USS Financial Advisor Training Presentation for USS accredited Financial Advisers
Summary of Comments on UNIVERSITIES SUPERANNUATION SCHEME This page contains no comments
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?
Page: 2 Number: 1 Author: Presenter Subject: Presentation Notes Date: 14/08/2012 10:45:03 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 email these questions in the first instance to uss@thepfs.org
Final Salary/Career Revalued Benefits
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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
Page: 4 Number: 1 Author: Presenter Subject: Presentation Notes Date: 14/08/2012 10:45:04 A new section, career average was created for members joining on or after 1st October 2011. 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.
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
Page: 5 Number: 1 Author: Presenter Subject: Presentation Notes Date: 14/08/2012 10:45:05 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%.
1 The calculation Final Salary
Page: 6 Number: 1 Author: Presenter Subject: Presentation Notes Date: 14/08/2012 10:45:07 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 10000.00 pa. then the full-time equivalent is 20000.00 pa. Let s look at an example.
1 Part-time calculation Final Salary 40 30 Salary 000s 20 10 10 years 3 years 10 years 5 years 100% 30% 100% 50% 10 20 30 40 Years
Page: 7 Number: 1 Author: Presenter Subject: Presentation Notes Date: 14/08/2012 10:45:09 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 40000.
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
Page: 8 Number: 1 Author: Presenter Subject: Presentation Notes Date: 14/08/2012 10:45:10 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
1 Pensionable salary Calculation relevant date 31 st July 2011 Salary Date Annual Salary @ Salary Date RPI Increase Indexed Salary Pensionable Salary 01/08/2010 48,500 n/a 48,500 48,500 01/08/2009 47,000 235.2 / 224.1 49,307 49,307 01/08/2008 45,000 235.2 / 213.4 49,597 49,597 01/08/2007 43,500 235.2 / 216.8 47,192 47,413 01/08/2006 42,000 235.2 / 207.3 47,653 47,546 01/08/2005 40,000 235.2 / 198.5 47,395 47,447 01/08/2004 38,889 235.2 / 192.2 47,589 47,433 01/08/2003 37,612 235.2 / 186.8 47,357 47,105 01/08/2002 36,501 235.2 / 181.3 47,353 46,301 01/08/2001 34,914 235.2 / 176.2 46,605 45,060 01/08/2000 33,327 235.2 / 174.4 44,945-01/08/1999 31,740 235.2 / 171.1 43,631 -
Page: 9 Number: 1 Author: Presenter Subject: Presentation Notes Date: 14/08/2012 10:45:10 In this example the Salary date is when the new level of salary starts from. So for the 12 months up to 31st July 2011 48,500 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 2011. 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.
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
Page: 10 Number: 1 Author: Presenter Subject: Presentation Notes Date: 14/08/2012 10:45:10 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.
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)
Page: 11 Number: 1 Author: Presenter Subject: Presentation Notes Date: 14/08/2012 10:45:11 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.
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
Page: 12 Number: 1 Author: Presenter Subject: Presentation Notes Date: 14/08/2012 10:45:11 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.
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 = 562.19 pa
Page: 13 Number: 1 Author: Presenter Subject: Presentation Notes Date: 14/08/2012 10:45:12 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.
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%
Page: 14 Number: 1 Author: Presenter Subject: Presentation Notes Date: 14/08/2012 10:45:12 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%.
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
Page: 15 Number: 1 Author: Presenter Subject: Presentation Notes Date: 14/08/2012 10:45:12 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.
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
Page: 16 Number: 1 Author: Presenter Subject: Presentation Notes Date: 14/08/2012 10:45:13 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.
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
Page: 17 Number: 1 Author: Presenter Subject: Presentation Notes Date: 14/08/2012 10:45:13 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.
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 40,000 500.00 500.00 42,000 1/80 x 42,000 525.00 1,025.00 43,500 1/80 x 43,500 543.75 1,568.75 45,000 1/80 x 45,000 562.50 2,131.25 Total Annual Pension 2,131.25
Page: 18 Number: 1 Author: Presenter Subject: Presentation Notes Date: 14/08/2012 10:45:13 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.
