Case Studies setting out the effect of tiered contributions being implemented on April 2012
For the Civil Service scheme, the Government’s preferred approach means that we have considered not only the rates of contribution to apply from April 2012, but also how we implement a “tiered” contribution structure.
We will adopt the following principles which we understand to be consistent with those proposed (or already adopted) by other public service schemes:
- An individual’s additional contribution rate will be determined by their annual full-time equivalent rate of pensionable earnings;
- The additional contribution rate for an individual will apply to all of their pensionable earnings.
Example:
Jayne works part-time – 3 days a week. Her actual salary is £12,000. Jayne will pay additional contributions on £12,000 but at the rate which applies to a salary of £20,000 (Jayne’s full time equivalent rate).
Tony has base pay of £17,500 and earns a further £4,000 in overtime. As overtime is not pensionable, Tony will pay additional contributions on his base pay and set at the rate which applies to a salary of £17,500.
- An individual’s additional contribution rate will usually be fixed for the full financial year. To ensure that the system is understandable and does not give rise to unduly perverse outcomes, the additional contribution rate applicable to an individual will usually be fixed throughout the year1, determined by the position (full-time pay plus pensionable allowances that go with the post) as at 31 March immediately preceding the year in question. The rate will be re-assessed during the year only in the following circumstances:
- Change to the full-time equivalent pay rate other than as a result of the annual pay review process. So, for example, the contribution rate would be re-assessed on promotion, but not on receipt of a short-term pensionable allowance (expected to last for no more than six months)
- Change to permanent pensionable allowance(s) – except where the rate of an allowance is changed on a blanket basis across the workforce
Example:
For the period from April until her promotion, Barbara will pay extra pension contributions at the rate applicable to a salary of £20,000. From her promotion date, Barbara will pay extra pension contributions at the rate applicable to pay of £22,000.
- The additional pension contributions will apply only where an individual is accruing benefits – so will not apply where someone has reached maximum accrual. Maximum accrual is 45 years’ reckonable service in classic, premium and classic plus and a pension of 75% of pay in nuvos.
Example:
Edward is aged 64 and has already built up 45 years of reckonable service in classic. Edward cannot build up any more pensionable service and no longer pays toward his pension; he will not pay the additional pension contributions.
- Pre-Fresh Start prison officers and other individuals with accelerated rates of pension accrual will pay additional contributions on their pensionable pay at the same rate as colleagues building up standard benefits.
- Additional contributions will apply to scheme benefits in general and will only be refundable in circumstances where benefits are given up in exchange for a short-service refund Individuals in classic, who are neither married nor in a civil partnership both on leaving the scheme and at the time of retirement, currently receive a partial refund of their contributions; this is because these contributions are intended to provide benefits for survivors. The additional contributions are intended to reflect the extra costs associated with pensions generally, and will not be refunded in this way. The additional contributions made by members of classic will be refundable only in the same circumstances as apply in premium and nuvos – that is, where individuals leave the scheme with insufficient service to qualify for a pension (generally 2 years).
- In the main paper, we set out the effect of tax-relief on contributions paid. At present, tax relief reduces the cost of pension contributions by 20% for basic rate taxpayers, 40% for higher rate taxpayers and by 50% for additional rate taxpayers.
Example:
Jane is a member of classic and earns £25,000 a year. At the moment, Jane pays contributions of 1.5% of pay. Jane’s contributions will rise to 2.7% in 2012-13.
The impact on take-home monthly pay (after tax relief at 20%) will be:
- Current monthly cost of pension = £25
- Monthly cost from April 2012 = £45
During this period, Jane carries on accruing a pension based on her final salary. Jane’s pension has full price indexation in payment and is safe because it is backed by the Government.
What does this mean for me?
A calculator is available that allows you to see the effect of this approach on your take-home pay.
1 Year means financial year starting in April.