Civil service pensions annual allowance
Discussion
Anyone with any experience of this being an issue?
Scenario, my brother in law is a Senior Civil Servant with ~18 years in. He has two pensions, an old one which seems straight forward, 1/60th of your final salary per year you're in, he's got 11 years, salary is 80k. And now 7 years in the new one which pays out later, but gives 2.32% of your earnings in a pot each year. Which sounds marvellous if you started that as a fairly high earner.
He got a 10k pay rise last year (as in from 70 to 80) which he reckons means the value of the old one will go up a lot, say from 12.8k to 14.6k, a "gain" of only £1800.
And the whole of the new "pot" (presumably virtual) will also go up by 10% because of inflation, before he's put anything in. It was worth say 15k, And "in" by ing that 2.23% is just shy of 2k. The pot becomes 17k, then add 10% inflation, 18.7. The gain is 3.7k.
So he reckons they multiply both of your gains by 16, end result if that's applied to both schemes, where his actual pension will increase nicely (about 5. 5k then), when you multiply that by 16 to get your pension input amount, it's £88k, against your 40k annual allowance.
Get the carryback for 2 years might provide some headroom, but I suspect that could be an enormous tax bill just because of a reasonable pay rise and inflation whacking the new pot too.
Is this how things are now? It'll surely impact every doctor, all MPs (unless they have magic rules), and anyone senior in the CS...
Scenario, my brother in law is a Senior Civil Servant with ~18 years in. He has two pensions, an old one which seems straight forward, 1/60th of your final salary per year you're in, he's got 11 years, salary is 80k. And now 7 years in the new one which pays out later, but gives 2.32% of your earnings in a pot each year. Which sounds marvellous if you started that as a fairly high earner.
He got a 10k pay rise last year (as in from 70 to 80) which he reckons means the value of the old one will go up a lot, say from 12.8k to 14.6k, a "gain" of only £1800.
And the whole of the new "pot" (presumably virtual) will also go up by 10% because of inflation, before he's put anything in. It was worth say 15k, And "in" by ing that 2.23% is just shy of 2k. The pot becomes 17k, then add 10% inflation, 18.7. The gain is 3.7k.
So he reckons they multiply both of your gains by 16, end result if that's applied to both schemes, where his actual pension will increase nicely (about 5. 5k then), when you multiply that by 16 to get your pension input amount, it's £88k, against your 40k annual allowance.
Get the carryback for 2 years might provide some headroom, but I suspect that could be an enormous tax bill just because of a reasonable pay rise and inflation whacking the new pot too.
Is this how things are now? It'll surely impact every doctor, all MPs (unless they have magic rules), and anyone senior in the CS...
So few people understand these things.
The final salary is closed to further accrual so there's no pension input. It's also not jumping up as his salary increased because it'll be based on his final salary at the point they closed that scheme. Since that point up to taking it he's a deferred member with annual revaluation, usually something like CPI.
The career average essentially has lots of annual tranches. Year one you get 2.32% of salary and then that bit revalues in line with inflation each year.
The only thing that's going towards the annual allowance this tax year is the difference between the starting and ending value of the career average pot inflation adjusted.
The final salary is closed to further accrual so there's no pension input. It's also not jumping up as his salary increased because it'll be based on his final salary at the point they closed that scheme. Since that point up to taking it he's a deferred member with annual revaluation, usually something like CPI.
The career average essentially has lots of annual tranches. Year one you get 2.32% of salary and then that bit revalues in line with inflation each year.
The only thing that's going towards the annual allowance this tax year is the difference between the starting and ending value of the career average pot inflation adjusted.
Edited by steve_n on Friday 24th February 10:00
steve_n said:
So few people understand these things.
I don't doubt that!He says he's been to two roadshows and a "clinic" from the people who run the scheme and they've contradicted each other every time.
If the preexisting part is increasing but purely by CPI it would explain why the apparent portion of LTA used keeps rising over 4% each year, implying the potential for total input of over 40k, but with no corresponding Pension Savings Statement.
