Defined Benefit (Final Salary) Post 'A-Day' Tax-Free Cash Calculator - calculate the maximum allowable tax-free lump sum under the post 06 April 2006 pension rules.
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This calculator works out the new 'maximum' lump sum available under Defined Benefit Pension schemes.
The purpose of this calculator is to calculate the maximum tax-free lump sum that could be received by members of a Defined Benefit (Final Salary) Pension Scheme after the A-Day (6 April 2006) 'Pension Simplification' changes.
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 new '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 - but because a Defined Benefit scheme does not have a 'fund value' as such (as a known amount of pension is offered) a calculation is done to calculate an equivalent amount.
Currently, most Defined Benefit schemes operate on the basis of providing a lump sum of 3/80ths of your final salary at retirement date as the lump sum. 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.
This calculator does one thing - it compares the PCLS on the standard accrual basis of 3/80ths per annum against the new maximum PCLS. This can be used to calculate or project what you may receive in the future.
Commutation, 60ths schemes and 80ths schemes.
PLEASE NOTE: This calculator only produces valid results for schemes that have an accrual rate of 60ths or less, and provide the lump sum by commutation of the main scheme pension (the term 'commutation' means sacrificing part of the annual pension that you could receive, and taking it upfront as a lump sum instead - if a scheme has a commutation rate of 12:1, this means that you have to sacrifice £1 of pension each year to receive an immediate tax-free lump sum of £12).
Most schemes that provide an accrual rate for the main pension of 1/80th per annum (most public sector and local authority schemes fall into this category) usually provide an additional lump sum of 3/80ths per annum WITHOUT commutation. This means the lump sum is additional, and the pension is not reduced in order to provide it. However, the new rules have made no changes to the calculation of the PCLS where no commutation of the main scheme pension takes place.
Pension Scheme Trustees are under no obligation to pay out higher lump sum amounts.
While the new calculation formula will in a lot of circumstances permit a higher PCLS than previously available, Pension Scheme Trustees are under no obligation to amend their scheme rules to allow higher lump sums to be taken. While many schemes are changing their rules, or will change their rules, if you are a member of a Defined Benefit scheme and the Trustees state that they have no plans to change the rules, in all likelihood there is little that you can do about it, apart from asking trustees to reconsider their position.
If you have protected lump-sum rights in an occupational money purchase pension scheme, use this calculator instead.
The figures projected by the calculator are only for guidance purposes - whilst we aim to ensure the accuracy of our calculators, we can take no responsibility for the usage made of the calculations generated on this site.