PSI10.1.12 - Retirement before Normal Retirement Date: General - Pre-FA 89 basis

(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)

[PN 7.47 and 8.37]

For other members not subject to the post-Finance Act 1989 discretionary regime described above, the maximum approvable limits on total benefits and lump sum benefits on early retirement are described below. The limits are modified (see PSI10.1.32) where a member’s benefit entitlement in the scheme is

• permanently reduced by a pension sharing on divorce order (see PSI3.5.4), and
• the pension debit must be taken into account for Revenue limits purposes (see PSI6.5.89).

Total Benefits

The greater of 1/60th of final remuneration for each year of service (with a maximum of 40 years to count), or an amount calculated by the formula N/NS x P where:

N is the number of actual years' service completed at retirement, with a maximum of 40 years to count.
NS is the number of years potential service to NRD. This may be limited to 40 to give a better result where the employee can complete more than 40 years potential service.
P is the maximum pension that would have been approvable if the employee had remained in service to NRD (see Part 6, Section 5) by reference to final remuneration calculated at the date of retirement.
Any restriction for retained benefits (see PSI6.5.51-69) at their value at the date of early retirement must be made in arriving at P before multiplying by the fraction N/NS.

Scheme rules may restrict the application of the N/NS formula to members whose earnings while a member of the scheme have exceeded £10,000 and who at the time of leaving pensionable service are 45 years of age or more. Where as a result of the restriction the N/NS x P formula does not apply, the maximum total benefits will be as set out in PSI6.5.6 and PSI6.5.8 by reference to years of service to the date of retirement.

Lump Sums

1. Pre-17 March 1987 continued rights

• the greater of: 3/80ths of FR for each year of service (maximum 40)
  
  

or N/NS x LS

where N and NS have - the same meanings as above LS - is the maximum lump sum that would have been approvable if the employee had remained in service to NRD (see PSI8.1.23), by reference to FR calculated at the date of retirement. Any restriction for retained benefits (see PSI8.1.31) at the value at the date of early retirement must be made in arriving at LS before multiplying by the factor N/NS

2. Pre-June 1 1989 continued rights

• the greater of: 3/80ths of FR for each year of service (maximum 40), or
• an amount calculated in accordance with PSI8.2.24.

where total benefits are granted at a rate of 1/30th of FR for each year of service (up to 20 years) or where A – B/ C - B in the formula in PSI8.1.24 is equal to or exceeds 1, the maximum approvable lump sum is calculated by reference to the table in PSI8.1.23 to determine LS. The fraction N/NS as above is then applied to the result.

3. Scheme approved prior to 27 July 1989, member post FA 1989, but who retains the pre- FA 1989 basis for early/late retirement

• the greater of:

3/80ths of FR for each year of service (maximum 40)
or
an amount equal to 2.25 times the initial rate of pension to be paid (see PSI8.1.25).

Example A member with pre-17 March 1987 continued rights retires early after completing 10 out of a possible 20 years' service. The member's final remuneration at the date of leaving is £12,000. The member has a retained benefit (valued at the date of early retirement) of £2,000 in pension terms (part of which is commutable for a lump sum of £4,500).

P is [2/3 x £12,000] - £2,000 = £6,000
LS is [120/80 x £12,000] - £4,500 = £13,500

The maximum early retirement pension (N/NS x P) payable is:

10/20 x £6,000 = £3,000. This is greater than a pension based on the N/60ths formula which is:
£12,000 x 10/60 = £2,000.

The maximum early retirement lump sum (N/NS x LS) payable is:

10/20 x £13,500 = £6,750. This is greater than the lump sum based on the 3N/80ths formula, which is:
£12,000 x 30/80 = £4,500.