Factors are provided to reduce the benefits of members who wish to retire before their normal pension age. The factors are provided in years and months, and the appropriate factor should be selected based on age in complete years and months at the date of early retirement.
This section applies only to the voluntary early payment of main scheme benefits, Added Years' pension and Additional Pension.
Factors are used to reduce the benefits of members who wish to retire before their normal pension age. The benefits payable on early retirement are determined by applying the appropriate reduction factor to the accrued benefit entitlement(s) at the date of retirement using the formula below and factors in Early Retirement Factors. Please note that, in the case of retirements before age 55, these factors allow for the fact that Pension Increase (PI) is not payable until age 55 and therefore no adjustments are needed at age 55 other than the addition of accrued PI.
Early retirement pension =
Main scheme pension x Factor ERF1
+ Added Years' pension (where normal pension age is 55) x Factor ERF12
+ Added Years' pension (where normal pension age is 60) x Factor ERF1
+ Added Years' pension (where normal pension age is 65) x Factor ERF2
+ Additional Pension (option exercised before 01/04/11 where normal pension age is 60) x Factor ERF5
+ Additional pension (option exercised before 01/04/11 where normal pension age is 65) x Factor ERF6
+ Additional Pension (option exercised on or after 01/04/11 where normal pension age is 60) x Factor ERF1
+ Additional Pension (option exercised on or after 01/04/11 where normal pension age is 65) x Factor ERF2
Early retirement lump sum =
Main scheme lump sum x Factor ERF7
+ Added Years' lump sum (where normal pension age is 55) x Factor ERF13
+ Added Years' lump sum (where normal pension age is 60) x Factor ERF7
+ Added Years' lump sum (where normal pension age is 65) x Factor ERF8
Points to note in using factors:
- Main scheme pension should include any transferred-in pension
- Reduced benefits should be calculated before commutation option is exercised. The resultant lump sum after any commutation option is exercised is then not subject to further reduction.
- The amount of Added Years' pension (and associated lump sum) should first be multiplied by an appropriate proportion, which is calculated as 'period for which contributions were paid divided by period for which contributions should have been paid' in accordance with scheme regulations.
Early retirement pension =
Main scheme pension x (1 / [Factor ERF3(A) / PI + ERF3(B)])
+ Added Years' pension (where NPA is 55) x (1/ [Factor ERF14 / PI + 1.000])
+ Added Years' pension (where NPA is 60) x (1/ [Factor ERF3(A) / PI + ERF3(B)])
+ Added Years' pension (where NPA is 65) x (1/ [Factor ERF4(A) / PI + ERF4(B)])
+ Additional Pension (option exercised before 01/04/11 where normal pension age is 60) x Factor ERF5
+ Additional Pension (option exercised before 01/04/11 where normal pension age is 65) x Factor ERF6
+ Additional Pension (option exercised on or after 01/04/11 where normal pension age is 60) x Factor ERF1
+ Additional Pension (option exercised on or after 01/04/11 where normal pension age is 65) x Factor ERF2
Early retirement lump sum =
Main scheme lump sum x (1/[Factor ERF9(A)/PI + Factor ERF9(B)])
+ Added Years' lump sum (where NPA is 55) x (1/ [Factor ERF15(E)/PI + Factor ERF15(F)])
+ Added Years' lump sum (where NPA is 60) x (1/ [Factor ERF9(A)/PI + Factor ERF9(B)])
+ Added Years' lump sum (where NPA is 65) x (1/ [Factor ERF10(C)/PI + Factor ERF10(D)])
Points to note in using factors:
- Main scheme pension should include any transferred-in pension.
- Reduced benefits to be calculated before any lump sum commutation option is exercised. The resultant lump sum after any commutation option is exercised is then not subject to further reduction.
- 'PI' is equal to the Pension Increase Factor from deemed date of PI to the date of taking benefits (and should be greater than or equal to 1).
- Factors should be multiplied by amounts of benefits before the addition of any pension increases to calculate the reduced amounts to be paid.
- Pension increases from the date of exit to age 55 on reduced pension to be awarded on reaching age 55.
- Increases from date of exit to date of early payment on reduced lump sum (plus any extra lump sum from exercising a commutation option) to be paid on reaching age 55 or earlier death.
The reduction factors applicable for members with special class status are the same as for other 1995 Section members i.e. the reduction is applied in respect of the period by which retirement precedes age 60 except for Added Years' pension with an NPA of 55.
Early retirement pension =
Main scheme pension x Factor ERF2
+ Additional Pension (option exercised before 01/04/11) x Factor ERF6
+ Additional Pension (option exercised after 01/04/11) x Factor ERF2
Points to note in using factors:
- Main scheme pension should include any transferred-in service
- Reduced benefits should be calculated before any lump sum commutation option is exercised. The lump sum after any commutation option is exercised is then not subject to further reduction.
For Choice Optants a mandatory lump sum (equivalent to the lump sum in respect of pre 1 April 2008 service which these members would have received in the 1995 Section had they not chosen to move to the 2008 Section) must be taken.
