Your NHS Pension Choice Factsheet The pay used to work out your pension Introduction In a final salary pension scheme the pay used to calculate your pension is defined by the rules of the scheme. It will reflect your pay in the period running up to your retirement but may differ from your pay at retirement (or leaving). In the 1995 Section the annual pay figure used is called Final Year s Pensionable Pay and in the 2008 Section it is called Reckonable Pay and they are worked out differently. This factsheet explains exactly what these definitions of final pay mean and how they are used to calculate your pension. How is Final Year s Pensionable Pay worked out for the 1995 Section? Final Year s Pensionable Pay is simply the highest pensionable pay of your last three years of service. Usually this is your last year. The pensionable pay in the final year ending on the date the member retired or left service is looked at. This is compared with the pensionable pay in each of the two years immediately preceding that final year. If one of the two previous year s figures is higher then the pension will be based on the pay in that earlier year. So final year s pensionable pay actually means the best year s pensionable pay in the last three years of working. However, where pay for an earlier year is used it will be re-valued, i.e. increased in line with the cost of living, before being used to calculate the pension. Increases are based on the CPI (Consumer Price Index) of inflation as is used to revalue pensions in payment. This revaluation means that the excess of the earlier year pensionable pay over the final year s pensionable pay will be enlarged. The examples below indicate how this works out in practice:-
Example A Final year s pay is the highest Paul is a nurse and retires on 15 April 2013. His pensionable pay for the last 3 years is as follows:- Year ending 15 April 2013 = 26,000 Year ending 15 April 2012 = 25,500 Year ending 15 April 2011 = 25,000. The last year is the highest so the pension calculation will be based on a final year s pensionable pay figure of 26,000. This is by far the commonest situation. Example B Final year s pay is not the highest Paul is a nurse and retires on 15 April 2013 after 20 years membership. His pensionable pay for the last 3 years is as follows- Year ending 15 April 2013 = 26,000 Year ending 15 April 2012 = 26,500 Year ending 15 April 2011 = 25,000 As the year before the final year is the highest pensionable pay, the pension increase factor is applied to that year s pensionable pay before making the pension calculation. The increase factor for the period up to 15 April 2012 is 1.0264. Consequently, the pensionable pay is increased as follows: 26,500 x 1.0264 = 27,199.60 (an increase of 699.60). The effect of this is to raise the value of the pension from 6,625 per year to 6,800 per year. How is Reckonable Pay worked out for the 2008 Section? Reckonable Pay is the annual average of the best three consecutive years pensionable pay in the 10 years before leaving or retirement, re-valued by increases in inflation. This may well be the average of your final three years pay but the rules give the flexibility to offer protection to members whose pay may have been reduced in the years immediately before retirement.
Working out Reckonable Pay can be complex because it looks back over a longer period and uses an annual average of three consecutive years pay rather than a single year. Here s how it works: Step A identifying the best three consecutive years 1. The last 10 years of pay (from 1 April 2008 at the earliest) is looked at and all the years before the last year are revalued by inflation to bring the pay figures up to their real value in the last year. This is done so each year s pay can be compared in like terms. 2. These figures are then used to identify the best three consecutive years pay over this 10 year period. Step B calculating the Reckonable Pay 3. The original pay figures are looked at again to identify the best three consecutive years and work out their average. 4. The average is then adjusted to account for revaluation of the earlier two years to make them comparable to the third year and this gives a Reckonable Pay figure. Step C calculating the pension 5. The Reckonable Pay is used to calculate the pension on the standard 2008 Section basis (Years of service x 1/60 x Reckonable Pay). 6. If the last of the three years used to calculate your Reckonable Pay is not the last year of membership then the pension to be paid is revalued by inflation for the period between these two years. What if I have been in the 2008 Section for less than three years? If you have been in the 2008 Section for less than three years when you retire the annual average is worked out for the period you have been in the 2008 Section. How does it work in practice? John s pension using Reckonable Pay