It's not what any of the scheme people he's spoken to have said, but it definitely sounds the most plausible outcome!
I'm not surprised he's getting contradictions. Often the people employed for such roles are youngsters who don't know their stuff. I know I am right.
The lifetime allowance is a different issue to the annual allowance. LTA will be 20 x starting annual pension when it goes into payment. In the meantime it's just the active accrual x 16 and inflation adjusted against the £40,000 annual allowance.
The lifetime allowance is a different issue to the annual allowance. LTA will be 20 x starting annual pension when it goes into payment. In the meantime it's just the active accrual x 16 and inflation adjusted against the £40,000 annual allowance.
Steve_n has covered it all.
Just to add that there is a detailed guide to the alpha pension on the civil service website. Reading it would have answered all your brother in law's questions. Amazes me how few people do read it (straw poll of my immediate team of 15 and I'm the only one who has looked at it!).
At £80k your brother in law will be entering the Senior Civil Service roles. As a civil servant a grade or two below, I find it slightly concerning that one of our fearless leaders can't even get to grips with simple aspects of their own pension!
Just to add that there is a detailed guide to the alpha pension on the civil service website. Reading it would have answered all your brother in law's questions. Amazes me how few people do read it (straw poll of my immediate team of 15 and I'm the only one who has looked at it!).
At £80k your brother in law will be entering the Senior Civil Service roles. As a civil servant a grade or two below, I find it slightly concerning that one of our fearless leaders can't even get to grips with simple aspects of their own pension!
steve_n said:
I'm not surprised he's getting contradictions. Often the people employed for such roles are youngsters who don't know their stuff. I know I am right.
The lifetime allowance is a different issue to the annual allowance. LTA will be 20 x starting annual pension when it goes into payment. In the meantime it's just the active accrual x 16 and inflation adjusted against the £40,000 annual allowance.
As I understand it, there are some gotchas in the AA calculation with regard to the inflation adjustment which are described in the link below.The lifetime allowance is a different issue to the annual allowance. LTA will be 20 x starting annual pension when it goes into payment. In the meantime it's just the active accrual x 16 and inflation adjusted against the £40,000 annual allowance.
https://adviser.royallondon.com/articles-and-guide...
The OP's BiL should be able to ask the pension admin for a pension input statement for the period in question + previous years for carry forward calcs.
it is a huge issue in NHS as longer you work and more senior your role the more you earn therefore the more you pay into pension causing you to breach annual and lifetime allowance so accountants/financial advisers tell you to retire or reduce work sessions
government in particular jeremy hunt aware of situation but not putting forward long term solution only temporary patches while senior staff are forced to retire or reduce work to avoids tax bills
government in particular jeremy hunt aware of situation but not putting forward long term solution only temporary patches while senior staff are forced to retire or reduce work to avoids tax bills
steve_n said:
So few people understand these things.
The final salary is closed to further accrual so there's no pension input. It's also not jumping up as his salary increased because it'll be based on his final salary at the point they closed that scheme. Since that point up to taking it he's a deferred member with annual revaluation, usually something like CPI.
I wasn’t sure about this either. I’m NHS with 21 years in the final salary scheme, now moved onto CARE.The final salary is closed to further accrual so there's no pension input. It's also not jumping up as his salary increased because it'll be based on his final salary at the point they closed that scheme. Since that point up to taking it he's a deferred member with annual revaluation, usually something like CPI.
Edited by steve_n on Friday 24th February 10:00
That means that those 21 years are now locked in and nothing can change the final amount, other than the annual increase for CPI or whatever other method.
Interesting, as I’ve always been acutely aware that the last 3 years (highest of the 3 were taken as final salary) were crucial in what you ended up getting at retirement. That no longer has the same effect, so if you fancied de-stressing to a lower grade in your twilight years, then you can without too much impact on pension.
rossub said:
steve_n said:
So few people understand these things.
The final salary is closed to further accrual so there's no pension input. It's also not jumping up as his salary increased because it'll be based on his final salary at the point they closed that scheme. Since that point up to taking it he's a deferred member with annual revaluation, usually something like CPI.
