Transcript Post review presentation Sep 2010

Your USS Journey
Presentation for USS members
Colin Busby and Eifion Morris APMI
Every effort has been made to present accurate information. Members are advised to check with their employer and/or the USS guides to confirm
their understanding before acting on any information given. This presentation may be recorded for training and audit purposes.
Transition
The review of USS
Changes affecting current members
Changes affecting new joiners
Tax relief restrictions from 2011
Your questions
The Review of USS
Review of USS
Why review?
•
•
•
•
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Increasing longevity
Salary increases impact on pension costs
Investment volatility
Employer contribution increase of 2% wef October 2009
Pensions Regulator
• Valuation 31 March 2011
• Possibility of deficit contributions
Review of USS
Joint Review Group (JRG) formed by employers and UCU
JRG unable to agree changes to USS
JRG disbanded
Employers & Union submit proposals to USS Joint Negotiating Committee
(JNC)
JNC accepts employers proposals
Board of USS agrees to implement changes at meeting held on 22 July 2010
Subject to statutory consultation
Changes affecting current
members – Final salary section
Changes affecting current members
1 April 2011
Final Salary Intact
Higher
Normal
Pension Age
Higher
contribution
Change to
pension
increases
Flexible
retirement
Higher Normal Pension Age (NPA)
What is Normal Pension Age?
• USS has always had age 65 Normal ‘Retirement’ Age
• In practice all members could have a full pension at age 60 (assuming
employer consents and retiring from active service)
• NPA will mean that you could still retire before 65 but service after 31
March 2011 will be reduced for each year/part year earlier than age 65
• Unless employer augments benefits or retirement due to redundancy
(later slide)
Exemption for those aged 55 or over on 1 April 2011
• Anyone with a birthday on or before 1 April 1956 exempt from the NPA
change only
Normal Pension Age (NPA)65
Example –retiring at 60 with employer
consent
Age at 31 March 2011
Service to 31 March 2011
Service since 31 March 2011
Pensionable salary
50
20 years
10 years
£45,000.00
• 30/80 X £45,000
• Total =£16,875.00 pa
Before change
After change
• 20/80 X £45,000 = £11,250.00
• Plus
• (10/80 X £45,000) X 0.793 =
£4,460.62
• Total = £15,710.00 pa
I’m buying extra service to retire at 60
You can still access your pension at 60
• Although it may be lower
You will still get the full value of the extra service you’re
buying
• On retirement from active membership you can still draw benefits
from Added Years in full from the age chosen when contract taken
out
Change to early retirement terms
Redundancy
• wef 1 April 2013 provision of full early retirement pension ends
• No exemptions
Retirement at request of employer
• wef 1 April 2011 provision of full early retirement pension ends
• No exemptions
Normal Pension Age to be linked to
rise in State Pension Ages
NPA to increase in line with State Pension Ages
• 1 April 2026
• 1 April 2036
• 1 April 2046
66
67
68
Retirement before NPA will be classed as early retirement
Contribution increase to 7.5%
Increase from 6.35% to 7.5%
Salary (pa) Cost from takehome pay at
6.35% (per
month)
£10,000
£36.00
£15,000
£50.00
£30,000
£94.00
£45,000
£139.00
£60,000* £317.50
£75,000* £186.00
* 40% tax relief applied
Cost from takehome pay at
7.5% (per
month)
£43.60
£61.80
£116.80
£173.60
£375.00
£243.40
Impact on
take home
pay each
month
- £ 7.60
- £11.80
- £22.80
- £34.60
- £34.50
- £57.40
Pension increases change
Current practice
• Rules state that pensions (in payment and for deferred
members) are reviewed each April in line with increases to
‘official pensions’
• ‘official pensions’ = Civil Service, Police, Teachers, NHS,
state pensions increased in same manner
Pension increase change
Change due to scheme review
• Pensions for future service to be reviewed in line with Consumer Price Index(CPI)
rather than ‘official pensions’
• 5% cap to pension increase for service after 31 March 2011
Change due to legislation change
• Government announced on 8 July that ‘official pensions’ would in future increase in
line with CPI, not Retail Price Inflation (RPI)
• CPI historically 0.5% lower
• USS rules state that pensions in payment rise in line with ‘official pensions’
• USS Pensions wef 1 April 2011 to increase in line with CPI
• Affects all pensions in payment now and in the future
• No cap
Deferred pension increases
Deferred pensions to increase by lower of CPI or
2.5%
• Only affects leavers after 31 March 2011
• All benefits increased by CPI, limited to 2.5%
max
• Pre-31 March 2011 benefits not subject to cap
of 2.5%
Flexible retirement
Flexible retirement from age 55
• Subject to consent of employer and USS
2 ‘Flexes’ possible, 3rd is full retirement
• Hours must reduce by at least 20%
• Draw up to 80% of benefits (minimum 20%)
• Early retirement reductions apply before age 60
You continue to build up benefits
• 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
What stays the same?
