USS Financial Advisor Training. Presentation for USS accredited Financial Advisers

Transcription

1 USS Financial Advisor Training Presentation for USS accredited Financial Advisers

2 Summary of Comments on UNIVERSITIES SUPERANNUATION SCHEME This page contains no comments

3 1 Agenda 1. final salary or career revalued benefits 2. contributions 3. how to calculate the retirement benefits 4. what happens if? 5. increasing member s benefits 6. Annual and lifetime allowances 7. USS website 8. questions?

4 Page: 2 Number: 1 Author: Presenter Subject: Presentation Notes Date: 14/08/ :45:03 Here is the full agenda for this training session, not neccesarily all in order but an overview of what we ll cover. It starts by explaining the two different sections within the USS and then goes on to explain how much it costs to be a member of USS. If you have attended a previous presentation then some of the content will be familiar, but be aware that there have been changes recently made to the scheme and to the tax rules. We will also explain how a member can increase their USS benefits and will cover what USS is doing now and in the future with regards to communicating with members, in particular our website development. The scheme has two sections providing different types of defined benefits. In this presentation we have followed the colour coding adopted by the USS in their literature Green applies to both sections, purple is for the final salary section and blue for the career revalued. For those that are colour blind we have also included in the heading of each slide whether it apples to both, final salary section or career revalued benefits section If after reading the presentation you have any questions, please these questions in the first instance to uss@thepfs.org

5 Final Salary/Career Revalued Benefits

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7 1 Conditions to retain Final Salary membership All active members at 30 September 2011 Deferred members at 30 September 2011 if they rejoin before 31 March 2014 Final salary members that leave and rejoin within 30 months So long as they have deferred benefits in the scheme

8 Page: 4 Number: 1 Author: Presenter Subject: Presentation Notes Date: 14/08/ :45:04 A new section, career average was created for members joining on or after 1st October This new section was formed following a process set out in the scheme rules involving representatives of USS Employers (Employer s Pension Forum) and USS members (UCU) together with a jointly appointed independent chairman, and was essential to ensure that the USS remained attractive and affordable and continue to remain an integral part of remuneration. Changes have also been made to the final salary section and these will be covered throughout the presentation. Those that retain eligibility for Final Salary are:- Those already members of that section on 30 September 2011, or Those that have deferred benefits in Final Salary (having left before 1 October 2011) and rejoin before 31 march 2014, or Exisiting Final Salary members that leave but rejoin within 30 months but note, they lose their eligibility if they no longer have deferred benefits in the Final Salary section. If the employer provides different pension arrangements for academic or comparable staff and support staff and they are promoted to a job that entitles them to membership of the USS then provided the promotion is prior to 1st October 2013 they will join the final salary section. The employer will confirm the section that applies and will issue a certificate to confirm this.

9 1 Final Salary/Career Revalued Benefits Both sections are defined benefit. The pension accrual for both sections is 1/80 th for each year of service and tax free cash entitlement of 3 times the pension The difference is with how the accrual is applied to calculate the defined benefit. Final salary section The cumulative accrual is applied to pensionable salary. service adjusted upwards for inflation Pensionable salary is based the best year earnings in your last 13 years of Career revalued benefits section The pension and tax free cash are calculated as 1/80 th and 3/80 th of salary each year and the benefit is increased by inflation

10 Page: 5 Number: 1 Author: Presenter Subject: Presentation Notes Date: 14/08/ :45:05 As a member of the final salary section each year the accrual of pension and tax free cash will be built up. The accrual are then applied to the member s pensionable salary. The pensionable salary will be based on either the best annual salary payable in the last 3 years or the best average over 3 consecutive years within the last 13 years. This can in some cases produce a pensionable salary figure salary higher than the actual salary paid. As a member of the career revalued benefits section the accrual of 1/80 will be applied to each year s salary and increased by inflation. based on the increase to Official Pensions as at 30 September each year and applied from April the following year. Increases are capped to a maximum of 10% in any one year. Increase up to 5% are fully matched by USS, if increases to official pensions are above 5%, then 50% of the excess is applied as an increase. So, if Official pensions rose by 10%, the USS increase would be 7.5%.

11 1 The calculation Final Salary

12 Page: 6 Number: 1 Author: Presenter Subject: Presentation Notes Date: 14/08/ :45:07 Members join and remain members of the USS because at some point in the future they want to retire and want to enjoy a set of benefits that will hopefully provide the member with a financially secure retirement. The pension in the Final salary section of the USS is calculated as 1/80th of your pensionable salary for every year and part year of the member s pensionable service. For part-time members the calculation is slightly different. If we use a simple example of a member working 50% of full-time hours, for every calendar year of membership only ½ of 1/80th of pensionable service is accrued. However, we calculate this against a full-time equivalent pensionable salary. So, if the actual part-time salary in this example is pa. then the full-time equivalent is pa. Let s look at an example.

