In their simplest format, pensions should be very easy to calculate. We simply take the member's length of service they have (if they have more than 20 years service, the period over 20 years is doubled), divide it by the relevant accrual rate for that scheme, which is 60 for the FPS 1992, and multiply that figure by their salary. If we apply this to the FPS 1992, the calculation would look like this:
Length of Service ÷ 60 × Salary (note: any service accrued after 20 years is automatically doubled, so when 30 years membership is achieved the pension is actually based on a maximum of 40 years).
Looking at a competent firefighter on a salary £28,766 per annum, who has completed 30 years pensionable service, working whole time; the following is what that firefighter 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 × £28,766 = £19,177
This pension is payable for the rest of the firefighter's life and is guaranteed to increase each year from age 55.
Note that within the above calculation, there is no mention of a lump sum. This is because the default benefit from the FPS 1992 does not include the automatic provision of a lump sum.
However, a firefighter can give up part of their pension in favour of a lump sum. This is known as 'commutation'.
If they decide that they do want to commute, they must ensure that their election is made before their benefits are paid to them, otherwise they could find themselves not being entitled to draw a lump sum from the scheme.
The amount of lump sum to which they are entitled will depend on the amount of service they have in the scheme, their age at the date their benefits come into payment and the reason that they are retiring.
The rate of conversion is set by factors that have been calculated and provided by the Government Actuary's Department (GAD).
In order to set the factors, GAD considers a number of elements such as demographic factors (these could be the longevity of members and the number of anticipated early retirements). As such, the commutation factors do need to be reviewed periodically, whenever GAD judges necessary.
The Firefighters' Pension Scheme 1992 regulations allow a firefighter to commute up to a quarter of their pension if they retire:
The amount of lump sum a firefighter can receive tax-free is restricted by HMRC limits. A firefighter can take up to ¼ of the capitalised value of their pension as a tax-free payment..
The capitalised value of their pension is calculated by multiplying the pension they are physically going to receive by 20 and adding their 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 × uncommuted pension) ÷ ((4 × factor *) - (factor* - 20))] × factor*
(note* Factor is taken from the commutation table):
Any lump sum you take in excess of this HMRC limit will be taxed at 40% (see Example 2).
In all other cases, the maximum lump sum you can receive is 2¼ times your gross annual pension
(please see example 3).
If a firefighter retires from their 55th birthday (i.e. their last day of service is the day before their 55th birthday), they will qualify for the factor applicable to the age of 55 years 0 months.
If we assume the firefighter (from Example 1) retires at age 55 (his normal pension age), the actual date that he would leave work would be the day before his 55th birthday. He would be able to commute ¼ of his pension into lump sum.
The maximum pension he can give up to commutation is one quarter, i.e. £19,177 ÷ 4 = £4,794.25
Using the factor from the commutation table, for each £1 pension commuted he will receive £20.80 lump sum (this is because his pension comes into payment at age 55).
The amount of lump sum the firefighter can receive tax-free under HMRC limits is:
[(20 × 19,177) ÷ ((4 × 20.8) - (20.8 - 20))] × 20.8 = £96,815.92
Their pension will be £19,177 - (£96,815.92 ÷ 20.8) = £14,522.39 a year.
The amount of lump sum the firefighter can receive under FPS 1992 rules is:
£4,794.25 × £20.8 = £99,720.40
His pension will be £19,177 - £4,794.25 = £14,382.75 a year
His lump sum will be: £99,720.40
Any lump sum between £96,815.92 and £99,720.40 will be taxed at 40%.
Tax due = 40% of £2,904.48 = £1,161.79.
If the firefighter took the maximum lump sum under the tax rules, they would pay £1,161.79 in tax to HMRC, but would receive a higher lump sum after paying the tax (i.e. £98,558.61 in this example).
Tax will be deducted from lump sum before payment.
If we assume the firefighter retired on his 51st birthday, with 28 years pensionable service (ordinary pension), he would only be able to commute enough pension to give a lump sum of 2¼ times his pension.
His annual pension would be worth £17,259.60. (28 + 8 = 36 ÷ 60 × £28,766.00 = £17,259.60)
The maximum lump sum they can receive is 2.25 × £17,259.60 = £38,834.10
Their commutation factor at age 51 is 21.6
For each £21.60 worth of lump sum they will have to give up £1 pension
Pension given up = £38,834.10 ÷ £21.60 = £1,797.88
The firefighter will receive a pension of £15,461.72 and a lump sum of £38,834.10
|The lump sum is calculated by reference to the attached factor table which has been prepared by the Government Actuary's Department (GAD). The table is the same for men and women and shows how much lump sum you will receive for each £1.00 of pension that you give up.|
|Years||Age in years and completed months on day pension commences|
In order to determine the correct commutation factor you need to look up your age in years and full months at the date on which your pension comes into payment.