I wasn’t sure about this either. I’m NHS with 21 years in the final salary scheme, now moved onto CARE.The final salary is closed to further accrual so there's no pension input. It's also not jumping up as his salary increased because it'll be based on his final salary at the point they closed that scheme. Since that point up to taking it he's a deferred member with annual revaluation, usually something like CPI.
Edited by steve_n on Friday 24th February 10:00
That means that those 21 years are now locked in and nothing can change the final amount, other than the annual increase for CPI or whatever other method.
Interesting, as I’ve always been acutely aware that the last 3 years (highest of the 3 were taken as final salary) were crucial in what you ended up getting at retirement. That no longer has the same effect, so if you fancied de-stressing to a lower grade in your twilight years, then you can without too much impact on pension.
ILikeCake said:
Steve_n has covered it all.
Just to add that there is a detailed guide to the alpha pension on the civil service website. Reading it would have answered all your brother in law's questions. Amazes me how few people do read it (straw poll of my immediate team of 15 and I'm the only one who has looked at it!).
At £80k your brother in law will be entering the Senior Civil Service roles. As a civil servant a grade or two below, I find it slightly concerning that one of our fearless leaders can't even get to grips with simple aspects of their own pension!
It's not surprising. Most people in SCS grades aren't Finance. Even if they were, pension schemes where the rules change on a regular basis can be touch to get your head around.Just to add that there is a detailed guide to the alpha pension on the civil service website. Reading it would have answered all your brother in law's questions. Amazes me how few people do read it (straw poll of my immediate team of 15 and I'm the only one who has looked at it!).
At £80k your brother in law will be entering the Senior Civil Service roles. As a civil servant a grade or two below, I find it slightly concerning that one of our fearless leaders can't even get to grips with simple aspects of their own pension!
ILikeCake said:
Steve_n has covered it all.
Just to add that there is a detailed guide to the alpha pension on the civil service website. Reading it would have answered all your brother in law's questions. Amazes me how few people do read it (straw poll of my immediate team of 15 and I'm the only one who has looked at it!).
At £80k your brother in law will be entering the Senior Civil Service roles. As a civil servant a grade or two below, I find it slightly concerning that one of our fearless leaders can't even get to grips with simple aspects of their own pension!
Setting aside his own capabilities for a moment (Just to add that there is a detailed guide to the alpha pension on the civil service website. Reading it would have answered all your brother in law's questions. Amazes me how few people do read it (straw poll of my immediate team of 15 and I'm the only one who has looked at it!).
At £80k your brother in law will be entering the Senior Civil Service roles. As a civil servant a grade or two below, I find it slightly concerning that one of our fearless leaders can't even get to grips with simple aspects of their own pension!
) Conceptually both schemes are straightforward. The data presented in the annual statements is s
t.Take the old one, he’ll get 1/60th for every year he was in, multiplied by his salary. The first two parts are irrefutable. The salary, well what salary? The value of that preserved pension does not seem to go up at all, implying the whole calculation was frozen at scheme closure.
But he showed me his last 3 statements, each of which shows an increase in salary, immediately adjacent that calc. Are they using it? It seems not. Are they revaluing by CPI? It doesn’t actually look like it either. So if it is truly frozen, ignoring it is then being mullered by inflation, why do they even put a number adjacent it which has no relevance?? That was the Premium scheme, a naming irony if ever there was one.
None of that is explained in the Alpha guide of course as it is a separate thing, although again conceptually Alpha is even easier to understand. 2.32% floats off to a magic non existent pot each year, the whole pot goes up by inflation. Or indeed down as he said year 1 saw -0.1%. With that there’s no need to think about salary as the link is broken annually.
And if he swaps 6(?) years of the new one for the old per this McCloud thing, which salary is that against? If the frozen, 6 year old one, it will be crap! But Alpha pays out at state pension age, the old one at 60.
What a typical mess…..
Macron said:
Conceptually both schemes are straightforward. The data presented in the annual statements is st.
