Pensionable pay lower than salary!

marklv

:mad:

I joined my new employer's final salary pension scheme in March, upon entering this new employment. Now, reading the small print, there is statement which says that my pensionable pay (that on which the pension is based) is not my full salary, but the salary less the lower earnings limit, which is currently £4,665. Apparently, this is because the LEL is covered by the state pension. I just think this is an excuse to cover up a hidden clause which makes the scheme cheaper for the employer. Disgraceful! How can this be legal? Surely 'final salary' should mean exactly that, not your salary after an arbitrary deduction. :mad:

I'm quite fortunate because I earn a relatively high amount, but someone on, say £14,000 a year, would see one-third of salary not counting towards the pension. Outrageous! I cannot believe this is legally allowed.

MRSTITTLEMOUSE

My husband's pension is final salary (he's paid in nearly 40 years to his) and his is two thirds of his final salary.
We also will get the state pension on top.
I think what you state is the norm.

dasherman

This happens with a lot of schemes - money purchase too!

MrChips

Marklv, this isn't an unusual situation. Many schemes apply such a deduction. The logic of it is to target an "overall" level of benefits in your retirement.

If the scheme offers a 1/60ths accrual rate say, then it is probably targetting a 2/3 of final salary pension after a full 40 year career. If the deduction to final salary didn't apply then members would get 2/3 PLUS the basic state pension. As it is, they will get (roughly) 2/3 of salary minus LEL PLUS BSP, which should be about 2/3 of final salary overall.

You won't be paying contributions on full salary (at least you shouldn't be!) so you aren't being ripped off.

Contributions will also be cheaper for your employer, so more chance it will be kept open. Win-win!

As for it being a "hidden clause" - you yourself say you only didn't spot it because you didn't read all the details so I don't think that's fair.

Aegis

marklv wrote: »

:mad:

I joined my new employer's final salary pension scheme in March, upon entering this new employment. Now, reading the small print, there is statement which says that my pensionable pay (that on which the pension is based) is not my full salary, but the salary less the lower earnings limit, which is currently £4,665. Apparently, this is because the LEL is covered by the state pension. I just think this is an excuse to cover up a hidden clause which makes the scheme cheaper for the employer. Disgraceful! How can this be legal? Surely 'final salary' should mean exactly that, not your salary after an arbitrary deduction. :mad:

I'm quite fortunate because I earn a relatively high amount, but someone on, say £14,000 a year, would see one-third of salary not counting towards the pension. Outrageous! I cannot believe this is legally allowed.

Try not to worry about it too much. You have a final salary pension scheme: you are guaranteed to get a good pension when you retire. If it's £1000 or so less than what you thought it would be each year that's still better than what anyone on a money-purchase scheme is guaranteed to get. The situation for money-purchase scheme members is essentially that all support from the company stops on resignation or retirement. No indexation, no guaranteed pension, nothing.

In many companies there are now employees who are getting 4-5% of their salary paid into a money purchase scheme by the company compared with a figure often over 20% for the final salary scheme members in the same company. If you really want to discuss unfair situations, that's the one you should take a look at before making any comments about how your scheme is offering a salary a little lower than expected.

You are extremely lucky to still have access to a pension like this, almost regardless of what terms it offers you.

Pension_Man

This is another version of the much maligned state scheme offset feature that some finaly salary schemes.

If you are interested in paying more into a pension scheme - you could look at paying AVCs.

With the introduction of A day legisltation these have become much more interesting- as they would form part of your overall main pension scheme benefits - which means that they would invariably (or a large portion of) be taken as a tax free lump sum (obviously the overall lump sum is subject to the 25% limit). Previously except for people who joined their occupational pension scheme before April 1987 - AVCs could only be taken as a pension.

In addition, if you are a higher rate tax payer - you get 40% tax relief- ie so if you pay in £100 it only costs you £60.

Regards

wisbech_lad

Pension_Man wrote: »

This is another version of the much maligned state scheme offset feature that some finaly salary schemes.

If you are interested in paying more into a pension scheme - you could look at paying AVCs.

