PENSIONS GUIDE 2019/20 - puzzled by pensions?
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puzzled by pensions? PENSIONS GUIDE 2019/20
introduction
Usdaw believes that all of our members have the right to
a decent standard of living in retirement. For this we need
a fair pensions system where both state and company
pensions play a part.
We know that to achieve good
company pensions we need
activists who understand how
pensions work so that we can
get pensions onto the bargaining
agenda and encourage other
members to take advantage of their
employer’s scheme.
This guide aims to explain the
different types of pensions available
to Usdaw members and how they
work and to help you understand
the technical terms used by pension
schemes.
Paddy Lillis
Usdaw General Secretary
1
Contents
Introduction 1
1. Occupational Pensions 5
Types of pension scheme 5
Defined Benefit (DB) 6
Defined Contribution (DC) 10
Hybrid schemes 17
Ill-health retirement 17
Salary sacrifice 18
Leaving a scheme early 18
Transferring your pension 20
2. State Pensions 23
State Pension reforms 23
Who will receive the new State Pension 23
How much you will get 24
Starting amount from April 2016 25
When you will receive your State Pension 25
Topping up your State Pension 26
Deferring your State Pension 26
Claiming from your spouse/civil partner 27
Pension Credit 28
State Pension increases 28
The Pension Service 28
2
3. Your Pension Rights 31
Auto-enrolment – new pension rights from 2012 31
Tax rules about pensions 33
The Pensions Regulator 36
Trustees 36
Master Trusts 38
What happens if your employer becomes insolvent? 38
Buyouts of pension schemes 41
Transfer incentives 41
Pension Increase Exchanges 42
Consultation on changing or closing a scheme 42
Making a complaint against your pension scheme 43
Your right to information about your pension scheme 46
Pension rights for part-time workers 48
Tracking down a lost pension 48
Divorce 48
Access to impartial guidance 49
Getting financial advice 49
Pension Scammers 52
4. Usdaw and Pensions: What We Do 55
Pensions Awareness Campaign 55
Pensions Online Home Study Course 56
Usdaw Pensions Website 56
Usdaw’s Pensions Team 57
5. Useful Information 59
Useful contacts 59
Pension statistics 60
Disclaimer
The content of this publication is intended solely for educational and general information purposes. It does
not constitute any form of advice or recommendation by Usdaw and is not intended to be relied upon
by users making (or refraining from making) any specific financial or other decisions. Usdaw has used its
reasonable endeavours to ensure the information contained in this publication is accurate and error-free.
However, Usdaw cannot warrant that the information does not contain inaccuracies or typographical errors.
3
4
1. occupational
pensions
Since auto-enrolment was introduced in 2012 all Usdaw
members will work for companies which offer a workplace
pension scheme for them to join.
This section explains the different types of occupational
pensions as well as personal pensions.
Occupational pensions are set up Types of pension scheme
by employers to provide pension
benefits for their employees. There are three main types of
occupational pension scheme:
Usually both the company and
the employee make contributions — Defined Benefit – where the
into the pension scheme. It is benefits payable to you are
the company contribution that clearly defined in the scheme’s
gives occupational pensions the rules and are calculated based
advantage over personal pensions on your salary and length of
and other ways of saving. It is also service. Contributions are paid
the reason why Usdaw believes into and benefits are paid out of
that occupational pensions are the one large pension fund.
best way of achieving a decent — Defined Contribution (also
retirement income on top of what called money purchase) – where
you get from the state. each scheme member has their
own individual pension pot.
In these schemes only the
amount of contributions being
paid by the company and
employee are defined. The
amount of pension you get
depends on the size of
your pension pot when you
retire.
— Hybrid Schemes – these
schemes pay benefits which are
a mixture of Defined Benefit and
Defined Contribution.
5
Defined Benefit (DB) Final Salary Schemes
Defined Benefit pension schemes Final salary schemes are one kind of
Defined Benefit scheme. They pay
are considered the best kind to be
in. This is because your pension is you a pension based on your salary
calculated based on your salary and in the last few years before you
service which makes it relatively retire (your final salary) and the
easy to predict how much your number of years you’ve been in the
pension will be. scheme (your pensionable service).
The pension benefits you build up The rate at which your pension
are guaranteed and the company builds up is called the accrual rate
carries the risk of having to pay and it is normally expressed as a
extra contributions if there is not fraction. A typical accrual rate is
enough money in the fund to pay 1/60th. If you paid into a 1/60th
out all the benefits promised. scheme for 30 years before you
Company contributions to DB retire then your pension would be
schemes are often at least twice 30/60ths – or one half – of your
what the employee pays. final salary.
DB schemes often come with a Lower accrual rates produce a lower
number of additional benefits for pension. So in a 1/80th scheme you
members such as: would need to pay in for 40 years
to achieve a pension of half your
— Pensions for your spouse/ final salary.
partner after you die.
Different schemes have a different
— Pensions for dependent children definition of what counts as
after you die. pensionable salary. In some
schemes it might be the whole of
— A lump sum payment if you die
your pay where in others it might
before you retire.
be basic or contractual pay only.
— Enhanced pension if you retire
early due to ill-health.
You also have the option of
exchanging some of your pension
for a tax-free lump sum when
you retire (this is called cash
commutation).
DB schemes are always governed
by a board of trustees who are
legally bound to act in the best
interests of the scheme’s members
(see the section on Trustees).
6
Career Average Revalued Earnings CARE schemes are usually more
(CARE) Schemes affordable for companies than
CARE schemes are another kind final salary schemes because the
of Defined Benefit scheme. Your value of the pension you have built
pension is based on your average up in previous years is linked to
salary during the time you are in the inflation increases rather than wage
scheme rather than your final salary increases and, over time, inflation
at retirement. tends not to rise as fast as wages.