13 1 Part-time calculation Final Salary Salary 000s years 3 years 10 years 5 years 100% 30% 100% 50% Years

14 Page: 7 Number: 1 Author: Presenter Subject: Presentation Notes Date: 14/08/ :45:09 This chart is based on a member with a 40 year career, nicely divided into 4 equal chunks of varying full and part-time service. The first 10 years are 100% full-time, the next at 30%, the next at 100% and the final ten years at 50%. This equates to 10 years service plus 3 years service, plus another 10 years and finally 5 years for the last period of part-time service at 50% of the full-time equivalent. In total therefore, the full-time equivalent pensionable service is 28 years, so the pension is 28/80ths of the members full-time equivalent pensionable salary. In other words, even though in this example the members actual salary on a part-time basis was 20000, the pensionable salary used will be

15 1 Pensionable Salary (Final Salary) Pensionable salary calculated in most favourable way possible based on last 13 years salary history all salaries indexed by RPI published as at relevant date better of best 12 consecutive months within in last 36; or best average over 3 consecutive years ending in last 10 years

16 Page: 8 Number: 1 Author: Presenter Subject: Presentation Notes Date: 14/08/ :45:10 Now let s look at a very important part of the USS pension formula, the pensionable salary. We are looking here at the final salary section of the scheme, it would be extremely unusual for the pensionable salary to equal the actual salary on the date of retirement, it might be slightly more or less. USS uses the best definition of pensionable salary currently allowed. We start off by obtaining up to the last 13 years worth of salary history, these historic salaries are then increased by the rise in retail price inflation from the date recorded to the retirement date..note this is still RPImight be worth mentioning as we use Official pensions (CPI) for pension increases, this was part of the scheme changes. We then do two comparisons. Firstly we look to find the highest consecutive 12 months of salary within the last 36 complete calendar months of employment and for most members this will be their last 12 months average salary. We then look back through the whole 13 year history and find the highest consecutive 36 month average salary, we then use the higher of these two figures as pensionable salary. What we are trying to do is find the highest possible salary in real terms. This is a safety net to catch members whose salary, for whatever reason is less in real terms at the end of their career than during an earlier period. One point to be aware of is that members have the option to elect for enhanced opt out. This will be covered later but as regards pensionable salary this is limited under this option. What follows is an example

17 1 Pensionable salary Calculation relevant date 31 st July 2011 Salary Date Annual Salary Date RPI Increase Indexed Salary Pensionable Salary 01/08/ ,500 n/a 48,500 48,500 01/08/ , / ,307 49,307 01/08/ , / ,597 49,597 01/08/ , / ,192 47,413 01/08/ , / ,653 47,546 01/08/ , / ,395 47,447 01/08/ , / ,589 47,433 01/08/ , / ,357 47,105 01/08/ , / ,353 46,301 01/08/ , / ,605 45,060 01/08/ , / ,945-01/08/ , / ,631 -

18 Page: 9 Number: 1 Author: Presenter Subject: Presentation Notes Date: 14/08/ :45:10 In this example the Salary date is when the new level of salary starts from. So for the 12 months up to 31st July ,500 will have been paid. The actual RPI used is the one published at the relevant date, so in this example the RPI figure used for the period 31st July 2011 is the June 2011 RPI of 235.2, as this was the last one published at 31st July Also the pensionable salary for the last 3 years is an annual figure whereas the ones before this use an average of the 3 consecutive years. You will not be required to do this calculation as this will be contained in the last page of the retirement quotation. Please also remember that a further check is made to see if the best average 3 years salary in the last 13 is more beneficial, if it is then that figure is used. However it is not just at retirement that you need the pensionable salary figures. As we will see later you will also need the pensionable salary for calculating the pension input amount for the annual allowance.

19 1 Final Salary Pensionable service service from normal contributions full-time part-time variable time service from added years AVCs service transferred-in service granted on entry (FSSU/Pre-University) Premature Retirement Compensation Scheme conversion of Prudential AVCs

20 Page: 10 Number: 1 Author: Presenter Subject: Presentation Notes Date: 14/08/ :45:10 As has already been demonstrated in other slides it is absolutely essential that you have full details of the member s service so that you are in a position to check it against the USS records. As we say in our covering letter to this presentation, it is absolutely vital you understand that in the first instance you should approach the individual s pay office at the respective university and ensure that their current salary has been notified to USS. We have direct experience of the fact that this is not always the case and in the circumstances where there has been a substantial increase in salary you may even find that USS has queried the change in salary and therefore any calculations etc are based on historical and not current salary figures. This is particularly important given the way the USS calculates salaries in respect of benefits during accrual and also at the time of taking benefits on retirement. We would further point out that individuals can have different service limitations. In other words, if their service was with an older university, for example Glasgow, they may well have uncapped salary in respect of their benefits. Were they to move to a new university, for example the University of Greenwich then their salary would become capped. If they then turn round and move back to Glasgow, their salary becomes uncapped again. This is a vital element of the scheme and it is absolutely essential that the advisers understand how this impacts on benefits. Missing a point like this could result in inadequate records at USS and the pay office significantly truncating the individual s benefits.

