionscheme.org.uk/members/nuvos-scheme-guide/)

it says;

You can find a calculator here:
https://www.civilservicepensionscheme.org.uk/members/member-calculators/
This shows the maximum lump sum for a given amount of pension and the effect that taking a lump sum would have on your remaining pension.

You need to use the online calculators to work out what your notional value (and therefore maximum available lump sum) is.

The maximum lump sum you can take is 25% of the notional value. The entire lump sum is tax free.

tgon

Thanks but I still don't understand the term "notional value" as the calculators do not show it, just annual entitlement, lump sum and reduced yearly pension. I have also used https://retirementmodeller.civilservicepensionscheme.org.uk/modeller/intro which isn't as accurate(?) due to the use of a sliding percentage scale.

Sorry if I'm being dim, its just that I find some terms expressed in different ways that could actually mean the same thing.

Brynsam

For 'notional value' read 'overall capital value' - does that help?

tgon

Ah, thank you - it has helped. I used that term to find a guide of lifetime allowances which states:

For defined benefit pension schemes, you calculate the total value by multiplying your expected annual pension by 20. In addition, you need to add to this the amount of any tax-free cash lump sum if it is additional to the pension. In many schemes, you would only get a lump sum by giving up some pension, in which case the value of the full pension captures the full value of your payouts.

So, the simple example in my original post means that Jane's overall value (AKA notional value) is £10k x 20 = £200k of which 25% is £50k and she has chosen to take £36k of it tax free. Do I understand the term correctly now?

MK62

tgon wrote: »

Ah, thank you - it has helped. I used that term to find a guide of lifetime allowances which states:

For defined benefit pension schemes, you calculate the total value by multiplying your expected annual pension by 20. In addition, you need to add to this the amount of any tax-free cash lump sum if it is additional to the pension. In many schemes, you would only get a lump sum by giving up some pension, in which case the value of the full pension captures the full value of your payouts.

So, the simple example in my original post means that Jane's overall value (AKA notional value) is £10k x 20 = £200k of which 25% is £50k and she has chosen to take £36k of it tax free. Do I understand the term correctly now?

No.....that value of a DB pension (20x) is really for HMRC and Lifetime Allowance purposes.
It may not equate to the same as the "value" of your DB pension for calculating max TFLS - your scheme should tell you what your max TFLS is - for Nuvos the max TFLS is annual pension entitlement * 30/7.

So if "Jane" has an annual pension entitlement of £10000pa, then her max TFLS is £10000*30/7=£42857, and her annual pension would be reduced by £42857/12=£3572, to £6428pa.

As an aside, a TFLS commutation rate of 12:1 isn't, on the face of it, very attractive, but it does depend on your age and circumstances......

tgon

Understood - thanks, I picked the wrong place to look. So, £42857 is the total notional value? Where does the maximum 25% TFLS limit play into this because £36k is far greater?

Silvertabby

MK62 wrote: »

No.....that value of a DB pension (20x) is really for HMRC and Lifetime Allowance purposes.
It may not equate to the same as the "value" of your DB pension for calculating max TFLS - your scheme should tell you what your max TFLS is - for Nuvos the max TFLS is annual pension entitlement * 30/7.

So if "Jane" has an annual pension entitlement of £10000pa, then her max TFLS is £10000*30/7=£42857, and her annual pension would be reduced by £42857/12=£3572, to £6428pa.

As an aside, a TFLS commutation rate of 12:1 isn't, on the face of it, very attractive, but it does depend on your age and circumstances......

Not quite. The notional value of a DB pension for maximum free tax lump sum purposes is also 20 x pension (plus 1 x any automatic lump sum). In the example used, the maximum tax free cash that may be taken under HMRC regulations is £50K - but the actual amount depends on the scheme commutation rate. In the case of the CS, this is a less than generous 1:12, hence the actual tax free cash of £36K.

Silvertabby

tgon wrote: »

Understood - thanks, I picked the wrong place to look. So, £42857 is the total notional value? Where does the maximum 25% TFLS limit play into this because £36k is far greater?

No - the notional value of your pension is 20 x annual pension (plus 1 x any automatic lump sum).

In the example given, £50K is the maximum tax free cash allowed by HMRC - but only £36K can be paid out due to the poor commutation rate of 1:12.

You may find the following link easier to use. It's LGPS, but uses the same commutation rate of 1:12 and so will work for the CS:

How much lump sum would you like to take?

tgon

Many thanks - l think I’m clear on this now.