Plus the inflation increases are
For every year you pay into the usually capped at 5% a year or less,
scheme you build up – or accrue which also helps to control the cost
– an amount of pension. The of the scheme.
scheme’s accrual rate will either
be a fraction (like 1/80th) or a CARE schemes might provide a
percentage (like 1.5%) of your better pension if you are likely to
pensionable earnings for each year. earn more in the middle years of
your career rather than the final
The pension built up each year is years or if you are going to switch
then increased (revalued) for every from full-time to part-time hours
subsequent year up until you get towards the end of your working
to retirement age. Usually, your life. They may also be more suitable
pension is revalued in line with rises if you work variable hours, which
in inflation using either RPI or CPI is why CARE schemes were
as a measure. originally set up for retail workers
at companies like Tesco and The
Co-operative Group.
Final salary schemes provide a
higher pension for people who have
one or more promotions in their
career and whose highest earnings
are in the last few years before
retirement.
7
Cash Balance Schemes Integrated Schemes
Sometimes called Retirement Some Defined Benefit schemes take
Balance Schemes, these schemes into account your State Pension
have features typical of both when working out your pension.
Defined Benefit and Defined Schemes that do this are referred to
Contribution schemes but they as being integrated with the State
are not treated as being a hybrid Pension system.
scheme.
Some integrated schemes will
The benefit promised by the apply a deduction to the amount
company is a cash sum at of your earnings which are treated
retirement. as pensionable. This can reduce
the cost of the scheme for both
The value of the cash sum is
the company and employees
calculated as a proportion of your
but is often unfair on the lowest
earnings in each year that you have
earners whose pensions are
been a member of the scheme.
disproportionately affected
A typical cash balance scheme compared to their higher paid
might provide a cash sum worth colleagues.
20% of your earnings for each year
Other schemes will apply a
of pensionable service.
deduction to your scheme pension
So after 30 years you would have when you reach your State Pension
a cash sum of 30 x 20% = 600% of Age.
your earnings or, in other words, six
years’ earnings. Paying for the benefits – valuations
Cash balance schemes split risk Employees pay a fixed contribution
between the company and the to the scheme but the company’s
employee. The company takes on contributions can vary from time
the risk of funding the scheme – to time because they must pay the
making sure that there is enough balance of the cost of providing the
money in the fund to provide the promised benefits.
cash sum promised. The employee All the contributions are paid into
takes on the risk that the cash sum a single fund and then invested in
may not be big enough to provide a a range of assets including stocks
decent pension. and shares (equities), government
From April 2015, if you are aged bonds (gilts), commercial property
55 or over, you have total freedom or foreign currency.
over how you take an income or a The law requires every Defined
lump sum from your cash balance Benefit scheme to undergo a full
pension pot. valuation every three years. The
results of the valuation show how
much the scheme’s assets are worth
and how much its liabilities – the
pension promises – are.
8If a scheme’s assets are greater
than its liabilities then the scheme
is said to be in surplus. These days
though a valuation is more likely to
show that the liabilities are greater
than the assets – in which case the
scheme is said to be in deficit. Additional Voluntary Contributions
When there is a deficit the company Members of Defined Benefit
must increase the contributions schemes usually have the option of
that it makes to the scheme to paying extra contributions on top of
make up the shortfall. A recovery their regular scheme contribution in
plan will be put in place where the order to achieve a bigger pension
company promises to pay so much and tax-free lump sum when they
extra money to the scheme over a retire. These are called Additional
period lasting maybe 10 to 15 years Voluntary Contributions or AVCs.
to eliminate the deficit.
AVCs are provided on a Defined
Often after a valuation the company Contribution basis where the money
will also increase the employees’ is paid into an individual pension
contribution rate to help reduce the pot of your own, kept separate from
deficit. They may make changes to the main pension fund.
the scheme or decide to close it.
These days it is no longer
compulsory for occupational
pension schemes to provide a
facility for members to pay AVCs.
9Defined Contribution (DC) decent income when you retire. The
company’s only concern is to pay
Defined contribution schemes the contributions promised in full
are also called money purchase and on time.
schemes.
From April 2015 you can choose to:
Unlike Defined Benefit schemes
where the amount of pension you a. Take the whole of your pension
get when you retire is predictable, pot in one go, 25% tax-free and
the only sure thing in a DC scheme the rest taxed as income.
is the amount of contributions b. Take smaller lump sums, as
being paid into your individual and when, with 25% of each
pension pot. withdrawal tax-free and the rest
The contributions paid are invested taxed as income.
in line with investment choices c. Take up to 25% tax-free and a
that you make when you join the regular taxable income from
scheme. The value of your pot will the rest. The regular income
rise or fall from time to time in line can be drawn directly from
with investments you have made. your pension pot which remains
The size of your pension at invested (drawdown) or by
retirement depends on lots of buying a secure income for life
different factors. These are just a (annuity).
few of them: Sometimes there might be
— The amount of contributions additional benefits for employees
paid in. who join their company’s DC
scheme such as a lump sum
— The amount deducted from your payment on death before
pot in management charges. retirement.
— How successful your investment
choices were in helping your pot The shift from DB to DC
to grow. Over the last ten years, as Defined
Benefit schemes have become
— How long your pot has been
more expensive and risky to run,
invested for.
many employers have made the
— What the economic conditions switch from DB to DC. DC is more
are like when you retire. affordable because the company
usually pays a smaller contribution.
— If you are considering buying a
Also, in a DC scheme the risk of
regular income (an annuity) the
adequately funding pensions lies
cost of this when you retire.
with the employee instead of
In a DC scheme it is the employee the company.
who carries all the risks – the risk
The first step was for companies
that your investments might not
to close their DB schemes to new
do very well or that your pot might
joiners and start a new DC scheme
not be big enough to provide a
for new employees to join.