21 1 Final Salary Variable-time members Variable-time employees three categories of variable time employee Concurrent variable time Sole variable time Multiple variable-time calculation of service different calculation to a part-timer based on earnings each tax year compared to full-time equivalent determined by institution, or default salary figure ( 40,055 for 2012/13)

22 Page: 11 Number: 1 Author: Presenter Subject: Presentation Notes Date: 14/08/ :45:11 A variable time employee is one who is paid on a basis which is not calculated either by reference to a fixed annual salary or by some other method that would quantify the level of part-time working, in some cases. The employee may have a fixed term contract. The employer will be able to confirm if the employee is a variable time employee. Any doubt will be cleared up by USS scheme trustees. Variable time employees are different from part time employees and can fall into 3 categories concurrent variable time (an individual employed in regular employment with an institution who at the same time is employed as a variable time employee with another or the same institution), sole variable time (an employee who holds a single variable time pensionable post with one institution), and a multiple variable time (an employee with more than one variable time pensionable post at one or more institution). The last two are almost identical for pension purposes. The benefits are calculated using salary figures. For concurrent variable time employees the benefit is added to the accrual for the permanent role. For the other two categories there is no permanent salary and so the employer will provide an annual equivalent salary or where this is not practical the default salary will be used. The examples that follow may help.

23 1 Final Salary Variable-time members Concurrent employment Formula Pensionable service = A / B X C A is Actual Earnings in variable employment B is Full time equivalent earnings in regular employment C is Period of concurrency of both employments

24 Page: 12 Number: 1 Author: Presenter Subject: Presentation Notes Date: 14/08/ :45:11 The formulae used are as above It is important to remember that once the service is calculated it is simply added to their main service. The pensionable salary going forward is then simply based on their main service pensionable salary-you do not add to this figure any VTE earnings they had.

25 1 Final Salary Variable-time members Concurrent employment example Earning received from variable employment 7,000 (A) Salary from regular employment 38,000 (B) Period of concurrency is 1 year (C) ( 7,000 / 38,000) X 1year = 67 days from variable employment plus 1 year from regular employment Pension = (1+ 67/365) X 1/80 X 38,000 = pa

26 Page: 13 Number: 1 Author: Presenter Subject: Presentation Notes Date: 14/08/ :45:12 Following this through with an example, here we can see the concurrency very handily ran for 1 year and their salary in the main job was 38,000 pa, the additional service-based on their VTE earnings and this formula is 67 days, so by the end of this year the member has accrued in total 1 year 67 days, but as we said before applied to the pensionable salary from their main job-in this case 38,000-not 38,000 plus the 7,000 in this example.

27 1 Final Salary Variable-time members Sole variable-time employment Pensionable Service = (A / B x 100%) x 365 A is Actual *salary received B is Notional full-time equivalent Pension = Pensionable service x 1/80 x B *Salary is derived from contributions paid in year divided by 7.5%

28 Page: 14 Number: 1 Author: Presenter Subject: Presentation Notes Date: 14/08/ :45:12 For sole VTEs there s a similar formula but as there is no main job we need either to use a salary provided by the employer, being their appraisal of what this VTE role would pay as a full-time employee or the employer can opt to use a default salary figure, which USS publishes each year. Once you ve worked out the service, pensionable salary is then the contributions paid in that year divided by 7.5%.

29 1 Final Salary Variable-time members Sole variable-time employment - example default salary 40,055 actual earnings 7,000 Service = 7,000 / 40,055 X 365 = 64 days Pension = (64/365) X 1/80 X 40,055

30 Page: 15 Number: 1 Author: Presenter Subject: Presentation Notes Date: 14/08/ :45:12 For variable multiple employments the same formula is used. For multiple variable-time appointments at the same employer then the employer will advise the trustees of the total earnings and full time equivalent level of pay for all of the appointments. Where the multiple employments are with different employers then each period will be calculated separately. The above point cannot be stressed enough and this is why the factfinding on any individual has to be extremely detailed.

31 1 Final Salary MHO/Special Class members College of health transfer from NHS in mid-90s MHO class members retain right to retire on full pension from 55 Doubling of service once they have 20 years service Special class members have he right to go at 55 but no doubling Very low numbers remain circa 300

32 Page: 16 Number: 1 Author: Presenter Subject: Presentation Notes Date: 14/08/ :45:13 MHO is a mental health officer, and a special class member is one of the special classes as defined in a Health Service transfer agreement. This includes the transfer of employees to institutions from nurse training establishments and Colleges of Health. In Scotland and northern Ireland this includes transfers from Colleges of Nursing and Midwifery Education. MHO members can go at 55 without early retirement reductions but in addition they get doubling of service, once they have 20 years membership. Special Class members simply have the right to go at 55 without early retirement reductions. You may never meet one of these members as the numbers are now very low, circa 300 remain. If you do meet any MHO/Special Class members it s probably best to contact the Communications team at USS to find out how their benefits differ.

