UNISON - Protecting
Pensions for Dummies
James's Jargon Buster
Here, UNISON steward, James Mulholland, explains all the things about pensions that we wanted to know but were afraid to ask!
"We’ve all been there, reading an annual statement for our pension or an article in a newspaper, and the phrases being used are becoming more baffling by the minute: “accrual rates” “actuarial reductions” “pensionable pay” “1/60th’s” “deferred pensioner”.
"Well hopefully this short guide to pensions language will help you understand what these phrases mean to you and your pension.
"So off we go........
Accrual rate: this is the rate at which your pension builds up, normally shown as a percentage of your annual salary per year of membership, eg 1/60th, which means for each year you are a member of the scheme, your pension accumulates by 1/60th of your salary, so that after say 30 years membership, your pension would be 30/60th’s (or half) your salary when you reach your retirement age.
Actuaries: These are the people who work away in the background of all pension schemes and work out if a scheme has enough money to pay its liabilities(the amount of pension it has to pay out). They use a lot of complex formulas and tables based on health, life expectancy etc.
Actuarial reduction: If someone wants to get their pension paid to them earlier than their official retirement age (not an ill health retiral) eg they wanted to retire at 60 instead of 65, the pension scheme would have to pay the pension for an additional 5 years which would cost money, so the scheme would apply a reduction in your benefits. This is normally a percentage for each year early that you are retiring. Your individual scheme would be able to advise you of what the percentage rates are for your scheme.
Pensionable pay: This is the amount of your salary which is pensionable. This would not normally include overtime payments. So if your normal annual salary was £20000.00 but you worked a lot of overtime which brought your salary up to £30000.00 per year, your pensionable pay would still be £20000.00 and this is what your pension would be based upon.
Final salary pension scheme: This is a type of pension scheme where your pension is based upon your final years salary or your salary over your last couple of years of service averaged out, multiplied by your years of service and accrual rate. eg your final salary was £21000.00, your accrual rate was 1/60th and you had 40 years of service and you retire on your retirement date, this means your pension is 1/60th x 40 = 40/60th’s(or 2 thirds) of £21000.00 = £14000.00 of annual pension.
Career average salary scheme (CARE): This type of scheme is the same as the final salary scheme except that the benefits are calculated on your career average salary (there is normally an element of adjustment for each year's salary to revalue them to today’s money) rather than your final salary. CARE schemes can be better for lower paid workers and for people whose salary may go down in the last few years before retirement.
(I will not do a CARE scheme pension example as there are too many variables and each person has to work them out themselves based upon their circumstance now and what they think they will be doing/earning when they retire.)
Benefits: This means what you gain from being a member of the scheme and they will typically include – a pension on retiral, a death in service benefit (your nominated dependent will receive a lump sum and possibly a pension), ill health pensions. Check your own scheme for a full list of benefits.
Contributions: How much you pay into the scheme. This is normally a percentage of your pensionable pay.
AVC & FSAVC: These stand for Additional Voluntary Contributions and Freestanding Additional Voluntary Contributions. These are extra contributions to a pension scheme over and above the normal percentage of your pensionable salary which you pay into the scheme. Contact your own scheme for further information on these.
Transferring in and out: If you no longer wish to be a member of a pension scheme, you can stop paying in and transfer your accrued benefits to another scheme and likewise it may be possible to transfer an old pension scheme fund you have into your current scheme. Before considering either of these, you must contact your scheme and discuss it with them and also seek independent financial advice before making any switch.
Defined contribution schemes: As explained earlier, a final salary or CARE scheme is known as a defined benefit scheme. There is another type of scheme known as a defined contribution scheme, you will also see these called private pensions, stakeholder pensions and SIPP’s (self invested personal pensions). These are generally the type of scheme you will find in the private sector.
The biggest difference between these schemes and final salary/CARE schemes is that you do not know what pension you will get when you retire. You pay your money into it and this money is invested on your behalf by the pension provider (such as Aviva, L&G, Zurich etc).
When you come to retire, the investments are cashed in and you are left with a sum of money (known as your pension pot) which is entirely dependent on how the investments performed. At this point you can take 25% of that sum as a tax free lump sum but the rest must then be converted in to an annuity, which is an income for life. You buy an annuity by handing over your pension pot to an insurance company or other annuity provider and they will then pay you an income for the rest of your life.
Currently, annuity rates are at rock bottom and if you are a 60 year old man today, a pension pot of £100,000.00 will buy you an annual income of £5051.00. This is a level annuity and won’t rise for the duration of payment. If you want an annual increase in line with the RPI, for the same circumstances, the annual income would start at £2717.00.
Hopefully this has demystified some pensions jargon for you."
Further help and advice can be found on these websites:
The North East Scotland Pension Fund are the pension scheme we are a member of and they can be contacted through the first link above or on 01224 914949