Two Eds are worse than one.

Aegis

hyubh wrote: »

Hmm, your definition of 'relatively modest' is probably broader than mine... got an example?

Not a recent example, but I have run the numbers on the following scenario:

• Employee on £30,000 per annum approaching the end of their career is offered a pay increase to £35,000 for increased responsibility.
• To date they have accrued 39 years of a maximum of 40 in their scheme.
• Scheme is a 60ths basis .
• Initial rights are for a pension of £19,500 p/a (ignoring lump sum).
• Inflating by, say, 2%, this results in a zero-accrual value of £19,890.
• After the pay increase and the increased number of years, the employee would be entitled to a pension of £23,333 p/a (again, ignoring lump sum).
• The deemed accrual is therefore 16 times the difference between £23,333 and £19,890, which is £55,093.

This shows that a relatively modest pay increase can represent an enormous deemed contribution for a final salary scheme due to the large number of previously accrued years. This is somewhat mitigated with career average schemes, but those offer much worse benefits for employees expecting to significantly uplift their salary towards the end of their careers, so that's to be expected.

I shall hold your opinions to a high standard then!

I'll have to double check all my number then!

Although, whether you agree with his conclusions or not, the present pensions minister has been ruminating on the topics he's been legislating on for a long time - first as a policy wonk, then as an academic (http://en.wikipedia.org/wiki/Steve_Webb). He's a Lib Dem version of the current Greek finance minister - spent years pontificating in the abstract to a half-empty seminar room, then boom, found himself actually in the driving seat.

I feel for politicians who have to make decisions on complex matters that they have no personal expertise with, but at the same time there's plenty of expertise out there which would be available for consultations and discussions if asked.

Although, not uniquely. I raise you education, or even the NHS...

True enough!

Rubbish - it's witless pandering to the student vote, which as this thread has witnessed, it is a uniquely stupid sector of the population.

I think there's an element of truth to both... It's also presumably an attempt at fairness somewhere in there (giving them the benefit of the doubt and assuming they're not doing it just to outdo the incumbents), but it's a very poor one.

atush

(giving them the benefit of the doubt and assuming they're not doing it just to outdo the incumbents),

that is all I can see, trying to outdo the incumbents?

hugheskevi

This shows that a relatively modest pay increase can represent an enormous deemed contribution for a final salary scheme due to the large number of previously accrued years. This is somewhat mitigated with career average schemes, but those offer much worse benefits for employees expecting to significantly uplift their salary towards the end of their careers, so that's to be expected.

As the new career average pension schemes in the public sector have better accrual rates, but higher Normal Pension ages, although they are of lower value than existing schemes they nonetheless lead to a higher pension input, as the HMRC methodology is blind to Normal Pension age.

That means someone moving to the new scheme will see more of the Annual Allowance used up each year for normal accrual.

Due to the lowering of the Annual Allowance, there is also less carry-forward available, particularly when the career average schemes are using up more of it in years when there is no significant salary increase. This will increasingly restrict headroom in the coming years.

In your example, the individual was probably using up about £8,000 of their Allowance each year, so would have a lot of carry forward available, particularly from the years where the Allowance was £50,000. So even with a £55,000 input there would not be a charge to pay.

Move that individual into a career average with a 1/43 accrual rate, and the amount of Annual Allowance used increases to £11,000 each year.

Decrease the Annual Allowance to £30,000 and the amount of carry-forward reduces to less than £20,000 in years where salary increases are CPI or lower.

From a position where this individual may have a six figure sum of carry-forward available at the moment, in a few years that will fall significantly, such that promotions similar to the one outlined may well lead to Annual Allowance charges.

Financial_Saddler

Even if there was a potential tax consequence, any company that was not "financially illiterate" should be able to structure an unusually large pay rise for an existing lower-paid employee with long pension service in such a way as to ensure that future annual allowances were more efficiently used, instead of bumping up pensionable salary all in one go.

Do you really think employers think about this sort of thing? Especially public sector employers?

From my experience as a Finance Director of companies with defined benefit pension schemes, yes absolutely.