1 Career Revalued Benefits The calculation..continued Pension for year Inflation Inflation Calculation Banked Pension 500.00-500.00 x 1 500.00 525.00 2% ( 500.00 x 1.02) + 525.00 1,035.00 543.75 3% ( 1,035.00 x 1.03) + 543.75 1,609.80 562.50 1.5% ( 1,609.80 x 1.015) + 562.50 2,196.45 Total Annual Pension 2,196.45
Page: 19 Number: 1 Author: Presenter Subject: Presentation Notes Date: 14/08/2012 10:45:14 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.
Contributions
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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
Page: 21 Number: 1 Author: Presenter Subject: Presentation Notes Date: 14/08/2012 10:45:15 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 2014. 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)
1 Both sections Contributions Cost of contribution modeller (www.uss.co.uk) 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%
Page: 22 Number: 1 Author: Presenter Subject: Presentation Notes Date: 14/08/2012 10:45:15 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.
Pension increases
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1 Final Salary Pension Increases Increase to pension in payment 30 25 Percenatge Increase 20 15 10 5 0-5 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 Year 1995 RPI Pension Increase 1997 1999 2001 2003 2005 2007 2009 2011
Page: 24 Number: 1 Author: Presenter Subject: Presentation Notes Date: 14/08/2012 10:45:17 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 2011. Members of final salary section will not have the pension increases capped in respect of the service prior to 1st October 2011.
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
Page: 25 Number: 1 Author: Presenter Subject: Presentation Notes Date: 14/08/2012 10:45:17 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 2011. 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%
How to calculate the retirement benefits
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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. 5.75 times standard pension)
Page: 27 Number: 1 Author: Presenter Subject: Presentation Notes Date: 14/08/2012 10:45:18 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.
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
Page: 28 Number: 1 Author: Presenter Subject: Presentation Notes Date: 14/08/2012 10:45:19 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.
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
Page: 29 Number: 1 Author: Presenter Subject: Presentation Notes Date: 14/08/2012 10:45:19 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.
1 Final Salary Tax-free cash sum Benefit conversion modeller (www.uss.co.uk)
Page: 30 Number: 1 Author: Presenter Subject: Presentation Notes Date: 14/08/2012 10:45:19 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.
1 Both sections Normal retirement Normal Pension Age (NPA) currently 65 NPA to increase in line with State Pension Ages 1 October 2020 66 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
Page: 31 Number: 1 Author: Presenter Subject: Presentation Notes Date: 14/08/2012 10:45:20 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.
1 Both sections Future increases to NPA - 66 100% 65 100% 96% 65 October 2020 NPA increases to 66
Page: 32 Number: 1 Author: Presenter Subject: Presentation Notes Date: 14/08/2012 10:45:20 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.
1 Both sections Early retirement Anything before Normal Pension Age Own choice Employer consent from 60 Redundancy Severance Flexible retirement Incapacity retirement
Page: 33 Number: 1 Author: Presenter Subject: Presentation Notes Date: 14/08/2012 10:45:21 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.
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
Page: 34 Number: 1 Author: Presenter Subject: Presentation Notes Date: 14/08/2012 10:45:21 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.
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 17/5/1990 65 (CPA if lower) 60 17/5/1990 to 31/3/1995 60 60 31/3/1995 to 30/9/2011 63.5 (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)
Page: 35 Number: 1 Author: Presenter Subject: Presentation Notes Date: 14/08/2012 10:45:22 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 2011. An exempt member is a member of the final salary section aged 55 or more on 1 October 2011. 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.
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
Page: 36 Number: 1 Author: Presenter Subject: Presentation Notes Date: 14/08/2012 10:45:22 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 2011. 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.
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
Page: 37 Number: 1 Author: Presenter Subject: Presentation Notes Date: 14/08/2012 10:45:22 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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Page: 38 Number: 1 Author: Presenter Subject: Presentation Notes Date: 14/08/2012 10:45:23 On line calculator in the Benefit Modeller for flexible retirement provides estimated values.
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
Page: 39 Number: 1 Author: Presenter Subject: Presentation Notes Date: 14/08/2012 10:45:23 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.
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
Page: 40 Number: 1 Author: Presenter Subject: Presentation Notes Date: 14/08/2012 10:45:23 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.
What happens if?
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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
Page: 42 Number: 1 Author: Presenter Subject: Presentation Notes Date: 14/08/2012 10:45:25 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
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
Page: 43 Number: 1 Author: Presenter Subject: Presentation Notes Date: 14/08/2012 10:45:25 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.