John retires on 1 April 2020 on his 65th birthday. He started in the 1995 Section on 1 April 1990 and made the Choice to move to the 2008 Section. John has 30 years membership and moved to a job that paid less five years before retirement. The table below shows John s full time equivalent (FTE) pensionable pay for the 10 years before he retired. It also shows the increase factor and what his revalued pay would be using that increase factor. Best 3 consecutive years Year 1 2 3 4 5 6 7 8 9 10 From 2019 2018 2017 2016 2015 2014 2013 2012 2011 2010 To 2020 2019 2018 2017 2016 2015 2014 2013 2012 2011 FTE pensionable pay 25,390 24,770 24,165 23,575 23,000 38,162 36,518 34,945 33,440 32,000 Increase factor 1 1.03 1.06 1.09 1.12 1.15 1.18 1.21 1.24 1.27 Revalued pay 25,390 25,513 25,615 25,697 25,760 43,886 43,091 42,283 41,466 40,640 Following the Step A process, the best three consecutive years are years 6, 7 and 8, as identified from the pay figures 43,886, 43,091 and 42,243. Following the Step B process, the average of these three years is calculated before they are revalued i.e. ( 38,162 + 36,518 + 34,945) / 3 = 36,542. To find out what John s Reckonable Pay is the three year average is adjusted to revalue the earlier two years of the three by multiplying the average by a factor of 1.0253. Reckonable Pay = 36,542 x 1.0253 = 37,467 Following the Step C process, as the last of the best three consecutive years is 6 years before retirement an inflation adjustment is made and John s pension (before he takes a lump sum) would be: Pension = 30 / 60 x 37,467 = 18,734 x 1.15 = 21,544 The pension increase factor used to revalue the pension is 1.15 see table above.
Is final pay worked out differently if I work part-time? No. If you work part-time Final Year s Pensionable Pay and Reckonable Pay both use the full-time equivalent of your actual pensionable pay. If you work full-time your actual pensionable pay is used. Special situations Voluntary pay protection in the 1995 Section For this purpose we will use the career earnings of John as in the table above. John s pension using Final Pensionable Pay without Voluntary Pay Protection If John had chosen to stay in the 1995 Section then his Final Year s Pensionable Pay would be his pay in his last year ( 25,390) and his pension would be 30/80 x 25,390 = 9,521. John s pension using Voluntary Pay Protection Because John moved to a job that paid less before he retired, he could have chosen Voluntary Pay Protection in the 1995 Section. If he did this, the benefits he had earned for each period of membership would be worked out separately, based on the pensionable pay at the end of each period and then revalued. He would get the highest rate as his pension. 25/80 x 38,162 = 11,926 x 1.15 = 13,715 plus 5/80 x 25,390 = 1,587 giving a total pension of 15,302. The pension increase factor used to revalue the pension is 1.15. This means that separate membership calculations are more beneficial for John s pension. Had he chosen to remain in the 1995 Section and protect his pay, he would get a pension of 15,302 instead of 9,521. What is Voluntary Pay Protection? If your earnings have reduced because you ve moved to a job that pays less, you have a one-off chance to protect your higher pay. To do this you must have reached minimum pension age and your pay must be at least 10 percent less. [DN: Insert cross ref or more details about applying for pay protection] Reckonable Pay in the 2008 Section where a member has less than three year s membership
Robert s pension using Reckonable Pay Robert started in the 1995 Section on 1 April 1990 and chose to move to the 2008 Section. Robert retires on 1 April 2010 aged 65 with 30 years membership. Although Robert has more than three years in the NHS Pension Scheme, he has less than three years pay in the 2008 Section. Only the pay received since he moved to the 2008 Section is used to work out his pension. Used for 2008 Section Year 1 2 3 From 2009 2008 2007 To 2010 2009 2008 Pay 25,390 24,770 24,165 Increase factor 1 1.03 1.06 Revalued pay 25,390 25,513 25,615 As Robert has only two years earnings in the 2008 Section then the pay in those two years takes the place of pay in the best three consecutive years. Following the Step B process the average of those two years pay is calculated and the average is adjusted by a factor to reflect a measure of revaluation of the earlier year. Reckonable Pay = ( 25,390 + 24,770) / 2 x 1.0148 = 25,451 Pension (before a lump sum is taken) = 30 / 60 x 25,451 = 12,726. Robert s pension is not immediately revalued (increased) because it has been worked out using up to date pay figures. Robert s pension using Final Pensionable Pay If Robert had chosen to stay in the 1995 Section the pay that would have been used to work out his pension would have been Final Year s Pensionable Pay ( 25,390) and his pension would be: Pension = 30/80 x 25,390 = 9,521