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This calculator works out the new maximum tax-free lump sum available under Defined Contribution (Money Purchase) Occupational Pension schemes.

 

The purpose of this calculator is to calculate the maximum tax-free lump sum that could be received by members of a Money Purchase Occupational Pension Scheme or Section 32 Buy-Out plan after the A-Day (6 April 2006) 'Pension Simplification' changes. You can use it to work out the lump sum if someone is retiring now, or use it to project the benefits at a future date.

 

Additional rules were implented with effect from 06/04/2012 (jump to section)

 

At this date, the technical name for Tax-Free Cash will be referred to as the 'Pension Commencement Lump Sum' - PCLS. As part of the 'simplification' changes, the new rules will equalise the maximum amount of PCLS across all types of pension scheme at a maximum limit of 25% of the fund value;; however, it was realised at the time that this could disadvantage certain individuals who had an entitlement to a tax-free lump sum that was in excess of 25% of the fund value. Even members who were not entitled to primary or enhanced protection of their pension funds have had their lump-sum entitlements automatically protected.

 

This was due to the fact that the lump-sum was calculated using the same formula that applied to final salary pension schemes; this is calculated on a basis of 3/80ths of your final salary for each year of service with the employer. Different pension regimes (such as the pre-1987 regime) allowed for 'accelerated accrual', whereby the maximum lump sum of 40 years service (120/80ths) could be accrued after 10 years. If this applies to you, would need to enter '40' as the number of years of service in the calculator. Also in some circumstances, post 1989 members could use a different formula of 2.25 residual pension if that would result in a higher lump sum. If you are coming up to retirement, and planned to use one of the alternative formulas, should this show a higher lump sum than the maximum amount under the new basis, you should seek to protect this higher amount - if you are unsure what to do, we recommend that you seek professional financial advice on the matter.

 

However, members who were entitled to higher lump sums and remained a member of the scheme after 2006 now have two distinct elements that are used when calculating the overall tax-free lump sum; the pre 06/04/2006 lump sum and the post 06/04/2006 lump sum entitlement.

 

It is often assumed that the lump sum from the post 2006 benefits is simply 25% of the fund accrued after 2006. However, this is not true. There is a specific calculation that needs to be undertaken to work out the overall tax-free lump sum. The way to work this out is:

 

 

The scheme member must become entitled to all of their pension and lump sum rights (that were not in payment on 5 April 2006) under the scheme on the same day.

 

 

Also, any members who have protected tax-free lump sums will in general lose the protection if they transfer to a new pension plan, where they only be entitled to a maximum of 25% of the fund value. Therefore this calculator also works out the equivalent lump sum on the 25% basis, so if you are considering transferring pension benefits into a new plan, you can compare the effect that this could have on your tax-free lump sum entitlement. (Note: This does not apply if the transfer is part of a "block transfer". A block transfer must involve the transfer in a single transaction of all sums and assets representing the rights of a minimum of two members, and the protection is maintained in the transferee scheme.) If you are considered such a transfer, you should consider getting independent financial advice.

 

However, if your protected benefits stem from membership of an occupational pension scheme that you left before 2006 (or transferred benefits into a Section 32 Buy-Out plan before 2006), then the benefits accrued in a new pension plan after 2006 will pay out a straight 25% tax-free lump sum, and these can be ignored for the purpose of the calculation.

 

If you have protected benefits and your retirement date is many years in the future, you can usually request a projection of your pension fund from the pension scheme trustees or the insurance company who administers the scheme and use the figures to insert the projected fund value into the calculator.

 

If you have protected lump-sum rights in a final salary pension scheme, use this calculator instead.