When you’re planning your retirement, it’s helpful to know about the different options you’ll have for taking your benefits when you retire.
As a Local Government Pension Scheme (LGPS) member, you have the option to exchange part of your pension for a tax-free lump sum when you retire.
If you joined the LGPS before 1 April 2008, you’ll get an automatic lump sum as part of your benefits, and all members have the option to exchange part of the annual pension for a higher tax-free lump sum.
Your lump sum if you joined before 1 April 2008
If you joined the LGPS before 1 April 2008, you’ll get an automatic tax-free lump sum as part of your benefits based on the membership in the scheme that you built up by 31 March 2008. For more information, you can visit our 'How your pension is worked out' page.
Converting part of your pension into a lump sum
If you want to increase the lump sum that you’ll get when you retire, you can exchange part of your annual pension for more tax free lump sum. For each £1 of pension that you exchange, you’ll get £12 of tax-free lump sum.
You can exchange up to a maximum of 25% of the total value of your benefits from the scheme, providing the total lump sum doesn’t exceed 25% of the Lifetime allowance. The total value of your benefits is calculated as 20 x your annual pension, plus the standard lump sum (plus the value of any Additional Voluntary Contribution you have):
Example
A pension of £1,000 per year with a lump sum of £2,000 would be valued at £22,000 (£1,000 x 20 + £2,000 = £22,000).
The national LGPS website includes a lump sum calculator to help you work out how much pension you can exchange and how much extra lump sum you can get. It’s helpful if you have your latest annual benefit statement with you when you use the calculator.
It’s not possible to exchange any of your automatic lump sum for a bigger pension.
Taking all your pension benefits as a lump sum
If your LGPS monthly pension is going to be small, you may be able to take all of your benefits as a one off lump sum payment. This is known as a trivial commutation.
The rules are quite complex, but generally, you must be 55 or over when you leave the scheme before we can investigate whether you’ll be able to take a trivial commutation.
It’s important to note that 75% of a trivial commutation lump sum payment is subject to tax.
There are 2 scenarios where you may be able to take a trivial commutation:
Trivial commutation from more than one pension scheme
If the total value of your benefits is less than £30,000 and your benefits are in more than one scheme (for example, LGPS and non-LGPS) you may be able to take a trivial commutation payment. You must take all of your trivial lump sum payments included in your total within 12 months of the first payment.
Trivial commutation from the LGPS only
If the total trivial payment of your pension benefits in the LGPS is less than £10,000 and you were an active member of the scheme on or after 1 April 2008, you may be able to take a trivial commutation. If you choose to take a trivial payment, it's important to note that:
- the value of your LGPS benefits must include any you may have in other LGPS funds in England and Wales
- you can't take a trivial commutation if you have transferred any funds out of the LGPS in the previous 3 years
- you'll not be entitled to any further benefits
- survivor benefits won't be payable in the event of your death
Recycling
We'll ask you to make a declaration about recycling before you take a tax-free lump sum from us. Recycling is where someone re-invests their tax-free lump sum from their pension into another pension. HM Revenue and Customs (HMRC) have rules against tax advantages gained by claiming tax relief on tax-free lump sums.
If you’re thinking of recycling, you’ll need to seek independent financial advice before you take payment of your benefits, as you might be taxed at up to 70% of your lump sum.