For each year, or part year, that you are in the Scheme, you will build up a pension equivalent to 1/80th of your final pensionable salary. You will also build up a lump sum of three times your annual pension entitlement.
Linda retires with 25 years’ of service in the Scheme, and her salary at the date she retires is £32,000 per year. Her pension is calculated to be:
|Pension of||(25 x £32,000)/80||= £10,000|
|Tax-free lump sum||£10,000 x 3||= £30,000|
Maximum cash and AVCs
In addition to the tax-free cash lump sum, you will have the option to take a maximum cash amount (broadly 25% of your Scheme pension) as cash and take the rest as a pension paid to you each month for the rest of your life.
If you have AVCs, you may be able to use up to 100% of the value of these as a lump sum instead and take a higher rate of pension from the Scheme.
If you can’t use 100% of your AVCs to provide your lump sum, any amount left over will need to be used to buy an annuity, which is an income paid for life provided by an insurance company.
In most circumstances, it will be possible to give up a portion of your annual pension to get a higher lump sum amount. If you are offered this option when you retire, you aren’t obliged to accept it. If you are offered a commutation option and you accept it, it will not affect any benefits that are payable to your spouse or eligible children in the event of your death.
The current commutation rate if 14:1, which means that for each £1 of pension you give up you will get £14 of lump sum in return. Please note that this is the current rate set by the trustees and may change in the future.