When you take your pension benefits you will have the option to exchange part of your pension for a one-off tax-free cash payment.
We provide you with the options to do this before you take your pension.
If you joined the LGPS before 1 April 2008 you will automatically get a lump sum amount based on total membership in years x your final pay x 3/80. You will also have the option to exchange part of your pension to increase your lump sum.
If you joined the LGPS after 1 April 2008 you will not receive any automatic lump sum but you will be able to give up pension for lump sum when you take your pension.
For every £1 of pension you exchange you will receive £12 tax free cash lump sum.
You can take up to 25 per cent of the capital value of your pension benefits as a lump sum. The total lump sum must not exceed £268,275. Taking a larger lump sum reduces your pension but does not reduce any survivor pension paid after you die to your spouse, civil partner, eligible cohabiting partner or child.
You can use the LGPS Member website lump sum calculator to provide an estimate of how much lump sum you can take, up to the maximum, and how this affects your yearly pension. Please note, the calculator does not take into account in-house AVCs.
There is a limit on how much tax-free lump sum you can take. HM Revenue and Customs (HMRC) rules mean that most people can take up to 25 per cent of the capital value of their pension benefits as a tax-free lump sum. The amount of tax-free lump sum you can take from the LGPS may be affected if you exceed the lifetime allowance or have lifetime allowance protection.
If you have previously taken payment of pension benefits, you can take 25 per cent of your remaining lifetime allowance as a lump sum. Details of the maximum tax-free cash payment you can take will be given to you shortly before you take your LGPS pension. It is at that time you need to make a decision.
It is very important that you think carefully about this option before you take your pension. It will not be possible to reverse your decision after your pension has been paid. You may wish to take financial advice before making your decision to exchange pension for lump sum. It is therefore important that you tell us in advance of your intended retirement date so that we can provide you with the details.
Lump sum recycling
If you use your tax-free lump sum to increase significantly the contributions you pay to a pension scheme, this is known as ‘recycling’. This is a complex area and if HMRC consider recycling has occurred, then you will have to pay extra tax.
You can find out more about lump sum recycling from HMRC. You may wish to seek regulated financial advice if you think recycling might apply to you.
