How your pension is built up
At a glance
Your pension is based on how long you were a member of the scheme and your pay. It is payable for life and, when you retire, you’ll also receive a tax-free lump sum of four times your pension.
You are in the
2006 scheme
Annual build up
Pension and tax-free lump sum
Your pension is calculated as:
Your lump sum is calculated as:
You have the option to exchange some of your lump sum for an increased annual pension. This is known as inverse commutation.
Example - Pension and lump sum
Amhir has been a member of the 2006 scheme for 17 years. His final pensionable pay is £50,000.
Amhir’s pension and lump sum are calculated as:
Annual pension
Lump sum
Your highest pay
What is final pensionable pay?
Generally final pensionable pay is your highest pay received in a single year in the 10 years before you retire. It can be your:
- Pensionable pay in the 12 months before retirement; or
- Pensionable pay in either of the two preceding years; or
- Pensionable pay averaged over any three consecutive years, in the seven years before that
Example - Final pensionable pay
The year before Alex retired, he was given temporary promotion.
His pensionable pay in the three years prior to his retirement has been:
| Year of retirement | £50,000 |
| 1 year before retirement | £62,000 |
| 2 years before retirement | £60,000 |
His average pensionable pay, for the purpose of calculating his pension, will be based on his salary in the year prior to retirement (£62,000).
Final salary link
Are you building up benefits in the 2015 scheme?
The 2015 scheme provides members with final salary service in both the 1987 scheme and the 2006 schemes with a final salary link. This means that if you are also building up benefits in the 2015 scheme, your average pensionable pay for calculation of 2006 benefits will be based on your earnings at the date you retire and not when you left the 2006 scheme.
The final salary link can be retained even if you leave pensionable service and come back later, as long as the gap is not more than five years.
How long you were a member
What is pensionable service?
Pensionable service is the amount of time that you were contributing to the 2006 scheme. It is capped at 35 years.
It includes:
- Regular service where you made contributions
- Service where contributions were deemed to be paid (e.g. the first 26 weeks of maternity leave)
- Transferred in service from another police force, including a Scottish force or the Police Service of Northern Ireland
- Periods of ‘relevant service’ under Section 97 of the Police Act 1996
- Transferred in service from a different pension scheme
- Part time working (service is calculated on a pro-rata basis)
Getting the right balance
Exchanging lump sum for pension
You can choose to exchange some of your tax free lump sum for an increased pension.
Calculating increased annual pension
The amount you can increase your annual pension by is calculated as:
The exchange of lump sum for increased annual pension is also called inverse commutation.
Lump sum factor in retirement
Enter the age you want to retire in years and months to find out the factor used to calculate your additional annual pension.
Example
When Thomas retires at age 58 and 9 months, he has an annual pension of £12,500 and a lump sum from the 2006 scheme of £50,000.
He wants to exchange his lump sum for additional annual pension.
The factor used in the calculation is 21.39.
As he has exchanged all of his lump sum for additional annual pension, his pension and lump sum will be:
NPCC Pension Podcast - Episode 3
You can find out more about exchanging lump sum for annual pension in the podcast episode.
See the full list of factors used to exchange lump sum for pension in the resources section.
Limits on what you can build up
Annual allowance
The annual allowance limits how much your pension (from all pension schemes) can grow each year before tax charges might apply. A figure known as your ‘pension input amount’ is used to see how much you have built up.
For the 2006 scheme, this is calculated as:
To calculate the value of your police pension scheme benefits, known as the capital value, you use the following formula:
More details about the annual allowance can be found in the 2015 annual allowance section.
Example - Calculating 2006 pension input amount
Meet Maya, she has benefits in the 2006 scheme.
Annual pension at start of year
£10,000
Lump sum at start of year
£40,000
Annual pension at end of year
£12,000
Lump sum at end of year
£48,000
CPI
Calculate benefits at the start and end of year
Value of benefits at the end of the year = pension x 16 + lump sum
£240,000
Value of benefits built up at the start of the year = pension x 16 + lump sum + an adjustment for CPI
£203,400
Compare start and end of year values
£36,600
Maya has the standard annual allowance of £60,000 and as the pension input amount of £36,600 is less than this Maya has not breached the annual allowance, does not need to utilise any carry forward, and has not triggered an annual allowance tax charge.