These changes in law affect individuals who have defined contribution benefits, which include money purchase or cash balance benefits. Each scheme provides different options regarding early retirement and the amount individuals can withdraw as cash.
There are four main options:
- purchase an annuity (or scheme pension if offered by the scheme, with or without an option for a cash lump sum)
- flexible access draw-down of benefits
- taking a number of cash lump sums at different stages
- taking the entire pot as a cash lump sum in one go.
To help individuals understand their retirement choices, the Government has introduced a free and impartial service called Pension Wise. This help will be available to members online, over the phone or face to face.
The Local Government Pension Scheme (LGPS) is a defined benefit pension scheme and the changes in law do not apply to defined benefit pension schemes, although it does have an effect.
The Local Government Pension scheme (LGPS)
The LGPS is a defined benefit pension scheme, which unlike a defined contribution scheme, provides a guaranteed level of pension benefits at retirement. For each year that you are a member of the LGPS you build up an amount of pension which becomes payable on retirement and is paid for life. There is also provision for survivors’ benefits in the event of your death. The benefits from the LGPS are also increased each year to keep pace with inflation.
At retirement the LGPS already offers flexibility to take some additional cash from your pension benefits. All members of the LGPS have the right to take up to 25% of their pension benefits as a tax free cash lump sum when they retire (subject to Her Majesty’s Revenue and Customs (HMRC) limits) in force at the time of retirement). The additional cash lump sum is achieved by giving up some of your annual pension. The current rate of conversion is £12 lump sum for each £1 of annual pension given up. This option is only available at retirement and you will automatically be provided with your options at this time.
If you are currently paying into the LGPS and you have your most recent annual pension statement, you can make use of our online pension calculator to see how much lump sum would be available at different retirement ages.
If you have left employment and have deferred benefits in the LGPS then the online calculator will not work for you. The current value of your pension benefits before any reduction for early payment is shown on your annual pension statement.
More details about the benefits payable from the LGPS can be found on our pensions page.
Taking your entire LGPS pension as cash
In most circumstances you can't take your entire LGPS as cash. The LGPS is a defined benefit pension scheme which provides for an ongoing annual pension to provide security in retirement.
However, there are certain circumstances where all your LGPS benefits may be taken as a cash lump sum. The circumstances depend on the total value of your LGPS benefits and the following options would not be available to everyone.
The limits involved can change over time but the current legislation allows for benefits to be taken as cash, subject to meeting certain criteria, in the following circumstances:
Standard Trivial Commutation from age 55 onwards (60 for women and 65 for men in certain circumstances)
If the total value of your pension benefits is less than £30,000 (your entire pension benefits not just LGPS) then you may be able to take your LGPS benefits as a one-off lump sum when you retire.
'Small Pot' Trivial Commutation from age 55 onwards (60 for women and 65 for men in certain circumstances)
If you left the LGPS after 1 April 2008 and the total value of your LGPS benefits is less than £10,000 you may be able to take your LGPS pension benefits as a one-off lump sum regardless of pension benefits you have with another pension scheme.
The value of your benefits is normally calculated as 20 times the annual pension plus any lump sum, therefore a pension of £1,000 per year with a lump sum of £2,000 would be valued at £22,000 (£1,000 x 20) plus £2,000 = £22,000.
Transferring your LGPS pension benefits to another pension scheme
If you wish, you can transfer your LGPS pension benefits into another pension scheme, including a defined contribution scheme. You will need to think carefully before transferring your LGPS benefits as you may be giving up a secure income at retirement. Additionally, if you opt out of the LGPS whilst still in employment you would also be giving up valuable life cover in the form of death in service benefits.
To help protect individuals and ensure that members of defined benefit pension schemes make informed choices before transferring their benefits to a defined contribution pension scheme the Government has also introduced legislation safeguards. This includes a requirement for members to get appropriate independent advice (at their own cost) from a Financial Conduct Authority (FCA) authorised adviser (where their benefits in the scheme are valued at more than £30,000 - this is calculated differently from the value for Trivial Commutations above and depends on a wide variety of factors). A member will need to prove that they have taken the appropriate financial advice before any transfer payment can be released.