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
Page: 44 Number: 1 Author: Presenter Subject: Presentation Notes Date: 14/08/2012 10:45:25 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.
Increasing members benefits
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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
Page: 46 Number: 1 Author: Presenter Subject: Presentation Notes Date: 14/08/2012 10:45:27 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.
1 Final Salary Added Years Added Years AVC Part of main scheme Contributions are a percentage of salary Increase to pension, tax free lump sum, associated death benefits, and incapacity benefits
Page: 47 Number: 1 Author: Presenter Subject: Presentation Notes Date: 14/08/2012 10:45:27 In the final salary section the Added years AVC will buy additional 1/80th of pension and 3 /80th as a lump sum.
1 Final Salary Added Years
Page: 48 Number: 1 Author: Presenter Subject: Presentation Notes Date: 14/08/2012 10:45:27 Once data has been input the cost of the AVC and the added year that this secures at retirement can be seen. In this example the additional 15% will cost 450 net of tax and will secure an additional 1 year 161 days of benefit at normal retirement date. It is possible at this stage to change the assumptions percentage of salary as contribution, include a projection of salary, and alter the retirement age.
1 Career Revalued Benefits Revalued Benefits AVC Revalued Benefits AVC Part of the main scheme Contributions are flat rate i.e. do not increase in line with salary Additional pension and tax free lump sum will be added in year of purchase Additional pension revalues in line with main benefits Increase to associated death benefits and incapacity benefits
Page: 49 Number: 1 Author: Presenter Subject: Presentation Notes Date: 14/08/2012 10:45:28 Unlike the final salary section the contributions are flat rate and they purchase an amount of additional pension and cash. The additional benefits are then increased in the same way as for the main scheme benefits. If they stop paying the additional contributions they receive a pro-rata benefit. There is a modeller that s part of the benefit modeller for CRB members to work out the cost/benefit of buying additional benefits.
1 Both sections Money Purchase AVC Money Purchase AVC Separate facility administered by Prudential but crucially within USS Maximum contribution is 50,000 pa less contributions to USS and any added years / added benefits AVC, but subject to contribution being deducted in full from salary Fund can be used to provide tax free lump sum plus pension. Open market option or purchase extra benefits within USS scheme
Page: 50 Number: 1 Author: Presenter Subject: Presentation Notes Date: 14/08/2012 10:45:28 This is a money purchase arrangement that can be used to provide benefits independent from the USS or can be exchanged for benefits within the USS. There will be choice for the member as regards to the investment funds, how much is paid, and when benefits are taken. There is a limit to the amount that can be paid in to the MPAVC, currently this is 50,000 (or salary if less), less any other contributions the member makes to USS, so standard (not if they are part of Salary Sacrifice) and Added Years/Benefits AVCs. This limit is in the process of being simplified so it it just a maximum of 50,000 a year to the MPAVC fund. This limit is coincidentally the same as the annual allowance but of course a member could still easily exceeed the annual allowance if they paid the maximum to the MPAVC, when you add to that figure the annual allowance generated simply from being a member of USS-build of service and salary growth. As the MPAVC arrangement is within the USS it is possible to use this fund to secure the additional tax free lump sum mentioned earlier. This can only be achieved when the MPAVC benefits are taken at the same time
Both sections MPAVC contribution limit Maximum contribution is lower of:- 50,000 less Ordinary USS contributions (unless members of a salary sacrifice arrangement), less Any added years contributions, or Salary in year less Ordinary USS contributions (unless members of a salary sacrifice arrangement), less Any added years contributions
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1 Both sections Money Purchase AVC 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
Page: 52 Number: 1 Author: Presenter Subject: Presentation Notes Date: 14/08/2012 10:45:29 Remember this slide when we identified the extra cash from the scheme. Well if we add a MPAVC fund of 36,666
1 Both sections Money Purchase AVC Pension 10,000 Standard Cash 30,000 Prudential AVC 36,666 Capital Value 266,666 Tax free lump sum 66,666 Less standard cash 30,000 Extra cash 36,666 75% 14% 11% Standard Cash 30,000 Pension (20x 10,000) 200,000 Extra cash 36,666
Page: 53 Number: 1 Author: Presenter Subject: Presentation Notes Date: 14/08/2012 10:45:29 If we add to the detail that the client has 36,666 of MPAVC fund on taking benefit this is added to calculate the 25% tax free lump sum. However, you will note that the capital value of the benefit does not increase by 36,666 but by 45,253. This has been created by the part of the standard pension not being used to provide the increase in tax free lump sum. This may look like a good planning opportunity for people close to retirement but there are couple of issues that need to be considered. In particular if the member is looking to contribute 36,666 gross immediately before retirement to create some tax saving.