10More recently, companies have — Death benefits – joining the
closed their DB schemes to the company DC scheme should
existing members too and switched entitle you to a lump sum
them over to DC. Sainsbury’s closed payment on death before
its DB scheme to future accrual in retirement.
2013 and Tesco, The Co-operative
— Ill-health benefits – joining the
Group and Morrisons all closed their
scheme should entitle you to
schemes in 2015.
some kind of protection if you
are forced to stop working due
What makes a good DC scheme?
to ill-health.
The key to a good DC scheme is the
amount of contributions being paid — Trust-based – your company’s
in – and in particular the amount DC scheme should be managed
that the company pays. by a board of trustees who will
act in the best interests of the
Some companies offer to match scheme’s members, or they
whatever the employee contributes should have an independent
up to a certain level. More generous governance committee.
companies will offer to contribute
more than the employee or will Personal and Stakeholder pensions
make a contribution even if the
Personal pensions are also Defined
employee pays nothing themselves.
Contribution type schemes. These
In Usdaw’s opinion a good DC are pensions that you can set up
scheme looks like this: yourself with a bank, building
society or insurance company.
— Adequate contributions – our
view is that a total contribution The downside to taking out your
of 15% of earnings is needed to own Personal pension compared to
achieve a decent pension with joining an occupational pension is
10% paid by the company and that there is no contribution from
5% by the employee. The longer your employer.
contributions are paid the better.
Also, the management charges in
This is why it is important that
Personal pensions tend to be higher
we encourage young people
than they are in company schemes.
to join their workplace pension
schemes as soon as they can. Stakeholder pensions were
introduced in 2001 as a more
— Pensionable earnings –
affordable alternative to Personal
contributions should be paid
pensions. Stakeholder pensions
on the whole of your earnings
have to meet the following
and not limited to basic pay or a
standards:
band of earnings.
— A maximum annual management
— Low charges – if your DC
charge of 1.5% dropping to 1%
scheme deducts management
after the policy is ten years old.
charges from your pot these
should be kept to a minimum
(see the section on Charges).
11— A minimum contribution of £20 Making your investment choices
a month. The contributions you and your
— No charges for transferring employer pay into your Defined
your Stakeholder pension into Contribution pension are invested
another pension scheme. in line with choices you make when
you first join the scheme. The size
— Offers you a default investment of the pension you get from a DC
option (see ‘Making your scheme is largely influenced by how
investment choices’). successful those investments are in
In recent years, companies have growing the value of your pot.
appointed a pension provider The most common types of
(usually an insurance company) to investment fund you are asked to
provide a Personal or Stakeholder choose from when you join a DC
pension for their employees rather pension scheme are:
than set up their own scheme.
These arrangements are usually — Stocks and shares (equities)
called Group Personal Pensions or in companies based in the UK
Group Stakeholder Pensions. or overseas. These are usually
the most high risk investment
Although your employer might because the value of stocks and
offer to make contributions to a shares rise and fall on a daily
Personal or Stakeholder pension for basis. The trade off though is
you, strictly speaking they are not that, over a long period of time,
occupational pension schemes. investing in equities can produce
Unlike an occupational scheme the highest returns.
set up by your employer, Personal — Government bonds (gilts) are
and Stakeholder pensions are issued by the UK and overseas
not governed by a formal board governments who will pay a
of trustees who act in the best fixed amount of interest on
interests of the scheme’s members. them over a fixed period of
Instead you are entering into a time. Investing in bonds is less
contract with an insurance company risky than investing in equities
exactly the same as if you had set although the trade off is that
the pension up on your own. they may produce a lower
The only differences are that your return.
employer is contributing too and — Corporate bonds are essentially
because the pensions have been the same as government bonds
arranged on a group basis to cover but issued by companies instead
the whole workforce the charges of governments. Corporate
are usually lower. bonds are a higher risk
investment than government
bonds because companies
go bust more frequently than
governments do.
12— Investing in property – usually In the lifestyle fund you are
commercial property – is less effectively leaving the investment
risky but will produce a lower decisions to the experts. They
return. will start by investing your money
in higher risk funds like equities
— Cash funds invest in bank
which are expected to produce
and building society deposits
the highest returns. As you get
and are one of the least risky
closer to your retirement age they
investments although they will
will automatically switch your
produce a far lower return.
money into lower risk/lower return
The paperwork you get from the investments like bonds and cash.
pension scheme when you join will The idea is to try to make sure that
normally categorise the investment there are no nasty surprises as you
choices as being high risk, medium get closer to retirement such as a
risk or low risk. sudden drop in the value of your
pot.
Even though you can change your
investment choices from time Lifestyling may be suitable for you
to time, most people don’t feel if you are intending to purchase an
confident making the decisions annuity when you retire (ie swap
themselves. Because of this, most your pension pot for a regular
pension schemes offer you a default income for the rest of your life).
investment choice – usually called a However, if you are considering
lifestyle fund. keeping your pension pot invested
and to drawdown your income as
and when, this may not be suitable.
This is because moving your
pension fund to less risky assets
is likely to reduce the investment
returns you will receive.
13Charges Annuity rates change on an almost
Personal pensions, which are daily basis and can be influenced by
usually provided by an insurance a number of different factors. These
company, carry an Annual are just a few:
Management Charge. This is the — Interest rates – annuity rates
pension provider’s fee for work are less generous at times
involved in handling and investing when interest rates are low and
your contribution money. The become more generous at times
AMC is usually expressed as a when interest rates are higher.
percentage which is deducted from
the value of your pot every year. — Life expectancy – how much
income an insurance company
Don’t underestimate the impact is prepared to pay you depends
high charges can have on a pension on how long they think you are
pot. A 1% charge might seem low going to live for (in other words
but if you are paying money in over how long they are going to be
25 years this means that you are paying you for).
having 25 x 1% = 25% of your money — Where you live – insurance
deducted in charges in that time. companies can determine how
Employers are usually able to long they expect you to live by
negotiate lower charges with their your postcode. People who live
chosen pension provider. in low income areas are likely to
get a better annuity than people
In April 2015 the Government who live in higher income areas.
introduced a cap on member
— Your health and lifestyle –
charges of 0.75% on the ‘default
smokers may get a better
funds’ available in Defined annuity than non-smokers and
Contribution schemes used to people with serious health
comply with the auto-enrolment problems may also be offered a
rules. better rate.
