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How much lump sum can I take? (NIFRS)

On retirement you can exchange some of your pension for a cash lump sum, this is known as commuting your pension or commutation.

You must give written notice to your FRA, no earlier than four months before your intended retirement and no later than the day before your pension is due to come into payment, stating how much of your pension (including any Additional Pension Benefit) you would like to exchange for lump sum, subject to the allowed limits detailed below.

You can exchange as much or as little as you like as long as you do not exceed the maximum limit.

The limit depends on the circumstances of your retirement as follows:

  • With an ill health pension, or
  • With an age retirement pension based on 30 years’ pensionable service, or
  • With a deferred pension, or
  • At or after normal pension age(55)
  • Maximum commutation of one quarter of pension (only the lower tier ill-health pension can be commuted in the case of a higher tier ill-health award)
  • At age 50 or over but below age 55, with 25 or more but less than 30 years’ pensionable service
  • Lump sum must not be greater than two and a quarter times the pension before commutation

The amount provided as a lump sum is decided by factors provided by the Scheme Actuary. The factor used will depend upon your age in completed years and months on the day your pension starts.

HM Revenue and Customs limit the amount of lump sum which a pension scheme member can receive tax-free. The limit is most likely to be exceeded if your commutation factor is greater than 20. However, when your pension becomes due, the FRA’s pension administrator will be able to tell you how much you can exchange while remaining within the tax limits.

Example of how a commuted lump sum is worked out

A protected FPS (NI) 2007 member born on 10 October 1966 has a last day of service of 17 May 2021. They have completed 30 years of service and are entitled to immediate payment of pension.

They choose to exchange the maximum amount of pension, in this case, one quarter.

The pension before commutation is £20,000 a year.

On the day the pension starts their age will be 54 years and 7 completed months; the relevant commutation factor is 22.1.

The maximum lump sum will be: £20,000/4 x 22.1

=     £5,000 x 22.1

=     £110,500 one off payment (minus any tax that may be payable)

The pension after commutation will be: £20,000 – £5,000

=     £15,000 a year

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