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CONVERTING DEFERRED BENEFITS FOR A LUMP SUM

Taking a Lump Sum
 
An option to take a lump sum 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:
 

 Annual Pension x 120/7

+ Automatic Lump Sum x 10/7

= Total Capital Value
 
This is how you calculate the maximum tax-free lump sum you can take:
 

Total Capital Value/4
= Maximum Lump Sum
 
The ratio of annual pension given up for lump sum received:
 

                      
                       £1 of Annual Pension gives you £12 of Lump Sum
 

 
 
Example: Jean
Retiring at 65
 
Jean retires on her 65th birthday with an Annual Pension of £4,000. She wants to exchange the maximum amount of her £4,000 Annual Pension to give her a Lump Sum:
 
£4,000 x 120/7
= £ = 68,571.43 Total Capital Value
£68,571.43/4
= £17,142.86 Maximum Lump Sum
£17,142.86/12
= £ 1,428.57 Annual Pension given up
Jean's Benefits are now:
Annual Pension = £2,571.43
Lump Sum = £17,142.86
 
 
Please Note                               
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 Form LGP1B form - RETIREMENT DECLARATION.
 
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.