33 1 Final Salary Salary capping Pensionable salary Capped and uncapped Capped aka scheme specific cap Post 89 regime Period 1 st June 1989 (14 March 1989) to 5 th April 2006 inclusive One off election to remove capped service with payment from both institution and member Uncapped service from 6 th April 2006

34 Page: 17 Number: 1 Author: Presenter Subject: Presentation Notes Date: 14/08/ :45:13 One final and important point on salary is the fact that a member can have capped and uncapped salary. A one off contribution payable at any time can remove the capped earnings. The employer is also required to contribute. If the option to convert capped earning to uncapped is refused then it cannot be taken up later. It is absolutely essential for the adviser to complete a timeline of the individual s career in the university sector to determine that all elements of his time have been accounted for and should include any transfers in from other schemes such as local authority or civil service.

35 1 Career Revalued Benefits The Calculation Pension - Full-time and / or part time 1/80 th X Salary each year. Pension is then revalued each year up to retirement Salary = Contributions/6.5% Salary in Year Pension Calculation Pension for year Banked Pension 40,000 1/80 x 40, ,000 1/80 x 42, , ,500 1/80 x 43, , ,000 1/80 x 45, , Total Annual Pension 2,131.25

36 Page: 18 Number: 1 Author: Presenter Subject: Presentation Notes Date: 14/08/ :45:13 The pension in career revalued benefits section of the USS is calculated as 1/80th of salary each year which is revalued up until the pension comes into payment. The table on this slide illustrates the annual pension gained each year. It does not include revaluation which we can see in the next table.. There is no adjustment to obtain a full time equivalent for part time service with the career revalued benefits section. Additionally, there s no complicated calculations for Variable-time members-members simply get a pension based on what they ve paid in each year. In the table we ve expressed benefits as 1/80th of salary for each year, salary is however derived from what the member paid as a contribution, so their annual contribution divded by 6.5% is their salary, that s why we don t need to worry about part-time and VTE members in this section.

37 1 Career Revalued Benefits The calculation..continued Pension for year Inflation Inflation Calculation Banked Pension x % ( x 1.02) , % ( 1, x 1.03) , % ( 1, x 1.015) , Total Annual Pension 2,196.45

38 Page: 19 Number: 1 Author: Presenter Subject: Presentation Notes Date: 14/08/ :45:14 Once a pension for a year is calculated, for each year that follows until payment the pension will increase by inflation. The inflation rate that applies will be the same that applies to the increase to pensions in payment and for CRB members this means that all of their benefits increase in line with Official pensions but if official pensions increase by more than 5% then they only get half of the excess over and above 5%-up to an overall maximum of 10% in any one year.

39 Contributions

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41 1 Both sections Contributions Final Salary 7.5% Career Revalued Benefits 6.5% Cost Sharing Future rises in costs shared 35:65 between members and employers Contribution rates reviewed normally every 3 years

42 Page: 21 Number: 1 Author: Presenter Subject: Presentation Notes Date: 14/08/ :45:15 Members contribution to USS is set at 7.5% of pensionable salary for members of the final salary section and 6.5% for members of the career revalued benefits section. For members of the final salary scheme the contribution rate prior to 1st October 2011 was 6.35%. There are several changes made for members of the final salary scheme. This figure is defined in the rules, rules can be changed but the trustees currently have no intention of changing the member s contribution rate. The employer rate is currently 16% and this is not fixed. At least every three years a full scheme valuation is carried out and the value of the scheme assets is compared to the value of all the liabilities accrued at that point in time. The next valuation is due in If there are more assets than liabilities then the employer rate will either be unchanged or may reduce. If the value of assets is below the value of the liabilities then the rate may increase. The employer pays the balance of cost of providing the pensions promised. If there is a requirement to increase the overall contribution above the current aggregate level of employer and member contributions then the increase will be split 65% payable by employer and 35% payable by member. This will be subject to the JNC deciding not to come up with an alternative (as at June 11)

43 1 Both sections Contributions Cost of contribution modeller ( Based on a salary of 25,000pa, the actual cost from take-home pay is 4.73% Based on a salary of 50,000pa, the actual cost from take-home pay is 3.93%

44 Page: 22 Number: 1 Author: Presenter Subject: Presentation Notes Date: 14/08/ :45:15 There is a modeller on the website that will calculate the cost to the member of joining the scheme. NOTE-only the benefit modeller requires a login. The two examples above are from the final salary section and you can see that for a basic rate taxpayer the reduction in take home pay is 4.73% and for a higher rate taxpayer 3.39%. These figures also include the reduction in national insurance as the USS is contracted out. There is a similar modeller within the CRB section of the website.

