The Pension Schemes Office (PSO) has announced an alteration in the way the maximum tax-free lump sum payable on retirement must be calculated for those whose final or relevant annual remuneration exceeds £100,000. The alteration only affects those who, with certain exceptions, joined their scheme on or after 17 March 1987 but before 1 June 1989.
Under the 1987 tax regime, if a member builds up pension rights at a rate faster than 1/60th of final remuneration for each year of service, the maximum lump sum available by commutation is 3/80ths of final remuneration for each year of service plus a percentage of the difference between 3/80ths of final remuneration for each year of service and the maximum given by the table of 'uplifted 80ths' applicable under the 1970 tax regime, i.e. applying to those who joined their scheme before 17 March 1987.
This figure is given by the formula:
[((A-B)/(C-B)) x (D-E)] + E where:
A = the scheme pension payable (excluding any pension from transfers) before any commutation
B = the pension equivalent to 1/60th of relevant annual remuneration for each year of service, excluding any pension from transfers, and before commutation
C = the pension equivalent to 1/30th of relevant annual remuneration for each year of service, excluding any pension from transfers, and before commutation
D = a sum equivalent to the number of 80ths of relevant annual remuneration given by the table of 'uplifted 80ths'
E = a sum equivalent to 3/80ths of relevant annual remuneration for each year of service
For the purposes of calculating lump sums on retirement, the final remuneration figure is capped at £100,000. Previously, the PSO had taken the view that this limit applied to items 'B', 'C', 'D' and 'E' of the formula. However, following legal advice, this no longer applies. With effect from 24 August 1998, the PSO instructs administrators to apply the £100,000 limit to items 'D' and 'E' only.
Let us take an example. An executive joined her scheme in January 1989, and is therefore subject to the 1987 tax regime. She transferred no pension rights into the scheme. She takes retirement on pension in January 1999 with a final pensionable salary of £300,000. She accrues pension at the rate of 1/45th of her final pensionable salary.
If the change had not been made her maximum lump sum would be have been £60,000. However, as a result of the change, her maximum lump sum is £40,000.
For further information please contact Jane Marshall, e-mail: Click Contact Link , 7 Devonshire Square, Cutlers Gardens, London EC2M 4YH, UK, Tel: + 44 171 655 1000
This article was first published in the Winter 98/99 Hammond Suddards Pensions Newsletter
The information and opinions contained in this article are provided by Hammond Suddards. They should not be applied to any particular set of facts without appropriate legal or other professional advice.
Under the 1987 tax regime, if a member builds up pension rights at a rate faster than 1/60th of final remuneration for each year of service, the maximum lump sum available by commutation is 3/80ths of final remuneration for each year of service plus a percentage of the difference between 3/80ths of final remuneration for each year of service and the maximum given by the table of 'uplifted 80ths' applicable under the 1970 tax regime, i.e. applying to those who joined their scheme before 17 March 1987.
This figure is given by the formula:
[((A-B)/(C-B)) x (D-E)] + E where:
A = the scheme pension payable (excluding any pension from transfers) before any commutation
B = the pension equivalent to 1/60th of relevant annual remuneration for each year of service, excluding any pension from transfers, and before commutation
C = the pension equivalent to 1/30th of relevant annual remuneration for each year of service, excluding any pension from transfers, and before commutation
D = a sum equivalent to the number of 80ths of relevant annual remuneration given by the table of 'uplifted 80ths'
E = a sum equivalent to 3/80ths of relevant annual remuneration for each year of service
For the purposes of calculating lump sums on retirement, the final remuneration figure is capped at £100,000. Previously, the PSO had taken the view that this limit applied to items 'B', 'C', 'D' and 'E' of the formula. However, following legal advice, this no longer applies. With effect from 24 August 1998, the PSO instructs administrators to apply the £100,000 limit to items 'D' and 'E' only.
Let us take an example. An executive joined her scheme in January 1989, and is therefore subject to the 1987 tax regime. She transferred no pension rights into the scheme. She takes retirement on pension in January 1999 with a final pensionable salary of £300,000. She accrues pension at the rate of 1/45th of her final pensionable salary.
If the change had not been made her maximum lump sum would be have been £60,000. However, as a result of the change, her maximum lump sum is £40,000.
For further information please contact Jane Marshall, e-mail: Click Contact Link , 7 Devonshire Square, Cutlers Gardens, London EC2M 4YH, UK, Tel: + 44 171 655 1000
This article was first published in the Winter 98/99 Hammond Suddards Pensions Newsletter
The information and opinions contained in this article are provided by Hammond Suddards. They should not be applied to any particular set of facts without appropriate legal or other professional advice.
