Maximum Lump Sum and Pension Section A/B

[platform béalfeirsde]

Suppose the Pension Statement is:

£7,000 annual pension.
£20,000 lump sum.

Is this the correct thing to do?

Multiply 7,000 x 20 = 140,000
Add 20,000
Total: 160,000

Then divide by 4 (25%) to get £40,000 lump sum.

Then subtract the 40,000 from the 160,000 to get 120,000
and divide by 20 to get £6,000 annual pension.

So ending up with £6,000 in Annual Pension and £40,000 in Lump Sum.

Or does a commutation factor come into play in all of this and if so could anyone explain how it works involving the above figures. (£7,000 annual pension and £20,000 lump sum).

Thank you in advance.

[baldrick]

I was in the Section A/B pension scheme. I took my pension in 2013. The standard quote for my pension gave a lump sum of
3 x the annual pension.
I was given the option of converting pension to lump sum. The conversion rate was 1 : 17.75, ie for every £1 I gave up on pension I would have got £17.75 extra on lump sum.
I also had the option of converting lump sum to pension. The conversion rate was 23.7 : 1, ie for every £23.70 I gave up on lump sum I would get an extra £1 on pension.

So if you want to convert £1,000 of your pension into lump sum you would get an extra £17,750.00 on your lump sum, if the commutation figures are still the same now.

[platform béalfeirsde]

I was in the Section A/B pension scheme. I took my pension in 2013. The standard quote for my pension gave a lump sum of
3 x the annual pension.
I was given the option of converting pension to lump sum. The conversion rate was 1 : 17.75, ie for every £1 I gave up on pension I would have got £17.75 extra on lump sum.
I also had the option of converting lump sum to pension. The conversion rate was 23.7 : 1, ie for every £23.70 I gave up on lump sum I would get an extra £1 on pension.

So if you want to convert £1,000 of your pension into lump sum you would get an extra £17,750.00 on your lump sum, if the commutation figures are still the same now.

Thank you for that insight. It would be great if there was a booklet of some sort for people who are on the verge of making a very important decision which will dramatically affect their own future and also that of those around them.
So it is impossible to crystallise a Defined Benefit pension and therefore I accept that the equation in the Opening Post is fatally flawed.

The correct working out for a £6,000 initial Annual Pension from the original figures should then read:

£7,000 minus £1,000 = £6,000 annual pension.
£1,000 x 17.75 = £17,750 plus £20,000 = £37,750.

Under this chosen circumstance, would there be any tax to be paid on the commutated £17,750 or would the total Lump Sum of £37,750 be tax free?

Thanks again in advance and I would be grateful if anyone has a link to any in-depth reading up/analysis of potential figures for Lump Sum and Annual Pension.

[RobertT]

You can always look at the guide to benefits:
http://royalmailpensionplan.co.uk/55/pensions-brochures" onclick="window.open(this.href);return false;

[baldrick]

Under this chosen circumstance, would there be any tax to be paid on the commutated £17,750 or would the total Lump Sum of £37,750 be tax free?

All of your Pension lump sum is tax free.

[RobertT]

Your first post wasn’t fatally flawed, it just used a rough ball park way to find out the maximum lump sum you’re entitled to. Although the two figures aren’t a million miles away from each other!

As I’m sure you know, the maximum tax free lump sum you can take is 25%. If the standard lump sum of 3 times pension is less than 25%, you can commute some of your pension to provide a bigger lump sum up to that limit. Or the opposite if you want more income instead.

When you come to take your pension, the service centre in Chesterfield will tell you what your max lump sum is and how your pension will be reduced accordingly.

[platform béalfeirsde]

As I’m sure you know, the maximum tax free lump sum you can take is 25%. If the standard lump sum of 3 times pension is less than 25%, you can commute some of your pension to provide a bigger lump sum up to that limit.

This bit in bold is what I would be looking for - as in a working example using figures of what this means so that it is possible to try various other permutations and decide on the most suitable one.
Are we sure that the Standard Lump Sum is not included in the figure that we get the 25% from?

[platform béalfeirsde]

http://www.hmrc.gov.uk/manuals/rpsmmanu ... 104400.htm" onclick="window.open(this.href);return false;

Found this which answers the question above.

Now we just need a formula and a few working examples.

[RobertT]

As a member of Section C myself I am probably not up to speed on Sections A/B as much. So I am more than happy to be corrected, but the way I understand things is:

As you’re in Section A/B you get a lump sum as standard which is made up of 3 times your pension, so if your pension is £10,000 per year, your lump sum would equal £30,000.

However, in that example the total value of your ‘pot’ would equal £230,000 - £10k multiplied by 20 plus £30,000. Therefore the standard lump sum would only equal about 13% rather than the maximum allowable 25%. So you could then commute some of your £10,000 per year pension into a larger lump sum to make up the other 12% or £27,500.

Using the figures baldrick supplied, and if I’ve worked things out correctly, you would need to commute £1,549 of your pension to provide an additional lump sum of £27,500 and so enable the maximum 25% lump sum.