45 Pension increases

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47 1 Final Salary Pension Increases Increase to pension in payment Percenatge Increase Year 1995 RPI Pension Increase

48 Page: 24 Number: 1 Author: Presenter Subject: Presentation Notes Date: 14/08/ :45:17 You will note that the historic pension increase here is for final salary section that is because the career averaged revalued benefits started 1st October 2011 Historically a USS pension in payment will increase annually based on the increase to Official pensions, which use RPI as their reference. In 2010 there was no increase, this was due to the fact that the RPI over the 12 month period ending September 09 was negativefell by 1.4%. Hence no increase. Since April 2011 USS pension increases, for both sections are still by reference to Official pensions, but they changed their reference from RPI to CPI. This is because USS follows what official pensions so, so public sector schemes, state pensions etc. this is what USS rules state. So when the chancellor changed the way on which official pensions benefits were increased USS followed suit. Any increase to the pension in payment will also apply to spouse, civil partner, and dependant pension. I mentioned earlier about there being changes to the scheme for existing final salary scheme members, well here is the second one pension increases. There is now a cap that applies to the maximum rate of increase in respect of service accrued from 1st October Members of final salary section will not have the pension increases capped in respect of the service prior to 1st October 2011.

49 1 Both sections Pension Increases Increases to pensions in payment The following cap applies to benefits accrued from 1 st October 2011 Annual increase to official pensions Increase payable by USS 5% or less Full increase matched More than 5% but less than 15% 15% or more 10% maximum 5% plus one half of the excess above the 5% level

50 Page: 25 Number: 1 Author: Presenter Subject: Presentation Notes Date: 14/08/ :45:17 Increases will continue to be in line with official pensions. Public sector pensions are paid to members of the public sector pension schemes like the NHS, Teaching and the Civil Service Schemes. The pensioners in the NHS, Teachers, and Civil Service schemes received a 5.2% increase in pension April 2012, which was the Consumer Price Index increase for the 12 month period to September 2011 ( RPI for same period was 4.6%). There was a change introduced to these schemes from 1st April 2011 with pension increases being linked to CPI where previously it was RPI. There is also a limit that will apply for all pensions that have accrued since 1st October This cap will also apply to the increase in the banked pension that is accrued in the Career Revalued Benefits section. Therefore the 5.2% increase in the CPI will be the equivalent to a capped pension increase on 5.1%

51 How to calculate the retirement benefits

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53 1 Both sections Tax-free lump sum Tax Free Lump Sum payable in addition to pension (standard package) standard tax-free cash is 3 X the pension option to take more cash (subject to limits) option to take less, or no cash Benefit Modeller available to calculate cash options and effect on the pension maximum cash is 25% of the capital value of the benefits (approx times standard pension)

54 Page: 27 Number: 1 Author: Presenter Subject: Presentation Notes Date: 14/08/ :45:18 An ever popular feature of any pension is the tax-free cash option. In USS the standard package of benefits is a pension plus three times that pension as tax-free cash. However, members can take more or less than this standard package of benefits, subject to limits set by HMRC. If the member takes more cash, they receive a lower pension. The decision only needs to be made at the point of retirement and is very personal. The member may wish to look at both the financial and possibly family health history to guide the member s choice. Looking at the financial side, what would the member do with the lump sum? Possibly they would pay off a debt, alternatively they would re-invest this money. The member needs to compare the return on this as compared to the extra pension they would receive by not opting for the cash. Of course the member may also just want to spend the cash, in which case they would just need to be sure they will have enough left over to meet their ongoing needs. It is obviously important to consider how long the member is possibly going to draw their pension, and this would be based on how long they think they will actually live into their retirement. It could be if they come from a family with an extended lifespan then they would be better off selecting the maximum pension in place of cash because they would benefit from drawing an index linked pension over a very long period. If they are not in the best of health then the member may want to take the maximum possible cash to enjoy it in their short but hopefully happy retirement. Whichever cash and pension option the members go for, on death within the first 5 years after retirement the scheme is designed to ensure that the total benefits they receive from USS are as far as possible equitable. The gamble therefore is their life expectancy after the first 5 years. The USS actuary thinks he knows how long the members will live and for a 60 year old male USS member he currently thinks age 83 is the limit, if the members think they can beat those odds then maybe the maximum pension might be attractive. The next slide illustrates the standard benefit package from the USS.

55 1 Both sections Tax-free lump sum Pension 10,000 Standard Cash 30,000 Capital Value 230,000 13% Standard Cash 30,000 87% Pension (20x 10,000) 200,000

56 Page: 28 Number: 1 Author: Presenter Subject: Presentation Notes Date: 14/08/ :45:19 The annual pension is multiplied by 20 to give a notional value. Hence the capital value of 230,000. You will note that the standard cash is 13% of the total capital value. The maximum cash available is 25% of the value of the member s total pension benefits. Taking a higher cash figure will reduce the annual pension. Therefore if they take more cash and less pension this will produce a different valuation on the total benefits as the next slide demonstrates.