Annuities — Your age – naturally the younger
you are when you choose to
If you have pension savings in a buy an annuity then the longer
Defined Contribution scheme, it is expected to be paid to you
one of the options available to for, which is going to result in a
you at retirement is to convert lower rate.
your savings into a secure regular
income, payable to you for the rest Annuities can be tailored to suit
of your life – in other words you can your own personal circumstances.
purchase an annuity. You can usually decide whether
you want your annuity to increase
Insurance companies sell annuities in payment or not or whether you
and set annuity rates – that is the want to provide an income for your
amount of income that they are spouse/partner if you die before
prepared to pay you in exchange them.
for your pension pot.
14You have the right to ‘shop around’
for an annuity, so you don’t have to
accept the quotation which your
pension provider sends you.
Many people are unaware of this
option, which is known as the Open
Market Option. By shopping around
you can sometimes increase your
income in retirement by up to 40%.
Following the new choices available
from 2015 it is anticipated that
fewer people may want to purchase
an annuity.
Access to impartial guidance
From April 2015, the Government
has provided free guidance to
help individuals to understand
their options at retirement. For
more information please refer to
the section on ‘Access to impartial
guidance’ on page 49.
Alternatively, for more information
about the pension changes
please contact Usdaw’s Pensions
Department on 0161 224 2804.
Defined Benefit v Defined
Contribution
The table on the next page
highlights how the two main types
of pension compare with each
other.
15Defined Benefit Defined Contribution
You know how much pension you The size of your pension can’t
will get – your pension is worked be predicted – you know you are
out based on your salary and going to get some pension but
service so you have a good idea of the amount depends on a number
how much it will be. of factors and can’t be accurately
predicted.
Your employer carries all the risks You carry all the risks – if average
– the risk that people live for life expectancy goes up or the
longer and pensions have to be stock markets go down then it is
paid for longer or that there isn’t up to you to make up any drop in
enough money in the fund to pay the value of your pension pot.
all the benefits promised.
Your pension is linked to your The size of your pension pot can
earnings – your pension will be vary depending on a number of
worked out as a proportion of factors:
either your final salary or career — How much you and your
average earnings. employer paid in.
— How much was deducted in
charges.
— Investment performance.
— How long your money was
invested for.
— Economic conditions when you
retire.
— How you wish to access your
savings when you retire.
Additional benefits – DB schemes No additional benefits – DC
usually pay a lump sum on death, schemes rarely come with
pensions for your spouse/partner/ additional benefits.
dependent children on death
and ill-health pensions.
Larger employer contributions – Smaller employer contributions
your employer is likely to pay at – in the average DC scheme the
least double what you contribute employer will match your own
to a DB scheme to meet the cost contribution up to a certain level.
of the benefits. In the best DC schemes the
employer pays a better-than-
matching contribution.
At retirement you will have the From April 2015 if you are 55 or
option of taking a pension or a over you will have total freedom
reduced pension and a tax-free over how you take an income or a
lump sum, which is paid out of lump sum from your pension pot.
one large pension fund.
16Hybrid schemes Ill-health retirement
Hybrid schemes offer benefits Most occupational pension schemes
which are a mixture of Defined – particularly Defined Benefit
Benefit and Defined Contribution. schemes – provide a pension if you
are forced to retire early due to
For example, a hybrid scheme
ill-health.
might make you a salary-related
pension promise (Defined Benefit) The pension scheme will only pay
but at the same time keep track of you an ill-health pension if your
a notional individual pension pot for condition is permanent and usually
you (Defined Contribution). If, when only if your condition prevents you
you retire, the notional pension pot from taking on any other job in
will produce a higher pension than future.
the salary related promise then the
Other schemes may offer a lower
Defined Contribution benefit will
ill-health pension in cases where
apply. This is called a DC underpin
you can no longer carry on doing
scheme.
your job for your current employer
Other kinds of hybrid scheme will but you might be able to do a
pay benefits on both a DB and DC different job somewhere else.
basis. For example:
Medical evidence of your incapacity
— Transfers into a DB scheme will be needed and the pension
may have been used to provide scheme trustees will want proof
extra benefits on a DC basis. that your condition is permanent.
Nowadays however, it is unusual Sometimes the company’s consent
for any DB scheme to accept a is needed as well as the trustee’s.
‘transfer-in’ from an alternative
In cases where the trustees have
arrangement.
turned you down for an ill-health
— Schemes which offer members pension it is usually difficult to
a choice between DB and DC challenge their decision unless it
sections. can be proved that they acted in an
unreasonable way when arriving at
— Additional Voluntary
their decision.
Contributions to a DB scheme
provided on a DC basis. Some employers, instead of
providing ill-health pensions,
— Schemes which pay DB benefits
may set up a Permanent Health
on earnings up to a certain level
Insurance policy with an insurance
and DC on all earnings above
company that will pay you an
that level.
income whilst you are off sick.
Some policies will provide cover
up until your normal retirement
17date and some may restrict cover designed to save money for both
for a specified amount of time, you and your employer by reducing
for example three years. Some the amount of National Insurance
companies will provide a Critical contributions you have to pay.
Illness policy. Also taken out with
You give up or ‘exchange’ an
insurance companies these policies
amount of your wages equal to the
are usually more affordable for
amount you regularly pay into the
employers because they only pay
pension scheme. Your employer
out a lump sum in cases of the most
pays your pension contribution for
serious illnesses such as stroke or
you as well as their own. Because
cancer.
