Taking 25 percent lump sum

hyubh

molerat said:

Forget "25%", you are entitled to a tax free commencement lump sum in accordance with the scheme rules from the age of 50.  That seems to be based on the (very poor) commutation rate of £9 for every £1 given up with a maximum lump sum of 3.82 times the original annual pension.

Not again... the scheme rules themselves refer to a limit of 25% the capital value, so like most public sector schemes, and reflecting covering pensions tax legislation.

Marcon

dunstonh said:

johnnicola said:

So im entitled to 25 percent tax free even though im under 55 years of age?

No.  Defined benefit schemes don't have 25% tax free cash.  They have a pension commencement lump sum, which is paid with a reduced annual income.    Taking PCLS would likely be a poor financial decision.

This sort of nit picking just confuses the average member. A lot of defined benefit public sector schemes DO have the option of 25% tax free cash and their websites refer to it as such.



OP has correctly stated his position, as I've confirmed above. Given he needs to pay off debt, it could actually be a perfectly sound decision - nobody here can know.

dunstonh

This sort of nit picking just confuses the average member. A lot of defined benefit public sector schemes DO have the option of 25% tax free cash and their websites refer to it as such.

25% of what?  9:1 is not 25%.

The dumbing down of standards to allow incorrect information doesn't make it right.

xylophone

MPS commutation  uses  the same factor as IWMPS commutation.

Can I exchange Pension for Cash at Retirement? 

When you take your pension you will have the option to exchange part of it for a cash sum which, under current tax law, is not subject to income tax. For every £1 of annual pension that you give up you will receive a cash sum of £9. This “commutation rate” is fixed in the IWMPS Rules. The maximum amount of pension you can exchange in this way in accordance with current tax law works out under the IWMPS Rules at approximately 3.82 x your pension. 

Example

If your pension at retirement was £5,000 you would have the option to take a cash sum of any value of your choosing up to a maximum of £5,000 x 3.82 = £19,100.

If you took the maximum cash sum your pension would be reduced by £19,100/9 = £2,122. The pension payable would therefore be £5,000 - £2,122 = £2,878.

Is the Cash CommutationRate Good Value?

Making the choice about your retirement must obviously be your personal decision based on your requirements during retirement. You should be aware that the lump sum option exchange rate is fixed in the Scheme Rules and it is not reviewed to take account of market conditions, interest rates or life expectancy. 

Under present financial conditions, if you are considering taking a lump sum you should bear in mind that it is unlikely to represent value for money as an exchange of pension for cash. 

You should also consider if exchanging pension for lump sum is in your best financial interests, or those of your dependants. You should think carefully about your long-term financial needs and those of your family – especially as you may be drawing a pension for decades to come. We strongly encourage you to take financial advice before deciding whether to take cash from the Scheme in lieu of pension income.

Please note that your decisions once made cannot be changed.

You can choose any amount of cash up to the maximum allowed. 

Future pension increases and Dependant’s pension will be basedon the amount of annual pension taken after deducting the value of any cash sum

xylophone

How to calculate the amount of tax-free cash

This is slightly different for different types of pension and is known as the applicable amount.

The applicable amount post the abolition of the LTA is the same as it was prior to abolition. 

Defined benefit schemes

The calculation is 25% x (tax-free cash + residual value), but a commutation factor is needed.

Max cash = (20 x commutation factor x yearly scheme pension before commutation)
                                                      20 + (3 x commutation factor)

You may recognise the formula above expressed as

Max cash = Pre-commutation pension x Commutation factor
                                                      [1+(0.15 x Commutation factor)]

The second formula is used within many exam study texts. It’s important to note this formula gives exactly the same answer as the previous (HMRC preferred) method.

Brie

How much are you earning currently?  will the extra weekly income take you in to a higher tax bracket?

Have you considered alternatives to help you deal with your debts?  There are some excellent organisations that can help you with this (StepChange, NationalDebtline, Christians against Poverty, Community Money Advice) or you can pop over to the debt free wannabee board and see what help is available there.  It may be possible to help you manage your situation for a couple more years at least and not take such a cut in future pension payments.  

QrizB

OP I agree with Brie that there might be better waya to deal with your debts.

Just for example:

I think your £37k lump sum will be costing you about £80 a week in reduced pension?

If you took the full pension you'd get £188 a week (about £150 a week (£650 a month) after basic rate tax).

£650 a month would cover the payments on a £37k personal loan at 6.9% over six years (currently offered on MSEs best buy personal loans table). Then, after six years, you'd still have £188 a week in pension.

johnnicola

Brie said:

How much are you earning currently?  will the extra weekly income take you in to a higher tax bracket?

Have you considered alternatives to help you deal with your debts?  There are some excellent organisations that can help you with this (StepChange, NationalDebtline, Christians against Poverty, Community Money Advice) or you can pop over to the debt free wannabee board and see what help is available there.  It may be possible to help you manage your situation for a couple more years at least and not take such a cut in future pension payments.  

m currently earning £80000 but pay 20 percent avcs also from my salary… my projection salary in retirement is £34 200 in my current employment who ive worked for last 17 years. Ive also got other pensions from old employers that will pay £6500 per annum on retirement. Ive got a private pension that i dont pay into with £31k in it. Also state pension roughly £11500 in today money .

johnnicola

QrizB said:

OP I agree with Brie that there might be better waya to deal with your debts.

Just for example:

I think your £37k lump sum will be costing you about £80 a week in reduced pension?

If you took the full pension you'd get £188 a week (about £150 a week (£650 a month) after basic rate tax).

£650 a month would cover the payments on a £37k personal loan at 6.9% over six years (currently offered on MSEs best buy personal loans table). Then, after six years, you'd still have £188 a week in pension.

Unfortunately im unable to get any loans etc for that amount due to credit rating from issues in my past

xylophone

It appears that you are happy with your retirement provision from your current employment/state pension (have you obtained a state pension forecast?), regarding other provision as"jam on top".

https://www.gov.uk/check-state-pension

To return to your original question, under the terms of the MPS, you are able to claim your pension from the age of fifty, albeit actuarially reduced for early payment.

You are also able to commute part of your pension to create a tax free Pension Commencement Lump Sum - the commutation factor is ungenerous at 9:1 but it seems that in your particular circumstances, you are prepared to accept this on the basis that it will clear your debts and therefore leave you better off (frees up money you are currently expending on repayments).

You will also receive a four weekly payment of pension from MPS. This is taxable income. HMRC should issue an appropriate code to the pension administrator.

You could regard this as "income replacement" enabling you to increase your pension contributions to your current scheme.