PSI6.5.3 - Total Benefits on Retirement at Normal Retirement Age: Maximum Total Benefits - Public Sector Type Schemes

(This archived guidance relates to HMRC discretionary practice before the 6th April 2006. For current guidance on Registered Pension Schemes see the Registered Pension Schemes Manual)

The provision of separate pension and lump sum benefits on Civil Service lines is not often met in the private sector but is common in public sector schemes. To calculate a member’s total benefits from such a scheme the lump sum must be converted into its pension equivalent.

There is an implied commutation factor of 9:1 and so, by dividing the lump sum by 9, a lump sum of 3/80ths of final pay for reach year of service becomes a pension accrual rate of 1/240th. The maximum approvable accrual rate for the non-commutable pension for each employee with 40 years’ service or less is 1/80th of final pay for each year. The aggregate accrual rate is thus 1/60th of final pay for each year of service (1/240th + 1/80th). For members of such schemes subject to the Finance Act 1989 requirements, to arrive at the pension equivalent of the lump sum for the purposes of ensuring that total benefits do not exceed Inland Revenue limits, the lump sum should be divided by 12. Here a lump sum of 3/80ths of final pay for each year of service becomes a pension accrual rate of 1/320th which when added to the non-commutable pension accrual rate of 1/80th produces an aggregate accrual rate of 1/64th of final pay for each year of service.

A different limit applies where an employee’s benefit rights in the scheme are reduced by a pension sharing on divorce order and the pension debit must be taken into account for Revenue limits purposes (see PSI8.1.49).