NI contributions would normally be
payable on the amount of wages
Access to Medical Reports Act
that you have given up, both you
1988
and your employer save money.
Your employer, pension scheme or
insurance company cannot apply These arrangements have become
to your own doctor for a medical more common over the last few
report about you without first years as companies look for ways
notifying you and telling you what to reduce the amount they spend
your rights are under this Act. on pensions. Sometimes they are
given a different name like SMART
You have the right to see the report Pensions.
free of charge before it is sent. You
can have your own copy of the Usdaw has a factsheet about salary
report for a reasonable charge. If sacrifice. You can download it from
you think anything in the report is the Usdaw website or order it from
inaccurate or misleading then you the Union’s pensions team.
can ask the doctor to change it.
Leaving a scheme early
If the doctor won’t change it then
you can attach a statement to the If you leave your company pension
report giving your own opinion. scheme before retirement age there
are a number of options available
The Act only applies to reports
to you depending on what kind of
requested from your own doctor
pension scheme you are in and how
and not to reports obtained from
long you have been in it for.
independent or company doctors.
We advise you to make sure you Occupational Defined Contribution
ask for your own copy of any (DC) schemes
medical report made about you. If you were paying into your
employer’s occupational DC
Salary sacrifice
scheme prior to October 2015, for
Salary sacrifice or salary exchange less than two years you could still
is an alternative method of paying qualify for a refund of your own
your regular contribution to the contributions less tax.
company pension scheme. It is
18However, since October 2015 Refunds
members of Occupational DC At some companies where salary
schemes may only have their sacrifice arrangements have been
contributions refunded if they introduced and you no longer pay
leave or opt out within the first your own pension contribution then
30 days of joining the scheme. the option of a refund may not be
Alternatively, your options on available.
leaving are: Refunds cannot be paid if you have
— A deferred pension – the transferred pension rights into the
pension rights you have built up scheme from a previous pension.
so far remain in the scheme and Refunds cannot be paid from
are paid to you when you reach Personal or Stakeholder pensions.
retirement age.
— A transfer of your pension rights Early retirement
into another registered pension If you are 55 or older you can apply
scheme. to the pension scheme to start
drawing your pension benefits
Defined Benefit (DB) immediately.
If you were contributing for less Early retirement usually needs the
than two years but more than three agreement of both the pension
months: scheme trustees and your employer.
— A refund of your own Also, pensions paid early will usually
contributions minus tax. be reduced because they are going
— A transfer of your pension rights to be paid for longer.
into another registered pension
scheme (including the value of Personal and Stakeholder Pensions
the contributions your employer If you contributed to a Personal or
made for you). Stakeholder pension provided by
your employer then you have the
If you were contributing for less
following options if you leave your
than three months you will usually
job before retirement age:
be given a refund of your own
contributions minus tax. — Stop contributing and leave your
pension pot invested until you
If you were contributing for more
are ready to start drawing your
than two years, your options on
pension.
leaving are:
— Arrange with the pension
— A deferred pension – the
provider to carry on contributing
pension rights you have built up
to your pension either on a
so far remain in the scheme and
regular or one-off basis – but
are paid to you when you reach
obviously you will no longer
retirement age.
receive employer contributions
— A transfer of your pension rights towards it.
into another registered pension
scheme.
19— If you are 55 or older you will Transferring your pension
have total freedom over how you
take an income or a lump sum It is usually possible for you to
from your pension pot. transfer pension rights from one
scheme to another. There are a
— If you start a new job with number of reasons why you might
a company that offers you want to do this:
membership of their pension
scheme then you might be able — You might believe that you
to transfer your pension from can get a bigger pension by
your previous job into the new transferring to a new scheme.
scheme. — The benefits in your old scheme
may not suit your personal
Group Personal Pension Schemes circumstances – for example, if
(GPPS) and Group Stakeholder your old scheme pays a pension
Pension Schemes (GSPS) on death to your spouse/partner
You will be entitled to the same but you are single.
options as before for Personal — You might not be happy with the
pensions or Personal Stakeholder investment performance of your
pensions. old scheme and think that your
However, if you were automatically- money will be better invested in
enrolled into either a GPPS or a new scheme.
GSPS and you opt out or leave the
company within 30 days you will be
eligible to receive a refund of your
contributions.
20— You might want to merge Transferring pension rights out
several small pension pots from of a Defined Benefit scheme is
different jobs into one large pot more complicated. The scheme’s
for convenience or to pay lower actuary works out the cost to the
charges. scheme of paying your pension
at your retirement age and this
— If you have a DB pension, the
is the amount of money that is
new rules introduced in April
transferred.
2015 do not apply. You might
therefore want to transfer to a Transferring pension rights out of
DC pension pot to access the a DB scheme is risky. If you are
new DC choices. transferring into a DC scheme then
you lose all guarantees about what
Whatever your reason, we advise
your pension rights will be worth
you to get independent financial
when you retire – they may be
advice because transferring
worth more or less.
pensions can be complicated and
there is a risk that you might lose If you are a member of a DB
money. scheme and the value of your
benefits is more than £30,000, you
There has also been an increase
are required to take advice from
in pension scammers and it is of
an Independent Financial Advisor
paramount importance that you
(IFA). The IFA will check that the
seek the advice of a registered
transfer value you are offered
Independent Financial Advisor
represents good value and the
(see the section on Getting
transfer is in your interests.
financial advice).
If your previous employer’s DB
Transfers between Defined
scheme is currently underfunded
Contribution schemes are usually
then the trustees can restrict your
straightforward. Your old pension
transfer amount. For example, if the
provider disinvests your pension
scheme is only 80% funded then
pot and pays the value to the new
they might only pay 80% of your
pension provider who reinvests the
full transfer value.
money. The risk is that there is a
delay between the disinvestment Transfers into a DB scheme are
and the reinvestment of your now very rare. Trustees of DB
money, which causes you to lose schemes are reluctant to take on
out. extra liabilities which might end up
costing the scheme money and so
they usually ban any transfers into
the scheme.