If retiring at 60 or over the mandatory lump sum is unreduced. If retiring under age 60:
Mandatory lump sum = Unreduced mandatory lump sum x Factor ERF7
Early retirement pension =
Main scheme pension x Factor ERF2
+ Mandatory lump sum (determined in the point above) x Factor ERF11
+ Additional Pension (option exercised before 01/04/11 where normal pension age is 65) x Factor ERF6
+ Additional Pension (option exercised on or after 01/04/11 where normal pension age is 65) x Factor ERF2
Points to note in using factors:
- Main scheme pension should include any transferred-in service and as used in the formula above is before any commutation for mandatory (and any further optional) lump sum.
- Reduced pension is calculated before any lump sum commutation option is exercised, including in respect of mandatory lump sum.
- The total lump sum, as a combination of the mandatory lump sum calculated above and any additional lump sum due to exercising additional commutation is then not subject to further reduction.
In certain situations, members may have some previously deferred benefits as part of their entitlements, i.e. where the deemed date for PI purposes is before the actual date of retirement. This may occur due to periods of service with pay protection, officers being made redundant with previous practitioner pensions or other possible scenarios.
Factors can be used as normal for these members except if members are retiring before age 55. In these cases, the 'deferred benefits' should be treated separately to the other benefits and, in respect of that part of the member's benefit entitlement, the factors for use for preserved members should be used instead of the factors for retirement from active status. That is, for the 'deferred benefits', benefits should be reduced using factors (1/ [Factor ERF3(A) / PI + ERF3(B)]) or (1/ [Factor ERF9(A) / PI + Factor ERF9(B)]) for the pension and lump sum respectively and the other benefits should be reduced using the factors ERF1 and ERF7 for the pension and lump sum respectively. If there are any queries, please refer these calculations to GAD.
On early retirement, pension debits should be reduced to reflect that the debit will be in effect for a longer period. Pension debits (including increases to date of retirement) should be treated as main scheme pension for the purposes of determining which reduction factors should be applied. Therefore, factors ERF1, ERF2 or (1/ [Factor ERF3(A) / PI + ERF3(B)]) should be applied as applicable to the pension debit (increased to date of retirement). The factors ERF7 or (1 / [Factor ERF9(A) / PI + Factor ERF9(B)]) should be applied to the lump sum debit if appropriate.
For NPA 55 members retiring between age 55 and 60 from active service who had a pension sharing order implemented before age 55, the pension debit will need to be reduced even though the member is not technically retiring early. Other scheme benefits are not affected and do not need to be adjusted. Factor ERF1 should be applied to the pension debit and Factor ERF7 to the lump sum debit.
Subject to meeting certain conditions, members liable to an Annual Allowance charge can make an election requiring the Scheme to pay an amount of the charge on their behalf out of their pension benefits (referred to as Scheme Pays). A scheme pays debit is determined for any year an election is made (a negative deferred benefit). This debit is applied when the member takes their benefits.
The debit is subject to annual increases in line with the Pension (Increase) Act 1971, in deferment and payment. Dependants' benefits are unaffected by Scheme Pays, i.e. reductions do not apply to dependants' benefits payable on a member's death.
On early retirement, the pension and lump sum debits due to Scheme Pays should be applied to main scheme benefits after they have been reduced to allow for early retirement. The debits should be applied to benefits before any other member options are exercised, e.g. commutation. Please refer to the Scheme Pays guidance for more details and factors required to calculate this benefit reduction.
Actuarially-reduced early retirement is not allowed if the reduced main scheme pension will be less than a member's guaranteed minimum pension (GMP) at GMP payment age (65 for males and 60 for females). The following test should be applied to check whether a member is eligible for actuarially-reduced early retirement.
The GMP must be covered by the reduced value of the pension after a member has exercised any commutation option (and therefore also after any pension debits due to divorce or Scheme Pays have been applied). It may be therefore that actuarially reduced early retirement is permitted but only if no pension is commuted.
The GMP test is set out below:
Step 1 - eligibility for early retirement
- Calculate the member's pension excluding any Added Years but including any transferred-in service (and before any commutation option):
A = Final Pensionable Pay x Reckonable Service / 80
(Note: For 2008 Section Optants, an accrual rate of 60ths should be used instead)
- Apply the relevant early retirement factor if any:
B = A x ERF1 or ERF2 or (ERF3(A) / PI + ERF3(B)) as relevant
- Take revalued annual GMP at date of retirement and add ERF16 for each complete year to GMP payment age:
D = Revalued GMP at retirement date × [1 + ERF16 x (period to date GMP payable)]
- Check if B is greater than D. If yes, the member is eligible to retire on actuarially reduced benefits at the relevant age. Otherwise, voluntary early retirement at the relevant age is not permitted.
Step 2 - scope for commutation
- Apply the commutation factor to the [additional] lump sum required (total lump sum for 2008 section members) and calculate the residual pension:
C = Total pension* (B) - ([additional] lump sum / 12)
*after application of ERF if applicable
- Check if C is greater than D. If yes, the member is eligible to benefit C, i.e. commutation up to the relevant [additional] lump sum.
- Otherwise the member is only permitted to exchange a smaller proportion of pension for a lump sum of up to 12 x (B - D), with corresponding reduction in pension of (B - D).
- Note both steps 1 and 2 must be satisfied for voluntary early retirement.