1 Both sections Recycling Recycling RPSM 04104900 1% of SLA 30% increase in expected contribution 30% of PCLS Annual Allowance
Page: 54 Number: 1 Author: Presenter Subject: Presentation Notes Date: 14/08/2012 10:45:30 Recycling is only an issue if contributions are increased and benefits have been taken. This will apply in the period two years prior to retirement. Basically due to HMRC relaxing the contribution limits they do not want tax free cash benefit to be used to be used to create additional tax breaks. There are limits to determine whether or not recycling applies all must apply for recycling. The above are the stated limits to see if recycling could apply. There is more detail available in HMRC website The annual allowance will be considered in more detail later but a member in particular with earnings in excess of 50,000 looking to make a significant contribution to the MPAVC needs to be careful not to exceed the annual allowance
1 Both sections Transfers-in Transfers to USS from Final salary Money purchase Personal pension including stakeholder Section 32 buy out policies Overseas schemes may be accepted by the trustees Special terms for Money purchase AVC Pension credit But not FSAVCs
Page: 55 Number: 1 Author: Presenter Subject: Presentation Notes Date: 14/08/2012 10:45:30 Transfers can only be received for active members of the USS. A transfer from an overseas scheme will only be allowed where the member has two years pensionable service. The special terms that apply for the Money Purchase AVC is that they will be held in the MPAVC section of the scheme. As regards to pension credit transfers to the scheme an additional pension is quoted and this is increased the same as a deferred member so for final salary section this is treated differently from other benefits.
1 Both sections Transfers-in Transfers, if accepted will provide:- Additional pensionable service for members of the final salary section excluding pension credits Additional pension and lump sum for members of the career revalued benefits section Transfers for part-time employees will be given the addition based on full time equivalent Guarantees on additional benefit offered can only be provided when the transfer is subject to a guarantee Based on actuarial guidance unless the transfer is from a participant of the Transfer Club, then the Transfer Club s requirements will apply.
Page: 56 Number: 1 Author: Presenter Subject: Presentation Notes Date: 14/08/2012 10:45:30 The actual additional benefits that the transfer will secure will be determined by age and salary Transfer club includes other public sector schemes with similar benefits e.g. teachers, NHS, civil service
1 Both sections Transfers-in Transfers to USS through the Public Sector Transfer Arrangements aka Transfer Club Beneficial transfer terms within the first two years of membership of USS Must apply within time limit transfer does not have to complete Equal value of benefit Transfers have a guaranteed date of 3 months from the date of calculation. If a transfer is not accepted within 3 months then revised calculations will apply. Unusually for Career Revalued Benefits section club transfers on a Final Salary basis
Page: 57 Number: 1 Author: Presenter Subject: Presentation Notes Date: 14/08/2012 10:45:31 The first point to notice is that this applies to both sections. So it is possible for a career revalued benefit member to transfer through the transfer club and have benefits in the final salary section. USS limit to take advantage of the transfer club is two years. Other schemes within the Transfer Club may have a shorter period. The equal value of benefit does not necessarily equate to the same number of years and months being offered. It is assumed that the salary in the USS will increase by 1% above inflation and assumption will be made with promotional pay increases. In other words, someone with 5 years in another scheme might only end up with 3 years in the USS but the exact numbers will be in the quotation once they put in their application and before they transfer.
1 Both sections Transfers-in Transfers from non academic schemes Changing jobs at a USS institution may result in becoming eligible for the USS. Equal value of benefit for the transfer will only apply if the non academic scheme was in the Transfer Club many schemes are not
Page: 58 Number: 1 Author: Presenter Subject: Presentation Notes Date: 14/08/2012 10:45:31 This shows the importance of checking out whether schemes are in the transfer club before you commit yourself to any recommendation
Annual & Lifetime Allowances
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1 Both sections Annual & Lifetime Allowances Annual allowance PIP 1 st April to 31 st March PIA = 19 x growth in pension (plus AVCs) Allowance for inflation Pension calculated as at retirement Annual allowance threshold 50,000 and after allowing for any carry forward tax is calculated by adding excess to the member s total income.
