COMMUTATION OF PENSION

The Teachers' Superannuation (Amendment) Regulations 1996 introduced a provision from the 1 October 1996, to allow a teacher who is retiring on serious health grounds to commute his/her pension to a lump sum. This would normally occur when the teacher has a terminal illness and is not expected to live more than a year.

The lump sum payment will be equal to five times the annual pension, at the rate it would have been payable on the retirement date (had the teacher not elected to commute) less five times the annual rate of the Guaranteed Minimum Pension (GMP), which cannot be commuted.

The commutation of the pension will not affect the payment of the teacher's retirement lump sum, nor will it in any way affect potential family benefits.

Guaranteed Minimum Pension

A teacher will obviously wish to have some idea of the capital sum available before indicating an interest and receiving more accurate details from Teachers' Pensions.

However, the GMP, which cannot be commuted, will vary from case to case. In the cases our NUT Regional office has dealt with so far, the GMP represented approximately 25 per cent of the pension payable. Any teacher should be aware, however, that this figure may well be different in their particular case.

Teachers will not lose their right to payment of GMP by commuting their pension. This sum will be paid to them as an annual pension, in monthly instalments, for so long as they survive.

Income Tax

Teachers' Pension has confirmed that the lump sum payable in respect of the commuted pension will not be subject to income tax. Although the normal retirement lump sum is tax free, the teacher's pension forms part of a teacher's income for tax purposes.

However, because the Guaranteed Minimum Pension cannot be commuted and, therefore, the whole of the pension is unable to be commuted, the resulting lump sum payment will not be subject to income tax.

Death Occurring Before Completion of the Process

Teachers' Pensions has taken the view that if a teacher indicates a wish to commute his/her pension but dies before the process can be completed it is likely that they will look sympathetically at any case where death occurs after the agreed last day of reckonable service and will accede to the teacher's wishes. In such circumstances, however, the lump sum would need to be paid to the teacher's estate. If however, a teacher indicated a wish to commute the pension but died whilst still employed in reckonable service, Teachers' Pensions would have no alternative but to deal with the case as a death in-service and pay a Death Grant accordingly.

Death Grant

The death grant payable is whichever is the greater of:

The Teachers' Superannuation (Amendment) Regulations 1994, which came into effect on 1 May 1994, enable a teacher to nominate any person to receive the Death Grant and it is only in the absence of such a nomination that the Death Grant would be paid to the spouse, in the case of a married teacher, and to the estate in the case of an unmarried teacher. Therefore, unmarried teachers, in particular, who discover that they were terminally ill, may wish to consider making a nomination for the Death Grant in order to avoid it becoming part of the estate for the purposes of assessing Inheritance Tax.

A form for the nomination of a Death Grant can be obtained from Teachers' Pensions.

CHECKLIST

In order to commute a pension, a teacher needs to:


Source: NUT Regional Office Briefing Paper

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