57 1 Both sections Tax-free lump sum Pension 8,303 Standard Cash 30,000 Extra Cash 25,353 Capital Value 221,413 Standard Cash 30,000 75% 12% 13% Pension (20x 8,303) 166,060 Extra cash 25,355

58 Page: 29 Number: 1 Author: Presenter Subject: Presentation Notes Date: 14/08/ :45:19 You can see that the total value has changed. The valuation is one prescribed by HMRC for valuing pension benefits against the pension taxation allowances. More of this later. The decision only needs to be made at the point of retirement and is very personal. The member may wish to look at both the financial and possibly genetic reasons for their choice. Looking at the financial side, what would they do with the lump sum? Possibly they would pay off a debt, alternatively they would re-invest this money. The member needs to compare the return on this as compared to the extra pension they would receive by not opting for the cash. Of course the member may also just want to spend the cash, in which case they just need to be sure they will have enough left over to meet their ongoing needs. If we look at the generic side of things the members need to consider how long they are going to draw their pension, in other words how long do they think they will live into retirement. If they are from a family with a long history of longevity then they might want to go for the maximum pension rather than cash because the odds are they will be drawing this index-linked pension for a very long time. If however they are not quite so fortunate and perhaps they drink and smoke too much, then theyu might want to take the maximum possible cash and enjoy it in their short but happy retirement! Whichever cash and pension option the members go for, on death within the first 5 years after retirement the scheme is designed to ensure that the total benefits they receive from USS are as far as possible equitable.

59 1 Final Salary Tax-free cash sum Benefit conversion modeller (

60 Page: 30 Number: 1 Author: Presenter Subject: Presentation Notes Date: 14/08/ :45:19 This modeller is only suitable for Final Salary section members and is accessible without any login details. A version for CRB will be developed, but for the immediate future we should not see any retirements from CRB as they will not have enough service. To be meaningful the member must have a retirement quotation. The inputs ask for information on the quote although you can run this with fictitious data. On the right you will see the maximum benefit that can be taken. If the maximum pension is taken by moving the cursor to the right then the selected tax free cash on the top left will reduce to zero. Likewise if the maximum tax free cash is taken the pension in the bottom left will be at it s lowest. As the cursor moves the corresponding figure changes. There is a print option that produces a one page report that confirms the inputs and the benefits options selected. If you login to the Benefit Modeller (Final Salary) you can use the Future Benefits option there to see what options members have in terms of their pension and tax-free cash.

61 1 Both sections Normal retirement Normal Pension Age (NPA) currently 65 NPA to increase in line with State Pension Ages 1 October timetable to be announced for increase to State Pension Ages Retirement before NPA will be classed as early retirement but only in respect of service after any increase

62 Page: 31 Number: 1 Author: Presenter Subject: Presentation Notes Date: 14/08/ :45:20 The Normal Pension Age in USS, since 1 October 2011 (for future service) is 65. The USS rules allow for NPA to be increased in line with any increase to State Pension Ages. This means that it s very likely that from 1 October 2020 USS NPA will increase to 66. As with all changes of this nature this will only impact service after any change to NPA.

63 1 Both sections Future increases to NPA % % 96% 65 October 2020 NPA increases to 66

64 Page: 32 Number: 1 Author: Presenter Subject: Presentation Notes Date: 14/08/ :45:20 So, we have an additional tranche of service, to which a higher NPA applies. This means that if a member retires early, then for service after 1 October 2011 early retirement reductions will apply for each year earlier than age 65. For service before this age it really depends on what their contract of employment said and the reason for retirement. Please always refer to the retirement factsheet if you are due to see a USS member to remind yourself about the complicated early retirement service tranches in USS, as each period of service may have a different NPA to which early retirement reductions apply. Importantly, members aged 55 or more on 1 October 2011 were exempt from this change to NPA to 65 that occurred in October 2011.

65 1 Both sections Early retirement Anything before Normal Pension Age Own choice Employer consent from 60 Redundancy Severance Flexible retirement Incapacity retirement

66 Page: 33 Number: 1 Author: Presenter Subject: Presentation Notes Date: 14/08/ :45:21 Talking about early retirement there are a number of ways a member could draw their benefits early. We are covering both sections here, although it s fair to say most of this is aimed at Final Salary as it s far more complicated. For CRB members, essentially if they go before Normal Pension Age they will be subject to an early retirement reduction for each year and partyear earlier than the Normal Pension Age, unless they ve been made redundant before 1 October 2013, or are going on a severance deal granted by their employer, or in fact incapacity retirement. For ball-park figures the early retirement reduction is circa 4% for each year early, for each section of the scheme.

67 1 Both sections Early retirement Own choice Reductions apply for each year earlier than Normal Pension Age Employer consent from 60 Redundancy Pre October 2011 benefits in full, post reduced All benefits in full if 55 or more on 1 October 2011 and member of Final Salary section Until 1 October 2013 no reductions apply Severance No reductions

68 Page: 34 Number: 1 Author: Presenter Subject: Presentation Notes Date: 14/08/ :45:21 So let s look at this in a bit more detail If a member just decides to go and their employer hasn t agreed the retirement, that s fine, but they will be subject to full early retirement reductions for the amount of time earlier than NPA. If, from age 60, their employer consents than all benefits earned before 1 October 2011 are paid without a reduction. Benefits since 1 October 2011 are reduced for each year and part-year earlier than NPA. There is one exception to this-those aged 55 or more on 1 October 2011 are exempt from this and so in this situation can receive all their benefits without any reduction for early retirement. Redundancy is a changing situation. Until 1 October 2013, for statutory redundancies, members are entitled to a full pension based on service and pensionable salary at the point they retire. Their employer pays to remove the effect of early retirement reductions. After 1 October 2013 their employer does not HAVE to remove the effect of early retirement reductions. Severance is USS terminology to describe a situation where an employer has asked/encouraged a member/group of members to retire by offering them a package, part of which will be an unreduced pension.