Page: 60 Number: 1 Author: Presenter Subject: Presentation Notes Date: 14/08/2012 10:45:32 You will be aware of much of this information, but there is one area that may cause a problem in respect of the final salary scheme. The retirement benefits at the beginning and end of each pension input period must be calculated i.e. the pensionable salary also needs to be calculated. Currently the annual statement issued to USS benefits in common with other schemes does not contain sufficient information to readily identify if there is an annual allowance charge due. In the next two years the scheme administrators will be required to issue a statement for any year in which the member s benefits exceed the annual allowance. The statement has also got to include the annual allowance usage of the last three years, particularly important if you are going to identify any carry forward being available. This facility can be made available immediately and therefore people that are in the position of needing to know what their position is, but they may well require to take advice or at the very least take advantage of the modeller on the USS website that estimates the value. (probably needs more tidying up)
1 Both sections Annual & Lifetime Allowances Annual allowance Annual allowance charge in excess of 2,000 can be paid from scheme benefits aka scheme pays Must be made by the deadline and will be irrevocable Tax can be split between scheme and member A pension debit will apply expressed in monetary terms and increased by CPI subject to the maximum pension increase
Page: 61 Number: 1 Author: Presenter Subject: Presentation Notes Date: 14/08/2012 10:45:33 If the increase in benefits within the USS result in a tax liability of more than 2,000 the scheme member can ask USS to pay this tax liability and reduce the member s benefits accordingly. USS have announced details of their Scheme Pays options and indicative figures are available from the USS website. Once notice has been given to the trustees this cannot be cancelled. Notice must be given by the 31st July following the tax year after the one to which the annual allowance relates e.g. for 2012/13 the 31st July 2014. However for the 2011/12 tax year the deadline is 31st December 2013. The deadline will be shortened if the member is due to take benefits as it is not possible to pay the tax from benefits that are in payment. If the tax liability is to be split between member and scheme then the scheme administrator must be given written confirmation that the total tax liability exceeds 2,000. So who will be caught? The following tables have been taken from a USS presentation.
1 Final Salary Annual & Lifetime Allowances Annual allowance Enhanced Opt-out Irrevocable Deferred benefits Continue death in service and incapacity 2.5% member contribution Temporary cessation accrual Maximum period 6 months Must end on 31 st March Salary capping with past service deferral Irrevocable Existing benefits become deferred benefits with future service on pensionable salary with 150,000 cap All other salary related benefits will be subject to cap
Page: 62 Number: 1 Author: Presenter Subject: Presentation Notes Date: 14/08/2012 10:45:33 In response to the reduction in both the annual allowance and lifetime allowance USS introduced three options available to finals salary scheme members. These are three options designed by USS which may help in certain circumstances. Enhanced opt out will cease accrual of additional service. Death in service and incapacity cover is maintained and the member s contribution is 2.5%. If member rejoins the scheme they will join the career revalued section. Enhanced opt out was identified as being most useful for members with higher salaries and longer service. In particular those who may exceed the lifetime allowance. It was made available shortly before 6th April 2012 and so members may have elected for enhanced opt out and registered for fixed protection. However care needs to be taken regarding the incapacity cover as payment could invalidate fixed protection. In capacity protection needs to be claimed by the member. Temporary cessation accrual applies will reduce a member s benefit accrual in a scheme year. Members must give 28 days notice and the maximum temporary period in a scheme year is 6months ending on 31st March. After this period the member recommences full final salary benefit accrual. During the period of temporary cessation the member pays 2.5% to maintain the death in service and the incapacity cover. Temporary cessation accrual was designed for members who would not normally be caught with an annual allowance charge but receive a one off increase in salary that creates an annual allowance charge. Salary capping with past service deferral.under this option all pension accrued at the date of election will be treated as deferred benefits. A new period of service will start for future service and will be subject to a pension salary cap of 150,000. The pensionable salary cap will apply to all benefits including death in service. Once elected the decision cannot be reversed. This option is designed for those members who are unlikely to have an issue with the lifetime allowance but may have an annual allowance issue. Members with high pensionable salaries and short service are likely to consider this option.