Death in service benefits
Incapacity benefits
Added years AVC contracts
• For existing contracts
• For new contracts for final salary members
USS money purchase AVCs (Prudential)
Transfers-in
Employer still contributes 16% of salaries
Changes affecting new
entrants after 31 March 2011
New section of scheme
Any new joiner after 31 March 2011 who has
not been in the final salary section within 6
months of joining will join new section
• Members rejoining within 6 months of leaving final
salary section can rejoin final salary section
How does new section work?
Scheme design to be confirmed
Pension calculated each year & ‘banked’
• Formula is 1/80 X Salary for year
• Plus 3 X Pension as tax-free cash
Banked pension & cash increased each year by inflation
• Increases limited to a max of 7.5%
New section - Example
Pension calculation Pension for year Banked pension
Salary in year
£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
£1568.75
£45,000
1/80 X £45,000
£562.50
£2131.25
TOTAL
£2131.25 pa
We now need to add inflation
New section - Example
Pension for
year
Inflation calculation
Banked
pension
£500.00
£525.00
£543.75
£500.00 X 1
(£500.00 X 1.02) + £525.00
(£1,035.00 X 1.03) + £543.75
£500.00
£1,035.00
£1,609.80
£562.50
(£1,609.80 X 1.015) + £562.50
£2,196.45
TOTAL
Final salary pension would have been
4 X 1/80 X £45,000.00 = £2,250.00 pa
Tax-free cash of 3 X pension in addition
£2,196.45 pa
New section vs Final Salary
New
section
Final Salary
Pension built up
each year then
revalued in line
with inflation
Final salary
pensions based on
service and salary
at retirement
1/80th formula + 3 X
pension cash
1/80th formula + 3 X
pension cash
6.5% contribution
7.5% contribution
Age 65 NPA
Age 65 NPA
Cost sharing
Cost sharing
Historically employer has met full cost of benefits
(in excess of employee contribution of 6.35% of salary)
Future rises in costs shared 35:65 between members and
employers
Contribution rates reviewed normally every 3 years
Consultation exercise
Consultation
Employer Consultation exercise begins October
2010
• Your chance to voice an opinion
• Trustees must consider opinions raised
• Consultation period to last more than statutory 60 days
Consultation website
Tax relief proposals from April
2011
Government propose to restrict tax
relief on pension from 1 April 2011
Original plans aimed at true ‘high earners’
• Aimed primarily at those earning more than £130,000
Revised plans impact large percentage of USS members
• Could affect members earning more than £50,000 (approx)
Tax relief changes – current system
Tax relief
• Currently you receive 20%/40% tax relief on all contributions
Current limit on maximum pension pot is a capital value
of £1.8 million
• Not many USS members affected
Tax relief changes – new system
(proposal)
Increase in pension value each year measured
• Capital value = Growth in pension X factor (potentially 23)
If capital value more than limit (£30,000 - £45,000 TBC) tax charge
applies
• Tax charge via annual return
• Always in arrears
• Clarification on how charge will be met
AVC options for final salary
members
AVC Options
Two USS options for increasing your pension and/or
tax-free cash
• Added years AVC
• and/or
• Money Purchase AVC (Prudential)
Other savings/investments available
Comparison
Added
years
Money
purchase
Tax-free cash
Tax-free cash
Certainty
Flexibility
Tax relief
Tax relief
15% maximum £
Up to 100% £
Added years modeller
Prudential AVC calculator
• Website www.pru.co.uk/uss
Beat the tax man
Proposed tax changes effective 1 April 2011
In this tax year you can:• Pay AVCs up to 100% of your salary and save 20%/40% tax
• Remember :• £100 contribution = £125 @ 20% or £167 @ 40% tax
band
• Potential to take Money Purchase fund as tax-free cash at
retirement
How to pay AVCs – Added Years
Added
Years
Money
Purchase
Use modeller
on
www.uss.co.uk
Contact
Prudential
directly
Contact
Pensions
Office
Face-2-face
0800 515914
Summary of changes
Final salary calculation retained for existing members and
certain re-joiners
• Normal Pension Age now 65 (for future service)
• Contribution rate increase to 7.5%
• Pension increase changes
• Flexible retirement
• Changes for retirements at employer request/redundancy
• New section of scheme for new entrants
More information
• Consultation exercise
– Starts October 2010
• Pensions office contacts
• USS website – www.uss.co.uk
• Prudential – www.pru.co.uk/uss