As an LGPS member, you build up a pension that will increase in line with the cost of living for the rest of your life after you take it. You can exchange part of your pension for a tax-free lump sum that is paid when you take your benefits.
You can only choose to swap pension for lump sum when you first take your LGPS pension. You cannot change your decision later. It is important that you think carefully and make the right decision for you.
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Your lump sum choice
When you take your pension benefits, you can choose to swap part of your pension for lump sum. For every £1 of annual pension you give up you will get a lump sum of £12.
If you were a member of the LGPS before 1 April 2009, you will have built up a lump sum. See the section on How your pension is worked out for more information. In most cases, you will still be able to give up part of your pension to increase your lump sum.
When you take your pension, your pension fund administrator will ask you if you want to swap any of your pension for lump sum. They will generally let you know:
- how much pension you have built up, and any automatic lump sum if you joined before 1 April 2009
- the maximum lump sum you can take
- the reduced pension you would receive every year if you choose the maximum lump sum.
You can choose to swap any amount of pension for lump sum, up to the maximum limit. If you elect to swap pension for lump sum, your pension will be reduced. Any survivor pension paid to your partner or eligible children will not be affected.
You must tell your pension fund administrator that you wish to swap pension for lump sum before your LGPS benefits are paid. You may wish to seek financial advice before making your decision. It is important that you Contact your pension fund in advance of taking your pension so they can let you know your options.
Once you have chosen what lump sum and pension to take, you cannot change your decision. You cannot elect to swap pension for lump sum once your pension is being paid to you.
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How much lump sum?
HM Revenue and Customs limits the amount of tax-free lump sum you can take when your pension is paid to you. The maximum lump sum is the lower of:
- 25% of the capital value of your benefits
- 25% of your remaining lifetime allowance.
The standard lifetime allowance is £1,073,100 and 25% of this amount is £268,275. The UK Government has announced that the standard lifetime allowance will stay at this level until 2025/26. If you have already taken pension benefits from any UK pension scheme, you have used up some of your lifetime allowance. The maximum lump sum you can take is 25% of your remaining lifetime allowance.
If you have a Guaranteed Minimum Pension (GMP) you may not reduce your pension below the level of your GMP. This means that your maximum lump sum may be lower than the limit set by HM Revenue and Customs.
If you have paid Additional Voluntary Contributions (AVCs) you may be able to take some or all of these as tax-free cash when you take your LGPS pension.
Your pension fund will let you know your options when you are taking your pension.
Use the Lump sum calculator to estimate:
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- the maximum lump sum you could take
- the reduced pension that you would get with your chosen amount of lump sum.
Withdrawing AVCs as taxable lump sums
You may be able to withdraw cash lump sums from your AVC funds. These are called uncrystallised funds pension lump sums (UFPLS). You can do this from age 55 (or earlier on ill health). You can withdraw these amounts at different times from taking your LGPS pension. The first 25 per cent of each withdrawal is usually tax free with the remaining 75 per cent taxed as ordinary income. Speak to your AVC provider for more information.
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