1 Final Salary section Annual Allowance Salary at start of Year Salary at end of year (+5%) Pension and lump sum accrual (19:1) 10 years 20 years 30 years 40 years 50,000 52,500 14,499 16,756 19,012 21,268 70,000 73,500 20,299 23,458 26,617 29,775 90,000 94,500 26,099 30,160 34,221 38,283 110,000 115,500 31,899 36,862 41,826 46,790 130,000 136,500 37,698 43,565 49,431 55,297 150,000 157,500 43,498 50,267 57,036 63,804 170,000 178,500 49,298 56,969 64,640 72,312 190,000 199,500 55,098 63,671 72,245 80,819
Page: 63 Number: 1 Author: Presenter Subject: Presentation Notes Date: 14/08/2012 10:45:33 This table has been taken from the USS presentation, and assumes that a 5% increase in salary. The term shown is the term at the end of the pension input period and the figures calculated using a CPI rate of 3.1% which was the rate for 2011/12. Remember the pensionable salary is the best 12 months in the last 36 or the best 3 consecutive years ending in the last 10. For salaries that are more than 1 year from the relevant date these can be increased by RPI. Therefore a 5% increase could quite easily cover inflation for salaries of more than 1 year old or of an increase in the current year through a review of the current salary scales or promotional increases. Given that RPI is at 5.2% (Sept 11) it would not be unreasonable to find that members salaries have increased by more than 5%.
1 Final Salary section Annual Allowance Salary at start of Year Salary at end of year (+10%) Pension and lump sum accrual (19:1) 10 years 20 years 30 years 40 years 50,000 55,000 20,437 28,631 36,824 45,018 70,000 77,000 28,612 40,083 51,554 63,025 90,000 99,000 36,786 51,535 66,284 81,033 110,000 121,000 44,961 62,987 81,014 99,040 130,000 143,000 53,136 74,440 95,743 117,047 150,000 165,000 61,311 85,892 110,473 135,054 170,000 187,000 69,485 97,344 125,203 153,062 190,000 209,000 77,660 108,796 139,933 171,069
Page: 64 Number: 1 Author: Presenter Subject: Presentation Notes Date: 14/08/2012 10:45:34 From the scheme guide page you can see the two sections on the left hand side of the screen and here under the final salary section you can see what information is available. In the Publications and Presentations grouping on the USS website you will be able to access the scheme rules.
1 Final Salary section Annual Allowance Salary at start of Year Salary at end of year (promotion) Pension and lump sum accrual (19:1) 10 years 20 years 30 years 40 years 15,000 20,000 14,444 25,214 35,985 46,755 20,000 30,000 27,175 49,452 71,730 94,007 36,000 45,000 27,540 46,464 64,989 88,713
Page: 65 Number: 1 Author: Presenter Subject: Presentation Notes Date: 14/08/2012 10:45:34 Remember these examples only look at the benefits in USS, if the member has other pension savings including pension term insurance then these will have to be considered.
1 Annual allowance Final Salary section Annual Allowance
Page: 66 Number: 1 Author: Presenter Subject: Presentation Notes Date: 14/08/2012 10:45:35 Although there is only a modeller on the website that will help final salary section members, the calculations for the Career Average schemes should hopefully be far simpler.
1 Both sections Annual & Lifetime Allowances Lifetime allowance Threshold reduces to 1.5 million from 6 th April 2012. If excess member can choice between lump sum (55% tax) and pension (25% from excess and then income tax on pension) Enhanced protection 1% contribution and death in service benefit retained Fixed Protection Enhanced Opt Out -2.5% contribution be aware benefit accrual is different from relevant benefit accrual
Page: 67 Number: 1 Author: Presenter Subject: Presentation Notes Date: 14/08/2012 10:45:35 The choice of tax or pension will depend on the tax rate to apply to the pension. It could be beneficial for those retiring abroad.
