You will be able to choose to give up part of your pension for an additional lump sum. You can choose how much extra lump sum you want up to a maximum set by HMRC. You must give up £1 of annual pension for each £12 of additional lump sum you take. You can find out how much additional lump sum you can take, and the effect it will have on your pension by using the lump sum calculator.
Additional Lump sums - example
Using the information from the example above, the maximum amount of additional lump sum Lloyd can take is £26,071.37.
If Lloyd chooses to take the additional lump sum, he has to give up £1 of pension for every £12 of total lump sum. This means that his pension will permanently reduce by £2,172.61 (£26,071.37÷12).
Pension choice
If Lloyd:
takes no additional lump sum he will have a pension of £8,333.32 (£5,000 + £3,333.32) with an automatic lump sum of £15,000; or
takes the maximum additional lump sum he will have a pension of £6,160.71 (£8,333.32 - £2,172.61) with a total lump sum of £41,071.37 (made up of his automatic lump sum of £15,000 and maximum additional lump sum of £26,071.37).
He can choose to take any combination of pension and lump sum within the maximum allowed.
Reducing your annual pension in this way generally has no impact on your dependants’ pensions as these are based on your pension before you give any up for a higher lump sum.
However, if you are aged 75 or over when you die, the tax rules on pensions may restrict the total of any dependants’ pensions payable to a maximum of the amount of your pension at the date of your death.
If you take a higher lump sum, your dependants’ pensions may reduce if you die after reaching 75 and leave two or more children under age 18 (or under age 23 if they are in full-time education).
If you are single and eligible to receive a refund of WPS contributions on retirement, you will have less scope to give up pension for an additional lump sum. This is because the total of any WPS refund plus any additional lump sum you choose to take cannot exceed the maximum permitted lump sum.
Pensions increase
Pensions in payment may increase every year in line with the cost of living. All pensioners aged 55 or over get these increases. Preserved benefits are also increased up to the date they become payable.
You will also receive the ‘cost of living’ increases if you are under 55 and if you are retired because of ill health.
Cost of living increases are also added if:
a pension is paid to a widow, widower or surviving civil partner; or if
a pension is paid to, or in respect of, a child.
Example
Pensions increase
You retire in mid-October with an annual pension of £7,500.
The following April, the cost of living increase is 3.5%.
As you retired exactly halfway through the relevant 12-month period, the pension is increased proportionately (that is, by one half of the total increase – 1.75%).
During the second year, the cost of living increase is 4.2%. Your annual pension becomes £7,631.25 after six months and £7,951.76 a year later.
