Transcript Post review presentation Feb2011
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?
• 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 50 20 years Service since 31 March 2011 10 years Pensionable salary £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 2020 66 • Timetable to be announced for increase to age 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 take home pay at £10,000 6.35% (per month) £36.00
£15,000 £30,000 £50.00
£94.00
£45,000 £60,000* £75,000* £139.00
£190.50
£238.00
Cost from take home pay at 7.5% (per month) £43.60
£61.80
£116.80
£173.60
£225.00
£281.00
-
Impact on take home pay each month £ 7.60
£11.80
£22.80
£34.60
£34.50 £43.00
* 40% tax relief applied
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,
Pension increase change
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 Change due to scheme review • Pensions for future service to be reviewed in line with ‘official pensions’ • 5% cap to pension increase for service after 31 March 2011
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, 3 rd 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% • 5% plus 50% of any increase over 5%, up to 10% • (5% + (50% X (10%-5%)) = 7.5%
New section - Example
Pension calculation Pension for year Banked pension Salary in year £40,000 £42,000 £43,500 £45,000 TOTAL 1/80 X £40,000 1/80 X £42,000 1/80 X £43,500 1/80 X £45,000 £500.00
£525.00
£543.75
£562.50
We now need to add inflation £500.00
£1,025.00
£1568.75
£2131.25
£2131.25 pa
New section - Example
Pension for year Inflation calculation £500.00
£525.00
£543.75
£562.50
£500.00 X 1 (£500.00 X 1.02) + £525.00
(£1,035.00 X 1.03) + £543.75
(£1,609.80 X 1.015) + £562.50
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 Banked pension £500.00
£1,035.00
£1,609.80
£2,196.45
£2,196.45 pa
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 20 October 2010 to 22 December 2010 • Your chance to voice an opinion Trustees met 20 January 2011 to consider comments raised by members and representatives • Trustees put forward 2 modifications to JNC for consideration • longer rejoining periods, and • adjustments to proposed caps on pension increases for post April 2011 benefits JNC met 1 February and 11 February, no agreement • Next meeting early March
Tax relief restrictions from April 2011
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 Increase in capital value of benefits each year measured • Capital value = Growth in pension X factor (19:1 for USS) • Allowance for inflation on benefits already built up If capital value more than limit of £50,000 from April 2011 tax charge applies • Tax charge via annual return • Always in arrears • Clarification on how charge will be met Maximum benefit value at retirement reducing to £1.5 million from April 2012 • Would affect USS members with 40 years’ service and £130,000 pa salary
Salary at start of year Salary at end of year (5% increase) £50,000 £60,000 £70,000 £80,000 £90,000 £100,000 £110,000 £120,000 £130,000 £140,000 £150,000 £160,000 £170,000 £180,000 £190,000 £200,000 £52,500 £63,000 £73,500 £84,000 £94,500 £105,000 £115,500 £126,000 £136,500 £147,000 £157,500 £168,000 £178,500 £189,000 £199,500 £210,000 10 years £14,499 £17,399 £20,299 £23,199 £26,099 £28,999 £31,899 £34,799 £37,698 £40,598 £43,498 £46,398 £49,298 £52,198 £55,098 £57,998 Pension and lump sum accrual (19:1) 20 years £16,756 £20,107 £23,458 £26,809 £30,160 £33,511 £36,862 £40,214 £43,565 £46,916 £50,267 £53,618 £56,969 £60,320 £63,671 £67,023 30 years £19,012 £22,814 £26,617 £30,419 £34,221 £38,024 £41,826 £45,629 £49,431 £53,233 £57,036 £60,838 £64,640 £68,443 £72,245 £76,048 40 years £21,268 £25,522 £29,775 £34,029 £38,283 £42,536 £46,790 £51,044 £55,297 £59,551 £63,804 £68,058 £72,312 £76,565 £80,819 £85,073
Salary at start of year Salary at end of year (10% increase) £50,000 £60,000 £70,000 £80,000 £90,000 £100,000 £110,000 £120,000 £130,000 £140,000 £150,000 £160,000 £170,000 £180,000 £190,000 £200,000 £55,000 £66,000 £77,000 £88,000 £99,000 £110,000 £121,000 £132,000 £143,000 £154,000 £165,000 £176,000 £187,000 £198,000 £209,000 £220,000 10 years £20,437 £24,524 £28,612 £32,699 £36,786 £40,874 £44,961 £49,049 £53,136 £57,223 £61,311 £65,398 £69,485 £73,573 £77,660 £81,748 Pension and lump sum accrual (19:1) 20 years £28,631 £34,357 £40,083 £45,809 £51,535 £57,261 £62,987 £68,714 £74,440 £80,166 £85,892 £91,618 £97,344 £103,070 £108,796 £114,523 30 years £36,824 £44,189 £51,554 £58,919 £66,284 £73,649 £81,014 £88,379 £95,743 £103,108 £110,473 £117,838 £125,203 £132,568 £139,933 £147,298 40 years £45,018 £54,022 £63,025 £72,029 £81,033 £90,036 £99,040 £108,044 £117,047 £126,051 £135,054 £144,058 £153,062 £162,065 £171,069 £180,073
Salary at end Salary at start of year 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 £46,264 £64,989 £83,713 £100,000 £250,000 £373,374 £722,261 £1,071,149 £1,420,036
AVC options for final salary members
USS AVC options
Added years Tax-free cash Certainty Tax relief 15% maximum £ Money purchase (Prudential) Tax-free cash Flexibility Tax relief 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
AVCs after April 2011
Still very attractive for most USS members • You can pay in up to the £50,000 pa limit • Receive full tax relief Money Purchase AVC payments simply add annual contribution to work out Annual Allowance • Annual Allowance without AVCs = £24,000 • Scope to pay up to £26,000 in Money Purchase AVCs Added Years AVCs will increase amount of service each year • Calculation therefore based on increase in pension value over year, including Added Years AVCs
How to pay AVCs – Added Years
Added Years Use modeller on www.uss.co.uk
Contact Pensions Office Money Purchase Contact Prudential directly 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