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.
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 maximum amount which can be commuted works our at c.19.64% of your annual pension.
A teacher retiring with a pension of £15,000 and £45,000 lump sum would be able to commute a maximum of £2,946 of pension, giving an additional £35,352 lump sum. This would leave the teacher with £12,054 pension and £80,352 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.
- Spouses benefits are not affected by commutation.
- The lump sum, as with all savings, can be passed to the surviving spouse on death without any income 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 0345 355 3242