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)
Example: 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).
|The lump sum is calculated by reference to the attached factor table which has been prepared by the Government Actuary. The table is the same for men and women and shows how much lump sum you will receive for each £1 of pension that you give up.|
|Age in years and completed months on day pension commences|
To determine the correct commutation factor you need to look up your age in years & full months at the date on which your pension comes into payment.For example:
If you retire on your 55th birthday (i.e. your last day of service is the day before your 55th birthday), you will qualify for the factor applicable to the age of 55 years 0 months.
If we assume Constable Smith retires at age 55 (his Compulsory Retirement Age), the actual date that Constable Smith would leave work would be the day before their 55th birthday, he would be able to commute ¼ of his pension into lump sum.
The maximum pension they can give up is one quarter i.e. £24,346 ÷ 4 = £6,086.50
From the table, for each £1 pension commuted they will receive £21.00 lump sum (this is because their pension comes into payment at age 55)
The amount of lump sum Constable Smith can receive tax free under HMRC limits is:
[(20 x 24,346) ÷ ((4x 21.00) - (21.00 - 20))] x 21.00 = £123,196.63
Their pension will be £24,346 - (£24.346 ÷ 21.00) = £18,479.49 a year.
Their lump sum would be £123,196.63
The amount of lump sum Constable Smith can receive under PPS rules is:
£6,086.50 * £21.00 = £127,816.50
Their pension will be £24,346 - £6,086 = £18,259 a year
Their lump sum will be: £127,816.50
¼ of the capitalised value = [(20 x £18,259.50) + £127,816.50] ÷ 4 = £123,251.63
Any lump sum between £123,251.63 and £127,816.50 will be taxed from 40% *
Tax due = 40% of £4,564.87 = £1,825.95**
If the Officer took the maximum lump sum under the tax rules, they would pay £1,825.95 in tax to HMRC, however they would receive £1,369.43 extra towards their lump sum. Over the year, this would result in the Officer receiving £219.99 less as taxable pension.
* The amount of tax can vary between 40% and 55% of the balance of; the capitalised value and the PPS maximum lump sum.
** Tax will be deducted from lump sum before payment
If we assume Constable Smith retired on their 51st birthday with 28 years pensionable service (ordinary pension), they would only be able to commute enough pension to give a lump sum of 2¼ times their pension. Their Annual pension would be worth £21,911.40.
The maximum lump sum they can receive is 2.25 * £21,911.40 = £49,300.65
Their commutation factor at age 51 is 22.40
For each £22.40 worth of lump sum they will have to give up £1 pension
Pension given up = £49,300.65 ÷ £22.40 = £2,200.92
Constable Smith will receive a pension of £19,710.48 and a lump sum of £49,300.65