It’s certainly not ideal!t.Macron said:
Take the old one, he’ll get 1/60th for every year he was in, multiplied by his salary. The first two parts are irrefutable. The salary, well what salary? The value of that preserved pension does not seem to go up at all, implying the whole calculation was frozen at scheme closure.
But he showed me his last 3 statements, each of which shows an increase in salary, immediately adjacent that calc. Are they using it? It seems not. Are they revaluing by CPI? It doesn’t actually look like it either. So if it is truly frozen, ignoring it is then being mullered by inflation, why do they even put a number adjacent it which has no relevance??
The information given by others is wrong.But he showed me his last 3 statements, each of which shows an increase in salary, immediately adjacent that calc. Are they using it? It seems not. Are they revaluing by CPI? It doesn’t actually look like it either. So if it is truly frozen, ignoring it is then being mullered by inflation, why do they even put a number adjacent it which has no relevance??
The salary to which the total number of 1/60ths is applied is his ‘Final Pensionable Earnings’.
Well what are they you ask. Your final pensionable earnings will be whichever is the best of:
- your last 12 months’ pensionable earnings; or
- your highest pensionable earnings in any of the last four complete scheme years; or
- your highest average pensionable earnings in any period of three complete scheme years during the last 13 years ending on your last day of service.
The first is the final salary when he retires (note it is ‘pensionable earnings’ not pensionable earnings in the scheme), but the second and third are the pay within the scheme before it closed in 2015, but updated by CPI each year since then.
Simple isn’t it.
And that means for many who haven’t had significant pay rises since 2015 due to years of 1% pay rises, that the second or third options can by higher than actual pay due to the CPI rises.
www.civilservicepensionscheme.org.uk/knowledge-cen...
Macron said:
That was the Premium scheme, a naming irony if ever there was one.
Premium because it gave more benefits than Classic, primarily a survivor’s pension to a partner, whereas Classic was only for spouses.Macron said:
None of that is explained in the Alpha guide of course as it is a separate thing, although again conceptually Alpha is even easier to understand. 2.32% floats off to a magic non existent pot each year, the whole pot goes up by inflation. Or indeed down as he said year 1 saw -0.1%. With that there’s no need to think about salary as the link is broken annually.
Pretty much.Macron said:
And if he swaps 6(?) years of the new one for the old per this McCloud thing, which salary is that against? If the frozen, 6 year old one, it will be crap!
Seven years - April 2015 to April 2022.If he opts to move those years back to Premium then they are simply recalculated as if in Premium so whatever pay he was earning between 2015 and 2022 for the three part salary calculation.
So it is probable that with a big pay rise now he will be better moving those years back to Premium from Alpha, but would need to check the maths.
Macron said:
But Alpha pays out at state pension age, the old one at 60.
But Alpha has an accrual of 1/43 (2.32%) against 1/60, so taking it early at 60 and suffering the actuarial reduction it comes out the same if you haven’t had any big pay rises.Macron said:
What a typical mess…..
Yes the government did fk up the introduction completely.But back to your original question, will he get a big tax bill due to this pay rise - yes probably he will.
However he will have a choice. Either pay the bill now or use what is known as ‘scheme pays’ where the pension scheme settles the tax bill for him now and then when he takes his pension it is slightly reduced to take account of the amount paid for him.
Edited by PF62 on Friday 24th February 15:51
Edited by PF62 on Friday 24th February 15:53
Thanks all, I've pointed him to this thread and told him to sign up to stop pestering me now we've found a range of alternativeconflicting opinions (I saw that late post edit )
In short Alpha really does sound easy from an input amount esp as it's an active scheme.
The unknown is how the old one is treated, for some of these schemes there is a retained link to current salary, and if that is the case it may indeed be being masked by a few years st pay rises.
If that link is broken, is it absolute and thus a complete scam bc inflation is killing the value but its defo no issue from an annual allowance perspective, or is there a revaluation linked to CPI, and if so is that irrelevant as it's not pension input per se, or does it cause a problem beyond mere nominal accrual when the % of LTA is presented for no apparent reason?
I need a drink.... And a guide to Premium, if one exists, if it even says anything!
