Scheme Member Zone. Preserved Members. Does my scheme integrate with the State Pension?

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Dwight Adams
5 years ago
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1 Scheme Member Zone Does my scheme integrate with the State Pension? One of a series of Factsheets and Quicknotes in the Module: Important Aspects of My Pension Information Education Communication Preserved Members

2 Does my scheme integrate with the State Pension? Preserved Members This Quicknote is written for people who are preserved members of a defined benefit scheme. It forms part of our Module Important Aspects of My Pension and should be read alongside the other Factsheets and Quicknotes in the series. For more detailed information see our Module, Drawing My Benefits Integration Integration is a way of designing a defined benefit scheme to take account of pension benefits being paid by the State. At State Pension Age you will be entitled to receive your Basic State Pension. The amount of Basic State Pension you will get will depend upon your contribution record which will include credits made by you or on your behalf. Any Basic State Pension you will receive is paid in addition to any other pension entitlement you will receive from other arrangements (for example, your preserved benefit, or personal pension plan). How does integration work? Normally, it is taken into account as a reduction from the amount of your earnings which were used to calculate your pensionable salary whilst you were an active member of the pension scheme. This is important as then not all of your earnings would have been used to calculate your pensionable salary (or final pensionable salary). Not all pension schemes use integration but a significant minority do. Integration, (sometimes called offset ), is important to you IF your pension scheme took State Pensions into account in calculating your pensionable salary. continued MyCompanyPension.co.uk Ltd 2007 Page 2 of 6

3 How does integration work? continued This can be demonstrated in the following example: Example: You left a pension scheme in September, 2001 and in calculating your preserved pension, the scheme made use of integration to allow for the Basic State Pension. Your basic salary was 42,000 p.a. with 6,000 of annual bonus. When you left, the scheme calculated your preserved pension based on your pensionable salary. At the time, the Basic State Pension for a single person was 3,770 p.a. (tax year 2001/2002). For pension purposes, let s say your pensionable salary (or final pensionable salary) was defined in the Scheme Rules as: basic salary Basic State Pension = pensionable salary So, your pensionable salary was - 42,000-3,770 = 38,230 p.a. Hence, although your total pay was 48,000, your pensionable salary was considerably lower. Your preserved pension benefits will be based on your pensionable salary (or final pensionable salary). In this example, if you had 20 years pensionable service and the accrual rate (part of the formula used by a defined benefit scheme to calculate your pension) was 60 th s, your preserved pension would be: Pensionable Service, 20 years Final Pensionable Salary, 38,230 Accrual rate, 1/60 th Preserved pension at date of leaving: 20 years x 38, = 12, p.a. continued MyCompanyPension.co.uk Ltd 2007 Page 3 of 6

4 How does integration work? continued If your preserved pension had been based upon your full earnings, it would have been: Pensionable Service, 20 years Final Pensionable Salary, 48,000 Accrual rate, 1/60 th Preserved pension at date of leaving: 20 years x 48, = 16,000 p.a. Typical reduction to earnings to calculate pensionable salary Often, a scheme that uses integration will have reduced members earnings which were used to calculate pensionable salary by a proportion of the Lower Earnings Limit (LEL). The LEL is the amount of income you must receive before you start to pay National Insurance Contributions and is in monetary terms, virtually the same as the Basic State Pension. The amount of reduction used will be defined in the Scheme Rules. It can be more or less than the Lower Earnings Limits or any other reduction it chooses. Common rates of reduction are: a reduction of 75% of the LEL a reduction equal to the LEL a reduction of 150% of the LEL. MyCompanyPension.co.uk Ltd 2007 Page 4 of 6

5 Summary People seldom have identical pensions and you should avoid drawing comparisons with colleagues whose circumstances may at first appear the same but could emerge as having significant differences. This Quicknote forms part of our Module Important Aspects of My Pension and should be read alongside the other Factsheets and Quicknotes in the series. This is not an authoritative document. Seek professional advice from an appropriately experienced and qualified adviser. Does my scheme integrate with the State Pension v3.0 Preserved Last updated 18/01/2007 MyCompanyPension.co.uk Ltd 2007 Page 5 of 6

This Factsheet contains general information on particular points of interest associated with pensions but is not intended to be a complete or authoritative guide. MyCompanyPension.co.uk Ltd is not registered with the Financial Services Authority and does not give advice under the terms of the Financial Services and Marketing Act 2000.

6 This Factsheet contains general information on particular points of interest associated with pensions but is not intended to be a complete or authoritative guide. MyCompanyPension.co.uk Ltd is not registered with the Financial Services Authority and does not give advice under the terms of the Financial Services and Marketing Act This Factsheet does not constitute any form of advice or recommendation and should not be relied on in making (or refraining from making) any specific personal or business decision. MyCompanyPension.co.uk Ltd PO Box 240 Telford TF6 5YN enquiries@mycompanypension.co.uk A member of the MyCompanyPension.co.uk Ltd 2007

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Redundancy: Spouse s Death Benefits For Preserved Members of Defined Benefit Schemes Redundancy: Spouse's death benefits* Preserved Members Possible changes caused by redundancy This Quicknote is written