2122
2. state
pensions
This section explains your State Pension, which is a regular
payment from the Government that you can claim when you
reach your State Pension Age.
Your State Pension is important because it forms the
foundation of your retirement income.
To qualify for a State Pension For an introduction to the new
you must have paid or been State Pension please access
credited with National Insurance the link www.usdaw.org.uk/
contributions. StatePensionChanges
The State Pension was reformed on To find out your State Pension
6 April 2016 and this section looks Age go to www.gov.uk/
at what the changes mean, who is calculate-state-pension
entitled to them and when they are
payable. Who will receive the new
State Pension
State Pension reforms
The new State Pension was
The State Pension changed on introduced for people who reach
6 April 2016. State Pension Age on or after
The State Pension is a regular 6 April 2016.
payment from the Government You will be affected by the changes
which you can claim when you if:
reach your State Pension Age.
— You are a man born on or after
Not everyone has the same State 6 April 1951.
Pension Age and not everyone will
receive the same amount of State — You are a woman born on or
Pension. after 6 April 1953.
Your State Pension Age depends on If you were born before these
when you were born and how much dates you will not be affected and
you receive will depend on your will continue to receive your State
National Insurance record. Pension under the current scheme
rules.
23How much you will get If you do not have the maximum
amount of Qualifying Years and
Existing pensioners you were contracted out of the
additional State Pension prior to
If you have already reached your
6 April 2016 (or both), your ‘starting
State Pension Age and you are in
amount’ will be less than the full
receipt of your State Pension you
new State Pension.
will continue to receive this in line
with the present rules. You will
Qualifying Years
continue to get both your Basic
State Pension and any additional From April 2016 you will need 35
State Pension (this could be State Qualifying Years to get the full
Graduated Pension, SERPS or State amount of the new State Pension.
2nd Pension) which you are entitled Furthermore if you reach State
to. This will also apply to anyone Pension Age after April 2016, for
who has reached their State Pension the first time, you will need to have
Age on or before 6 April 2016. a minimum of 10 years National
Insurance contributions or credits
Furthermore, if your current to qualify for a State Pension.
pension entitlement is more than
the new full single tier pension, your Contracting Out
pension will NOT be reduced.
If you have previously been a
member of a workplace pension
New pensioners
scheme which was ‘contracted-out’
For any man born on or after of the State Additional pension,
6 April 1951 and any woman born (you will have paid reduced rate
on or after 6 April 1953 you will National Insurance to enable you
be affected by the reforms and to contribute to your workplace
your pension will be calculated in pension) there is a possibility
accordance with the new rules. that you will not qualify for the
The full level of the new State full amount of the new single tier
Pension will be £168.60 each pension. (This will depend on how
week however, not everyone will long you were contracted out for).
automatically qualify for this
amount.
The amount you receive will be
based on your National Insurance
record.
Your new State Pension will be
based on how many ‘Qualifying
Years’ you have on your National
Insurance record and whether you
have previously been ‘contracted-
out’ of the additional State Pension
at any time prior to 6 April 2016.
24Starting amount When you will receive
from April 2016 your State Pension
From April 2016 the Government You can only claim your State
will look at how many existing Pension when you have reached
Qualifying Years you have and if your State Pension Age and this will
you have a contracting out record, depend on your date of birth.
which will determine your ‘starting
Historically the State Pension was
amount’.
60 for women and 65 for men. This
If your starting amount is less started to change in April 2010 as
than the new full State Pension of women’s State Pension Age began
£168.60 a week, each qualifying to increase – in stages from 60 to
year you add to your National 65 to bring them in line with men.
Insurance record, after April 2016,
Between 2018 and 2020 men’s and
will start to build up an additional
women’s State Pension Age will
amount up until you reach the full
increase from 65 to 66 and from
level of the new State Pension or
2026 to 2028 the State Pension
when you reach your State Pension
Age will rise to 67 for everyone.
Age – whichever happens first.
The Government announced that
If your starting amount is more
it will review the State Pension
than the full State Pension you will
Age every five years. The review
receive this higher amount when
published in 2017 recommended
you reach State Pension Age. This
that the State Pension Age should
will occur if you have built up a
be increased to age 68 for all
certain amount previously in the
between 2037 and 2039.
additional State Pension.
25If you do not qualify for the new
full State Pension there are ways in
which you can increase it up to the
full amount:
— You can continue to work
and pay National Insurance
contributions up to your State
Pension Age and this will boost
Topping up your your starting amount from
State Pension 6 April 2016.
The new State Pension won’t be — You may find that you have
the same for everyone. What you gaps in your National Insurance
get will be based on your National record and you may be eligible
Insurance record. to claim credits for these.
From 6 April 2016, for the first — You can elect to pay voluntary
time you will also need a minimum National Insurance contributions
of at least 10 Qualifying Years to to increase your State Pension.
be eligible to receive any State — If you have already reached
Pension. your State Pension Age you can
You can get a new online State delay claiming your pension and
Pension statement at www.gov.uk/ over a period of time your State
state-pension-statement You can Pension will increase in value.
also complete Form BR19 if you
Deferring your State Pension
are unable to access this online.
Contact the Future Pension Centre You don’t have to claim your State
on 0800 731 0175 for a form. This Pension as soon as you reach State
will estimate what your new State Pension Age.
Pension will be based on your
You can delay (or defer) claiming
National Insurance contributions
your State Pension which means
to date. This will be your starting
that you will get extra State
amount in the new system.
Pension when you do claim it. The
In most cases this is the lowest extra amount will be paid as extra
amount you could expect to receive pension (not as a lump sum) but
at your State Pension Age. remember it may be taxable.