)In short Alpha really does sound easy from an input amount esp as it's an active scheme.
The unknown is how the old one is treated, for some of these schemes there is a retained link to current salary, and if that is the case it may indeed be being masked by a few years s
t pay rises. If that link is broken, is it absolute and thus a complete scam bc inflation is killing the value but its defo no issue from an annual allowance perspective, or is there a revaluation linked to CPI, and if so is that irrelevant as it's not pension input per se, or does it cause a problem beyond mere nominal accrual when the % of LTA is presented for no apparent reason?
I need a drink.... And a guide to Premium, if one exists, if it even says anything!
I have years 2003-2015 in the "1995 section" final salary NHS pension scheme, with ongoing membership in the CARE-type scheme since then. I note that I will have the option to choose McCloud remedy membership from 2015-22 in the older scheme.
In the meantime, I have also begun to be affected by the cursed annual pensions allowance issue. I have been at Band 8d since 2012, and feel unlikely to progress further - not least because additional pay on promotion leads to eye-watering tax bills. My board-member manager had to take a mortgage for the £80k (! yes really) tax bill he received on going from an 8d to VSM role.
My annual tax bill arising from 2021/22's contributions (which I cannot control) was £3k, and of course exceeded my inflationary pay award of a flat £1.4k this year. I think I'll be able to offset this against previous years' allowances for one more year, before I need to pay from cash.
Paying from reduced pension benefits ("scheme pays") looks quite uncompetitive as it's basically an interest-bearing loan charged at about 2.5% above inflation.
It's a really hopeless situation and while I accept it's exacerbated by inflation it's only going to get worse if not addressed. I'm only 42 for goodness sake, and far from the NHS' highest earner. This is a serious recruitment and retention issue but, because it's so complicated and appears to relate to "gold plated public sector pensions", will only attract world-smallest-violin type media coverage.
Public sector pensions are generally rights to future income, not actual funds that can be controlled / adjusted year-by-year / passed on at death in their entirely etc. What would be helpful would be to proactively control pension contributions so that continuing to work, let alone promotion, does not lead to reduced income for employees. At the moment the most effective way to do that is to leave the schemes altogether.
In the meantime, I have also begun to be affected by the cursed annual pensions allowance issue. I have been at Band 8d since 2012, and feel unlikely to progress further - not least because additional pay on promotion leads to eye-watering tax bills. My board-member manager had to take a mortgage for the £80k (! yes really) tax bill he received on going from an 8d to VSM role.
My annual tax bill arising from 2021/22's contributions (which I cannot control) was £3k, and of course exceeded my inflationary pay award of a flat £1.4k this year. I think I'll be able to offset this against previous years' allowances for one more year, before I need to pay from cash.
Paying from reduced pension benefits ("scheme pays") looks quite uncompetitive as it's basically an interest-bearing loan charged at about 2.5% above inflation.
It's a really hopeless situation and while I accept it's exacerbated by inflation it's only going to get worse if not addressed. I'm only 42 for goodness sake, and far from the NHS' highest earner. This is a serious recruitment and retention issue but, because it's so complicated and appears to relate to "gold plated public sector pensions", will only attract world-smallest-violin type media coverage.
Public sector pensions are generally rights to future income, not actual funds that can be controlled / adjusted year-by-year / passed on at death in their entirely etc. What would be helpful would be to proactively control pension contributions so that continuing to work, let alone promotion, does not lead to reduced income for employees. At the moment the most effective way to do that is to leave the schemes altogether.
The NHS won't match pension contributions outside the NHS scheme, so it's not very good long term financial planning on a personal level. It also seems very unfair that you effectively won't have any option but to exit the pension once you get to a certain level of salary, or age - given that generations of people haven't been affected by an arcane issue that was probably an unintended consequence anyway.
The ongoing drain of high-rate contributors will be detrimental to the viability of public sector pensions and will see the eventual loading of pension burden onto those lower paid.
The ongoing drain of high-rate contributors will be detrimental to the viability of public sector pensions and will see the eventual loading of pension burden onto those lower paid.
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