PCLS at normal pension age
The scheme rules determine accrual rates, such as 3/80th of final pensionable pay
For private sector DB schemes – the pension income is usually commuted to provide PCLS
GMP cannot be commuted for cash
Max 25% of value of benefits can be PCLS – PCLS = (PCLS + (20 x residual pension)) x 25%
The commutation factor of 12:1 means £12 of PCLS is gained when £1 of income is given up.
Commutation formula; C = commutation factor
Question - Use Your Note Taker To Jot Down Ideas / Calculations
Sarah is about to retire at the age of 65, the normal pension age of her company’s defined benefit pension scheme. Sarah has pensionable service of 26 years and final pensionable remuneration of £45,000. Part of Sarah’s pension can be commuted for a PCLS, using a commutation factor of 12:1. The PCLS accrues at a rate of 3/80ths for each year of pensionable service.
a) Calculate Sarah’s PCLS entitlement at the scheme’s normal pension age.
b) By how much would the pension calculated in question 4.2 reduce if Sarah chooses to take all of her PCLS?
Sarah’s PCLS and reduced pension entitlement is calculated as follows:
a) Sarah’s maximum PCLS would be 26 × 3/80ths × £45,000 = £43,875.
b) Her annual pension will be reduced by: £43,875/12 = £3,656.25
and her reduced pension will therefore be: £19,500 – £3,656.25 = £15,843.75.