Since the pension reforms came into
force, the change that has prompted the
largest number of queries to us at EIS
Financial Services has been the subject
of Pension Commutation.
Since April 2007, retiring teachers have
been able to reduce part of their
pension to get an increase in their tax
free lump sum. From the calls we have
taken, most members want to know how to
calculate the lump sum increase, what
the implications are and advice on
whether to opt for commutation or not.
The Calculation
Members
are now able to increase their lump sum
by £12 for every £1 of their pension
that they give up. They can commute up
to 25% of the notional pension fund that
they receive from the SPPA. Pension
received from your employer as mandatory
or discretionary enhancement under the
Premature Retirement Compensation (PRC)
arrangements cannot be commuted.
The
formula to calculate the maximum amount
which can be commuted is:
[(Annual
Pension x 20) + (Lump Sum x
20/12)]/4.6667.
This
equates to 19.64% of your annual
pension.
Example
A teacher
retiring with a pension of £15,000 and
£45,000 lump sum would be able to
commute a maximum of £2,910 of pension,
giving an additional £34,920 lump sum.
This would leave the teacher with
£12,090 pension and £79,920 tax free
lump sum.
The
question of whether or not you should
commute is a matter of personal choice.
There is no right or wrong answer to
this question.
Different sets of personal circumstances
will lead to different decisions. Some
key points that should be considered:-
-
The lump sum is tax
free. The pension is taxable.
-
The lump sum can be
invested to produce additional
income which, in some investments,
has little or no income tax payable.
-
Although taxable, the
income from the pension will
increase each year.
-
On death, a maximum
of 50% of the teachers’ pension will
be passed onto the surviving spouse.
-
The lump sum, as with
all savings, can be passed to the
surviving spouse on death without a
tax liability.
If
you have any questions regarding this
change to the pension scheme or would
like help with the calculation or indeed
working out how to best use the lump sum
as efficiently as possible, then call
your EIS Financial Services Independent
Financial Adviser on 0141 332 8004. |
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