This is one reason why the argument about annual allowances potentially being a disadvantage for relatively low-paid workers is more a political soundbite than a business reality.
So, she has gone over her annual allowance for one year. If she has only a hugely positive financial outcome as a result, with no negatives at all, then what exactly is your point?

See above.

See above.

Financial_Saddler

Aegis wrote: »

Not a recent example, but I have run the numbers on the following scenario:

• Employee on £30,000 per annum approaching the end of their career is offered a pay increase to £35,000 for increased responsibility.
• To date they have accrued 39 years of a maximum of 40 in their scheme.
• Scheme is a 60ths basis .
• Initial rights are for a pension of £19,500 p/a (ignoring lump sum).
• Inflating by, say, 2%, this results in a zero-accrual value of £19,890.
• After the pay increase and the increased number of years, the employee would be entitled to a pension of £23,333 p/a (again, ignoring lump sum).
• The deemed accrual is therefore 16 times the difference between £23,333 and £19,890, which is £55,093.

This shows that a relatively modest pay increase can represent an enormous deemed contribution for a final salary scheme due to the large number of previously accrued years. This is somewhat mitigated with career average schemes, but those offer much worse benefits for employees expecting to significantly uplift their salary towards the end of their careers, so that's to be expected.

Thanks for an actual example, but all it highlights is -
1. There is no problem at all for this individual because of the availability of carry-forward allowances.
2. There will be no future problem since the individual will now be at the maximum allowed earned years for that particular scheme anyway.
3.It would be a particularly generous and unusual existing scheme anyway if "final salary" actually meant final salary as per your calculation assumptions. A typical gold-plated scheme would be an average of the 3 best consecutive years in the last 10 - which would change your calculation completely and not trouble the annual allowance limit at all!

There must be a better scenario somewhere to highlight the plight of this tortured cohort?

BeansOnToast_2

Financial_Saddler wrote: »

3.It would be a particularly generous and unusual existing scheme anyway if "final salary" actually meant final salary as per your calculation assumptions. A typical gold-plated scheme would be an average of the 3 best consecutive years in the last 10 - which would change your calculation completely and not trouble the annual allowance limit at all!

That's true. My private sector "final salary" scheme uses the average of 3 years, so it would take 3 years for a big pay rise to be fully reflected in my projected pension.

zagfles

Financial_Saddler wrote: »

From my experience as a Finance Director of companies with defined benefit pension schemes, yes absolutely.

That's presumably because you were the finance director and you thought of it! But anyway, the vast majority of people with active DB scheme are in the public sector now, and public sector pay tends to use pay grades/spinal points etc, ie move to a job at a particular level and there's an exact defined salary. No discretion from the boss to phase the rise etc.

TH1878

Linton wrote: »

The majority of children in the 1960s and previously never went to grammar schools. The objective of grammar schools was to educate a largely middle class elite on the basis that the rest would go into unskilled/semiskilled labouring jobs where education beyond the very basics was irrelevent. If you failed your 11+ your chances of getting to university were pretty close to zero.

Bringing back grammar schools means bring back secondary moderns - I wonder why we dont hear UKIP advocating that?

We still have selective education and Grammar schools in Trafford (South Manchester) and Trafford's education system is ranked second in the country at GCSEs and A Levels (and first at Key Stage 2).

All secondary schools in Trafford are rated Good or Outstanding by Ofsted. So what you write doesn't really ring true for me.

As for University, that may have been true in the 60s but it certainly hasn't been from the 90s onwards. Although I went to Grammar school, many of my friends went to Comprehensives and still went to University.

robin61

TH1878 wrote: »

We still have selective education and Grammar schools in Trafford (South Manchester) and Trafford's education system is ranked second in the country at GCSEs and A Levels (and first at Key Stage 2).

All secondary schools in Trafford are rated Good or Outstanding by Ofsted. So what you write doesn't really ring true for me.

As for University, that may have been true in the 60s but it certainly hasn't been from the 90s onwards. Although I went to Grammar school, many of my friends went to Comprehensives and still went to University.

Yes same here in Kent. I do not see the kids who don't get into the Grammar schools being disadvantaged and I speak from the personal experience of my own family. Works very well here.