69 1 Both sections Own choice Early retirement reductions apply Career Revalued Benefits section reductions simply apply to benefits for years and days earlier than NPA Final Salary-more complex! Service Men Women Before 17/5/ (CPA if lower) 60 17/5/1990 to 31/3/ /3/1995 to 30/9/ (CPA if lower) 63.5 (CPA if lower) 1/10/2011 onwards 65 (Exempt 63.5/CPA if lower) 65 (Exempt 63.5/CPA if lower)

70 Page: 35 Number: 1 Author: Presenter Subject: Presentation Notes Date: 14/08/ :45:22 For members retiring out of their own choice they are able to from 55 but they will suffer early retirement reductions. For CRB members it s very simple, for each year and part-year earlier than the NPA, their benefits are reduced by an early retirement factor, approximately 4% for each year early. For final salary it s much more complicated as set out in this table. CPA stands for Contractual Pension Age, in other words the age set out in their contract of employment as at 30 September An exempt member is a member of the final salary section aged 55 or more on 1 October they were exempt from the increase to age 65 NPA. However, if they leave OF THEIR OWN CHOICE, WITHOUT THEIR EMPLOYER S CONSENT before 65 and certainly before 63.50, they will be hit by early retirement reductions, but only from 63.5, this is the same treatment as before the increase to NPA. Essentially, exempt members in almost all cases can receive unreduced benefits from age 60.

71 1 Both sections Late retirement If employment continues past 65 so does membership Unless member decides not to Service still accrues Pensionable salary calculated at actual retirement age Late retirement increase of 0.5% for each month later than age 65 Applied to benefits at 65 based on service at 65 but pensionable salary at retirement age

72 Page: 36 Number: 1 Author: Presenter Subject: Presentation Notes Date: 14/08/ :45:22 For Late retirement, this in USS means any member continuing past age 65, which is very common. If employment continues so must membership, unless the member chooses not to continue. The employer, before 1 October 2011 used to have a choice about paying their share of the contribution, this came to an end on 1 October The benefits are calculated in 2 parts. First of all, based on the pensionable salary at the actual retirement age, the benefits based on service at 65 are calculated. The value of these benefits is then increased by ½% for each month later than 65. In addition, the member will have been accruing service as normal after 65, this is simply calculated as normal and added to the benefits at 65.

73 1 Both sections Flexible retirement Flexible retirement from age 55 Subject to consent of employer and USS 2 months notice required by USS 2 Flexes possible, 3 rd is full retirement You continue to build up benefits Hours must reduce by at least 20% Draw up to 80% of benefits (minimum 20%) Early retirement reductions apply as per own choice retirement If you flex, you continue to build up further benefits on a part-time basis and remaining benefits based on future full-time equivalent pensionable salary

74 Page: 37 Number: 1 Author: Presenter Subject: Presentation Notes Date: 14/08/ :45:22 Once a member reaches age 55 they can opt for flexible retirement. this must be agreed with their employer, as the employer must agree with the member a reduction in hours and pay of at least 20% on each flex. 2 flexes may be taken, on the third occasion the member must fully retire. If they take a flex they can draw up to 80% of their pension and their tax-free cash sum and all of their money Purchase AVC fund (subject to HMRC limits). They continue to be members of the scheme, albeit now on a part-time basis.

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76 Page: 38 Number: 1 Author: Presenter Subject: Presentation Notes Date: 14/08/ :45:23 On line calculator in the Benefit Modeller for flexible retirement provides estimated values.

77 1 Both sections Incapacity retirement Incapacity Retirement Minimum of two years service required Employer agrees that the member is suffering from incapacity i.e. unable to work as a result of long-term illness or injury Unreduced pension will be paid. Partial service taken up to date benefits commence Total service taken up to date benefit commence or where the member has 5 years added service Serious Ill Health Lump Sum

78 Page: 39 Number: 1 Author: Presenter Subject: Presentation Notes Date: 14/08/ :45:23 An enhancement to the benefits is only available with total incapacity and where the member has at least 5 years membership with the same institution, or in the trustees opinion as that of the same institution. There is also special terms for members with multiple appointments The scheme rules also provide for a serious ill health lump sum payment, in other words full commutation of member s benefits in extreme cases where life expectancy is very short, in accordance with HMRC guidance/rules.

