In their simplest format, pensions should be very easy to calculate. We simply take the length of service you have (if you have more than 20 years service we will double this period) , divide it by the relevant accrual rate for your scheme and multiply that figure by your salary. If we apply this to the PPS, the calculation would look like this:
Length of Service ÷ 60 X Salary (note: any service accrued after 20 years is automatically doubled to an overall maximum of 40 years)
If we take a Police Constable on the highest salary, £36,519.
Who has completed 30 years pensionable service, working whole time, the following is what that Officer could expect to receive:
20 years at normal accrual = 20 years
10 years at double accrual = 20 years (giving the maximum of 40 years)
Pension = 40 years ÷ 60 X £36,519 = £24,346
This pension is payable for the rest of the Officers life and is guaranteed to increase each year from age 55.
You will note that within the above calculation, there is no mention of a lump sum. This is because the default benefit from the PPS does not include the automatic provision of a lump sum, however one can be taken from the scheme if you wish.
Many Officers look forward to retirement in the knowledge they will be able to take a lump sum of cash from the scheme in addition to their annual pension income. You are able to take a lump sum from the PPS but in order to do so, you must commute (exchange) part of your pension.
If you decide that you do want to commute, you must ensure that your election is made before your benefits are paid to you otherwise, you could find yourself not being entitled to draw a lump sum from the scheme. The amount of lump sum to which you are entitled will depend on the amount of service you have in the scheme, your age at the date your benefits come into payment and and the reason that you are retiring. The rate of conversion is set by factors that have been calculated by the Government Actuary’s Department (GAD). In order to set the factors, GAD consider a number of factors such as demographic factors (such as longevity and the number of early retirements). As such, the commutation factors do need to be reviewed periodically, whenever GAD judges necessary.
The Police Pension Scheme regulations allow you to commute up to a quarter of your pension if you retire:
» with an ordinary pension after not less than 30 years pensionable service, or
» on compulsory retirement on account of age, or
» with a short service pension, or
» on ill health grounds.
The amount of lump sum you can receive tax free is restricted by HMRC limits. You can take up to ¼ of the capitalised value of your pension as a tax free payment. The capitalised value of your pension is calculated by multiplying the pension you are physically going to receive by 20 and adding your lump sum to this amount. As this calculation cannot be applied until your pension and lump sum has been determined, you need to use the following formula to determine how much tax free cash you can take from the scheme.
[(20 x uncommuted pension) ÷ ((4 x factor *) - (factor * - 20))] x factor *
(note* Factor is taken from commutation table):
Any lump sum you take in excess of this HMRC limit will be taxed up to 55% (please see example 1). In all other cases, the maximum lump sum you can receive is 2 ¼ times your gross annual pension (please see example 2).