1 Final Salary Annual & Lifetime Allowances Lifetime allowance Enhanced Opt-out Irrevocable Deferred benefits Continue death in service and incapacity 2.5% member contribution Temporary cessation accrual Maximum period 6 months Must end on 31 st March Salary capping with past service deferral Irrevocable Existing benefits become deferred benefits with future service on pensionable salary with 150,000 cap All other salary related benefits will be subject to cap
Page: 68 Number: 1 Author: Presenter Subject: Presentation Notes Date: 14/08/2012 10:45:36 In response to the reduction in both the annual allowance and lifetime allowance USS introduced three options available to finals salary scheme members. These are three options designed by USS which may help in certain circumstances. Enhanced opt out will cease accrual of additional service. Death in service and incapacity cover is maintained and the member s contribution is 2.5%. If member rejoins the scheme they will join the career revalued section. Enhanced opt out was identified as being most useful for members with higher salaries and longer service. In particular those who may exceed the lifetime allowance. It was made available shortly before 6th April 2012 and so members may have elected for enhanced opt out and registered for fixed protection. However care needs to be taken regarding the incapacity cover as payment could invalidate fixed protection. In capacity protection needs to be claimed by the member. Temporary cessation accrual applies will reduce a member s benefit accrual in a scheme year. Members must give 28 days notice and the maximum temporary period in a scheme year is 6months ending on 31st March. After this period the member recommences full final salary benefit accrual. During the period of temporary cessation the member pays 2.5% to maintain the death in service and the incapacity cover. Temporary cessation accrual was designed for members who would not normally be caught with an annual allowance charge but receive a one off increase in salary that creates an annual allowance charge. Salary capping with past service deferral.under this option all pension accrued at the date of election will be treated as deferred benefits. A new period of service will start for future service and will be subject to a pension salary cap of 150,000. The pensionable salary cap will apply to all benefits including death in service. Once elected the decision cannot be reversed. This option is designed for those members who are unlikely to have an issue with the lifetime allowance but may have an annual allowance issue. Members with high pensionable salaries and short service are likely to consider this option.
1 USS website
Page: 69 Number: 1 Author: Presenter Subject: Presentation Notes Date: 14/08/2012 10:45:36 The website is very extensive and has a large amount of material and is certainly something that you should study as part of this course to obtain accreditation. You will be asked to attest to the fact that you have actually studied the site in detail and be required to give dates and times.
1 USS Website www.uss.co.uk
Page: 70 Number: 1 Author: Presenter Subject: Presentation Notes Date: 14/08/2012 10:45:37 This is the home page to the website. At the foot of the column Joining USS there is a link to take you to the Scheme Guide. This screen will then take you to the appropriate section final salary or career average revalued benefits. If you are looking for a particular area of the website then you may find this under member resources. To access the modellers for a particular member you will need their member number, national insurance number and their surname to access. The modeller requires service and salary information which can be obtained from the members Your Service statement which is issued annually around about June.
1 USS website http://www.uss.co.uk/schemeguide/finalsalarybenefitssection/pages/default.aspx
Page: 71 Number: 1 Author: Presenter Subject: Presentation Notes Date: 14/08/2012 10:45:37 This slide shows the page dealing with Career revalued Final Salary benefits section and if you look just above the screen shot you will find the URL to take you to the appropriate section of the website
1 USS website http://www.uss.co.uk/schemeguide/careerrevaluedbenefitssection/pages/d efault.aspx
Page: 72 Number: 1 Author: Presenter Subject: Presentation Notes Date: 14/08/2012 10:45:38 As this The Career revalued section is a relatively new section of the scheme there is not the same support information as found in the final salary section. However work is being done on this part of the website. The scheme rules can be accessed in the same place (Publication and presentations) but the starting point for this section should be Schedule 1 which states how the rules have been adapted for this section.
1 USS website
Page: 73 Number: 1 Author: Presenter Subject: Presentation Notes Date: 14/08/2012 10:45:38 The website is extremely useful, you will find a section on the right hand side that indicates the support available in the area that you are currently in, it details forms, factsheets or any related resources. There is also a link to Independent Financial Advice that takes the user to the link of the IFAs who are currently accredited.
1 Questions?
Page: 74 Number: 1 Author: Presenter Subject: Presentation Notes Date: 14/08/2012 10:45:39 The website is very extensive and has a large amount of material and is certainly something that you should study as part of this course to obtain accreditation. You will be asked to attest to the fact that you have actually studied the site in detail and be required to give dates and times.