79 1 Both sections Transfers-in and early retirement Transfers agreed pre 1 st April 2009 Benefit may be actuarially reduced if paid prior to age 60 (ex ill health retirement). The reduction will apply if: the transfer is received within 1 year of joining, the benefit from the transfer payment will be reduced if retirement happens with less than 7 years active membership, or Transfer received outwith 1 st year, and retirement is within 7 years of active membership since the transfer payment was made then the benefits from the transfer payment will be reduced ( a period of 6 months is discounted for administration to complete the transfer) Transfers agreed since 1 st April 2009 Benefits reduced for each year earlier than NPA (65 since 2009) applicable when transfer received

80 Page: 40 Number: 1 Author: Presenter Subject: Presentation Notes Date: 14/08/ :45:23 Transfers-in to USS are possible under both transfer club and on a private transfer basis. Since April 2009, all transfers have been on the basis that benefits are payable from NPA, currently 65. If they draw these benefits early they are subject to an early retirement reduction. For transfers agreed before April 2009, there is a rule called the 7 year rule. Essentially this is only an issue if a member retires before age 60. If they do, and the transfer has been in the scheme for less than 7 years the transferred-in benefits will be reduced for early retirement. The 7 years starts from the date the transfer was received, less 6 months, unless it was received within a year of joining, in which case the 7 years runs from their joining date.

81 What happens if?

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83 1 Both sections Death in service Lump sum minimum value 3 times salary Pension to surviving spouse or civil partner of 50% of member s expected pension at age 65 (usually limited to 40 years max) Pension for 1 st 3 months Equivalent to salary if member had at least 5 years service Children s pensions 75% of member s potential benefit at 65 shared between 2 or more children 32.5% if only one child Eligible child up to 18 or 23 if in full-time education

84 Page: 42 Number: 1 Author: Presenter Subject: Presentation Notes Date: 14/08/ :45:25 Lump sum is the higher of 3 times salary or the Total Incapacity lump sum payment. Lump sum expression of wish form is available. Expected pension at 65 includes future service up to a maximum of 40 years (past and potential service). However the member had already achieved 40 years within the scheme and continues to pay contributions the additional service will be included in the calculation. A spouse s / civil partner s pensions increase at the same rate as the member s. If the member had been contributing to either an added years AVC within the final salary section or revalued benefits AVC within the career revalued benefits section, then provided these were paid for 5 years the full added benefit will be included in the expected pension, otherwise it will be proportioned over the 5 years

85 1 Both sections Death after retirement Lump sum at the discretion of the trustees from the guaranteed period of 5 years, calculated by the sum of lump sum and pensions to be paid less lump sum and pension actually paid Spouse s/dependant s pension of 50% of STANDARD pension at retirement plus pension increases to death Children s pensions Higher level pension for first 3 months = member s pension if they had more than 5 years service

86 Page: 43 Number: 1 Author: Presenter Subject: Presentation Notes Date: 14/08/ :45:25 A lump sum is payable at the discretion of the trustees. The amount payable is based on a range of criteria. The result should be that all members, regardless of their commutation options, receive fair value out of the scheme on death within the first 5 years of retirement. We first of all work out the life assurance (3 X salary) that would have been paid had they died the day before they retired. We then take from this any taxfree cash they received (not Money Purchase AVC funds) and then deduct the gross amount of pension instalments received. We compare this amount (if any) to the balance of unpaid instalments in the first 5 years. The maximum payable is the remaining instalments for the balance of the 5 years. The spouse s/dependant s pension is equivalent to 50% of the standard pension, in other words the pension at retirement before any exchange for cash was made, plus pension increases to death. Children s pensions would be payable and a higher level pension for the 1st 3 months if the member had 5 or more years service, equivalent to the member s standard pension.

87 1 Both sections Leaving the scheme Deferred pension and lump sum Refund if less than 2 years membership ( with tax deduction and deduction to reinstate in S2P) Option to transfer to another scheme Public sector transfer club Private transfer Rejoin from another institution Members of final salary with a gap in membership over 30 months will rejoin Career Revalued Benefits section

88 Page: 44 Number: 1 Author: Presenter Subject: Presentation Notes Date: 14/08/ :45:25 Members who leave USS are entitled to the usual short-service benefits of either a deferred pension or refund. Note that even with less than 2 years service members can opt for a deferred pension but based on their contributions only. But if they subsequently transfer-out then the transfer value is based on the full value, so as if calculated on the 1/80ths basis, in line with statutory requirements. Members who leave their deferred benefits in USS can rejoin and re-link to earlier periods (see earlier section on time limits). Rejoining, particularly under final salary, can be very beneficial as it will be possible to add previous years service to the latest service and use the pensionable salary of the latest employment. This will prove beneficial if current salary exceeds the previous salary. Remember, if someone leaves final salary but rejoins more than 30 months later, they will rejoin the CRB section and their final salary benefits are kept as deferred benefits.

89 Increasing members benefits

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91 1 Both sections Increasing member s benefits Additional years / benefits Max contribution for added years 15% Money Purchase Prudential Can be used to increase benefits or fund for early retirement

92 Page: 46 Number: 1 Author: Presenter Subject: Presentation Notes Date: 14/08/ :45:27 Additional years can be bought by members of the final salary section and added benefits by members of the career revalued benefits section The maximum contribution is in addition to the contribution payable as a member of the scheme. So a member of the final salary section can pay up to 22.5% in total in the final salary section or 21.5% in the career revalued section.