26How much extra pension depends Inheriting State Pension from your
on how long you delay claiming it. husband/wife or civil partner
The longer you leave it the more You may be able to inherit an extra
you will get. payment on top of your new State
You will need to delay at least Pension if you are widowed or a
nine weeks – your State Pension surviving civil partner. The extra
will increase by 1% for every nine payment may consist of additional
weeks that you put off claiming. State Pension or a ‘protected
This works out at just under 5.8% payment’ (if any).
for every full year that you put off This will depend on whether the
claiming. deceased:
After you claim, the extra amount — Reached State Pension Age or
you receive will usually increase died before 6 April 2016; or
each year in line with inflation.
— Died under State Pension Age
Claiming from your spouse/ after 5 April 2016.
civil partner You might also be able to inherit
extra State Pension or a lump sum
Receiving State Pension from your payment if your late spouse or civil
husband/wife or civil partner partner reached State Pension Age
If you reach State Pension Age on before 6 April 2016 and put off
or after 6 April 2016, your State claiming their State Pension.
Pension will be based on your
National Insurance record only. If you remarry or form a new civil
There is one exception to this – partnership
if you are a married woman or If you are under State Pension
widow who has opted to pay Age you won’t be able to inherit
reduced rate National Insurance anything from your deceased
contributions. This is called a spouse or civil partner if you
Reduced Rate Election (or perhaps remarry or form a new civil
most commonly known as ‘Married partnership before you reach
Women’s Stamp’). State Pension Age.
If you made this choice in the past If you get divorced or dissolve
you may get a new State Pension your civil partnership
based on different rules, if these
will give you more than the amount The courts can make a ‘pension
of the new State Pension that you sharing order’ if you get divorced
would have otherwise got from or dissolve your civil partnership. If
your own National Insurance record. this happens the court can decide
if you must share your additional
If these rules do apply to you, you State Pension or protected
will not need the qualifying 10 years payment with your former
of your own in order to get any husband, wife or civil partner.
State Pension.
27Your State Pension will be reduced Triple Lock Guarantee
accordingly and your former Your State Pension should increase
husband, wife or civil partner each year by the highest of:
will get this amount as an extra
payment on top of their State — Inflation (Consumer Prices
Pension. Index); or
— National Average Earnings; or
Pension Credit
— 2.5%.
If you only qualify for a small
amount of State Pension or no
State Pension at all, you may be Getting a State Pension Statement
eligible to claim Pension Credit. The application for a State Pension
Statement is called BR19 and we
Pension Credit is an income-related would encourage all our members
benefit that tops up your weekly to apply for this Statement so that
income to a guaranteed minimum they have an expectation of what
amount if you have reached the they might receive once they have
Pension Credit qualifying age. If you reached their State Pension Age.
are a couple, the amount you get
will depend on your joint income The Statement will also help
and capital (this will include your identify if there are any current
savings and investments). gaps in your National Insurance
records so that you can challenge
State Pension increases whether this is correct and if so, you
Every year your new State Pension can consider how the shortfall can
should go up in line with the be addressed by paying additional
triple lock guarantee until 2022 voluntary NI contributions.
(the date scheduled for the next The Pension Service
General Election), and at least with
the growth in average earnings The Pension Service is part of the
thereafter. Department for Work and Pensions
and provides customers with
If you have extra State Pension pensions, benefits and retirement
or a Protected Payment (over the information. They can:
full State Pension entitlement of
£168.60) it will not increase at — Work out the amount of State
the same rate. This part of your Pension and Pension Credit that
State Pension will increase in line you are entitled to.
with inflation (Consumer Prices — Pay your entitlements to you
Index-CPI). and answer your questions over
If you live outside the UK, your new the phone, by post or by email.
State Pension may not go up every — Tell you how to access other
year. pension-related entitlements
and services.
28The Pension Service has a network
of pension centres supported by a
local service.
For more information search for the
Pension Service at www.gov.uk or
phone the national helpline on
0800 731 7898.
More Information
For more information on all these
issues go to www.usdaw.org.uk/
pensions
2930
3. your pension
rights
This section explains some of the laws which govern our
pensions system (pensions laws, tax laws and employment
laws), the organisations which have a role to play in the
system and the rights you have as a member of a pension
scheme.
Auto-enrolment – new Employers must tell their employees
pension rights from 2012 about the pension scheme, deduct
contributions from wages and
Since 2001 the only legal obligation forward those contributions to the
on employers to provide pensions pension scheme within statutory
was a requirement for them to timescales.
choose a Stakeholder pension for
their employees to pay into. Most Usdaw members already
have the opportunity to join a
This rule only applied to employers pension scheme which meets the
who employed five or more people minimum standard. At the moment
and there was no requirement it’s up to you whether you join or
for the employer to pay into the not. Following the 2012 reforms, if
Stakeholder pension themselves. eligible, you will be automatically
However, new laws were introduced enrolled into your employer’s
in 2012 that now affect all employers pension scheme with the option
and give workers a new set of to opt out of it if you want to.
pension rights. Auto-enrolment has been
described as the most radical
Auto-enrolment change for working people since
Between 2012 and 2017 all UK the introduction of the National
employers started automatically Minimum Wage and it will help
enrolling their employees into a millions of workers on low to middle
workplace pension scheme of a incomes to save for retirement.
minimum standard. This is called Usdaw supports auto-enrolment as
auto-enrolment. it helps thousands more workers to
Also, for the first time employers save for retirement who otherwise
must make a compulsory minimum might not have done so.
contribution towards their
employees’ pensions.
31Who qualifies? When did auto-enrolment start?
If you are not already paying into The timetable for employers to
your employer’s pension scheme stage for auto-enrolment started to
then you will qualify to be auto- take place over a five year period
enrolled if you meet all of the between October 2012 and October
following criteria: 2017.