With the introduction of A day legisltation these have become much more interesting- as they would form part of your overall main pension scheme benefits - which means that they would invariably (or a large portion of) be taken as a tax free lump sum (obviously the overall lump sum is subject to the 25% limit). Previously except for people who joined their occupational pension scheme before April 1987 - AVCs could only be taken as a pension.

In addition, if you are a higher rate tax payer - you get 40% tax relief- ie so if you pay in £100 it only costs you £60.

Regards

Note though that if you are on 150,000 or more, you only get basic tax relief now.

jem16

wisbech_lad wrote: »

Note though that if you are on 150,000 or more, you only get basic tax relief now.

Not entirely accurate. This won't happen until 2011 and you need to be on £180,000 or more to only get basic rate tax relief. From £150k to £180k there will be a gradual loss.

From 2009/10 those over £150k will actually get 50% tax relief. It may also mean for those between £150k and £160k that they still get more than 40% even from 2011.

http://www.guardian.co.uk/money/2009/apr/28/pension-contributions-tax-relief

marklv

MrChips wrote: »

Marklv, this isn't an unusual situation. Many schemes apply such a deduction. The logic of it is to target an "overall" level of benefits in your retirement.

If the scheme offers a 1/60ths accrual rate say, then it is probably targetting a 2/3 of final salary pension after a full 40 year career. If the deduction to final salary didn't apply then members would get 2/3 PLUS the basic state pension. As it is, they will get (roughly) 2/3 of salary minus LEL PLUS BSP, which should be about 2/3 of final salary overall.

You won't be paying contributions on full salary (at least you shouldn't be!) so you aren't being ripped off.

Contributions will also be cheaper for your employer, so more chance it will be kept open. Win-win!

As for it being a "hidden clause" - you yourself say you only didn't spot it because you didn't read all the details so I don't think that's fair.

My understanding is that most public sector final salary schemes do not deduct the LEL from pensionable pay. I'm pretty sure the Civil Service Nuvos and the NHS schemes don't. I'm not trying to make a big deal out of it as I'm a manager on £50k a year, but for a low earner this is a suckerpunch. And I son't be getting 2/3 of pensionable final salary anyway, more like 45%, as my service isn't long enough.

CluelessJock

Marklv, as others have said you are in the fortunate position of having an employer that contributes to your pension. Given that it is not a legal requirement for employers to do so how can you ask if the adjustment is legal?

Some people appear never to be happy, irrespective of what they have.

MrChips

marklv wrote: »

My understanding is that most public sector final salary schemes do not deduct the LEL from pensionable pay. I'm pretty sure the Civil Service Nuvos and the NHS schemes don't. I'm not trying to make a big deal out of it as I'm a manager on £50k a year, but for a low earner this is a suckerpunch. And I son't be getting 2/3 of pensionable final salary anyway, more like 45%, as my service isn't long enough.

To my knowledge, no public sector schemes apply this deduction. However, I am aware of some private sector schemes doing so.

I think you're comnig at this from the wrong angle. Of course the scheme provides a lower pension than if a deduction wasn't applied. But then, it would also provide a lower pension if the retirement age was 5 years later, or if a lower accrual rate was used. These are all just different elements of scheme design to provide the right balance between affordability and protection for members.

By including an offset, the scheme can target providing an "overall" level of benefits to its members in their retirement. If the offset wasn't applied, it could conceivably be "over generous" to lower paid members at the expense of medium earners. E.g.

A member works for 40 years and finishes with a salary of £15k, pension from scheme of £10k plus £6k State Pension = £16k - higher than salary before retirement (and more generous tax status)!

With the offset, this becomes (approx) an overall pension of £10k, which is more in line with the very general target of 2/3 of salary needed in retirement (NB this is a very general approach).

By targeting the accrual at the right level, maybe the scheme can afford to give more generous increases, or pay benefits from age 60 rather than age 65. Or these days, actually afford to keep the scheme open!

Re your 45% comment, your pension provision from your earlier career will (approx) make up for the difference. Your scheme can't be expected to provide benefits in lieu of earlier periods of employment.