Revenue set the rules for maximum tax-free lump sums and 3/80 x salary x years of service is one of a number of methods. Other methods are detailed here. [broken link removed]
Assuming that your scheme has amended its rules to accommodate changes brought in by Finance Act 2011, then you can also calculate your lump sum as 25% of the overall fund.
Thanks LDFerguson,
This is very useful. Do you know how I can access the full document ? I can see all the individual chapters by changing the digits in the link you supplied and chapter 1 indicates that all terms in italics are defined in Appendix 1. I cant figure out the correct link to access Appendix 1 though.
Specifically I am looking for the definition of the term final remuneration. I am being made redundant but am many years from retirement age so I am trying to figure out what final remuneration means in this context. It could be the remuneration at the date I get made redundant, or if I find another job and hold it till retirement it could be the remuneration from that job when I hit retirement age, or I suppose it could be something else? Hopefully the definition in Appendix 1 will clarify. So does anyone know how I can access it ?
Thanks,
Usjes.
Thanks LDFerguson,
This is very useful. Do you know how I can access the full document ? I can see all the individual chapters by changing the digits in the link you supplied and chapter 1 indicates that all terms in italics are defined in Appendix 1. I cant figure out the correct link to access Appendix 1 though.
Specifically I am looking for the definition of the term final remuneration. I am being made redundant but am many years from retirement age so I am trying to figure out what final remuneration means in this context. It could be the remuneration at the date I get made redundant, or if I find another job and hold it till retirement it could be the remuneration from that job when I hit retirement age, or I suppose it could be something else? Hopefully the definition in Appendix 1 will clarify. So does anyone know how I can access it ?
Thanks,
Usjes.
It's the remuneration from the job you're leaving, indexed for inflation until you retire. A reduction in maximum benefits is applied to account for the number of years' ACTUAL service relative to the number of years' POTENTIAL service.
The pension scheme broker should be able to calculate your entitlement to a lump sum now, which would only be adjusted for inflation. The calculation methods are complex and varied and I wouldn't recommend DIY.
Let's simplify it a little bit. For the purpose of this example, I'm going to assume that...
- Redundancy date is 2014
- You had a higher salary (including allowable elements e.g. BIK and bonuses) in 2012 than in 2014
- Your retirement date is 2020
In this example it's in your best interests and permissible for you to use your salary in 2012 rather than your salary in 2014, as 2012 was the higher salary.
You're permitted to use indexation (a) from 2012 to 2014 and also (b) from 2014 to 2020 to arrive at the final figure in 2020.
The 3/80 scale ignores any other pension benefits you may have. When using the uplifted scale you must take other pension benefits (excluding State pensions) into account and reduce the maximum benefits by the others.
Basically I am asking if anyone can construct a scenario where the 3/80 method gives you a value in excess of the 'uplifted scale' method because if not then it seems that the 30/80 method is redundant. And I am trying to understand why revenue would include a redundant method.
You worked for 20 years in high-paying job A with a DB pension scheme. You then started job B that paid far less. In calculating your benefits from Job B using the Uplifted Scale, your big pension from Job A might wipe out your smaller benefits from Job B.
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