— You are between age 22 and Every employer has a staging, ie a
State Pension Age. start date, by which they must have
begun auto-enrolment. The start
— You earn more than the
date is based on how many people
minimum earnings threshold,
they employ. The process started
which is currently £10,000 a
with the biggest employers and left
year (£192.00 a week).
the smallest until last.
— You work in the UK.
The Pensions Regulator will notify
You can opt out of auto-enrolment every employer of their start date 12
but your employer will have to keep months in advance.
re-enrolling you every three years
until you reach State Pension Age. Auto-enrolment Number of
start date employees
Young workers aged between 16
and 22 and older workers aged October 2012 120,000 or more
between State Pension Age and
November 2012 10,000 – 120,000
75 don’t have to be auto-enrolled
– March 2013
but can opt in and are entitled
to the same employer pension April 2013 1,250 – 9,999
contribution as everybody else. – September 2013
People currently earning between October 2013 250 – 1,249
£6,136 and £10,000 a year don’t – February 2014
have to be auto-enrolled but can
April 2014 50 – 249
opt in and are entitled to the same
– April 2015
employer pension contribution as
everybody else. June 2015 Less than 50
– April 2017
People earning less than £6,136
a year don’t have to be auto- May 2017 New employers
enrolled. You can opt in but your – September 2017 set up between
employer does not have to make a April 2012
contribution for you. and 2017
The earnings thresholds above are October 2017 New employer
reviewed by the Government every onwards set up from
year. October 2017
32Minimum pension scheme In simple terms, in general any
standards part of an employee’s income that
The new minimum standard is paid into a registered pension
of workplace pension will be a scheme is untaxed, with the amount
Defined Contribution scheme with that would have been taken in tax
a minimum total contribution of instead going into the pension
8% of your wages from April 2019. scheme.
Your employer will be required to For basic rate taxpayers this means
contribute a minimum 3% of the that every £1 you pay into your
total 8%. pension only costs you 80 pence.
Contributions only have to be Before April 2006 you weren’t
deducted from a band of earnings allowed to contribute more than
– currently between £6,136 and £15,000 a year towards a pension.
£50,000 a year.
This limit was abolished and
Basic pay, commission, overtime, replaced with an Annual Allowance
bonus, statutory maternity, and a Lifetime Allowance. These
paternity and adoption pay must new allowances only really affect
count towards pensionable pay. very high earners.
Contributions don’t have to be split The Lifetime Allowance is the
this way. Your employer might offer amount of pension benefits that
to pay more than the minimum or you can build tax-free over your
even pay the whole contribution. working life. The Lifetime Allowance
Similarly, you can pay more than the is currently £1,055,000 (2019/20).
minimum employee contribution if
you want. The Annual Allowance is the
amount of pension benefits you can
Usdaw has a separate guide on build up with tax relief in a single
auto-enrolment which you can tax year. The Annual Allowance is
download from the Usdaw website currently £40,000. From 6 April
or order from the Union’s pensions 2016 those with an income of
team. over £150,000 will be subject to
a tapered annual allowance which
Tax rules about pensions
could reduce to just £10,000.
The Finance Act 2004, which
From 6 April 2017, the annual
became law in April 2006 made
allowance will be reduced to
far-reaching changes to the tax
£4,000 if you have withdrawn
treatment of pensions.
more than the 25% tax-free lump
sum from a Defined Contribution
Tax relief
pension pot. This is known as the
Contributions paid to a registered Money Purchase Annual Allowance.
pension scheme receive tax relief (MPAA)
from the Government up to certain
limits.
33In a single tax year you can have Contributing to more than one
tax relief on contributions to your pension
pension of whichever is the lower of Before 2006 you were only allowed
100% of your annual earnings or the to contribute to one pension at a
annual allowance. time. You can now contribute to
Your own company pension scheme as many pensions as you like as
may have limits on the amount you long as you don’t exceed the tax
can pay in that are more restrictive allowances described above.
than the above allowances.
AVCs
If you don’t have any earnings (for
Before 2006 AVCs could only be
example if you don’t work) or if you
used to provide extra pension.
earn less than £3,600 each year,
Now when you start drawing your
you can make gross contributions
pension benefits you can choose to
of up to £3,600 each year to a
take some or all of your AVCs as a
Personal pension, Self Invested
tax-free lump sum instead.
personal pension or a Stakeholder
pension, receiving basic tax relief at
currently 20% of your contribution.
Tax-free lump sum on retirement
When you start to draw your
pension benefits you can take up to
25% of the value of your benefits as
a tax-free lump sum – sometimes
called a Pension Commencement
Lump Sum.
Again, your own company pension
scheme rules might be more
restrictive than this.
34Flexible retirement From April 2015 new legislation has
Since 2006 you can start drawing allowed more flexibility on how you
your company pension and carry access your Defined Contribution
on working. This can be attractive pension pots. As long as you are
for people who want to ‘phase aged 55 or over you will be in
in’ retirement by receiving their a position to take as little or as
pension and reducing the hours much of your pension pot as cash
they work. It is up to your employer (subject to taxation), irrespective of
whether they have a flexible the size of your pot.
retirement policy and what terms For Defined Benefit schemes
and conditions they attach to it. however, Trivial Commutation will
still be possible after 5 April 2015.
Small pensions – Trivial
Commutation You may be able to take the whole
of your Defined Benefit pension as
If your pension pot at retirement
a Trivial Commutation lump sum if:
is quite small, up to now you have
been able to take all of it as a cash — You’re aged at least 55, or you’re
lump sum subject to certain criteria. retiring at an earlier age because
This is what Trivial Commutation of ill-health, and the value of
means. your defined pension benefits
(ignoring any State Pension)
From April 2015 Trivial
when added together do not
Commutation no longer applies to
exceed £30,000 in total.
Defined Contribution pots (unless
the 12 month commutation period
commenced before 6 April 2015).
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