Preserving classic pension civil service

Fphelp123

I was hoping someone could explain the preserved pension in civil service to me.  If I stay in service but switch to partnership pension and stay in it for over 5 years am I correct that the classic pension will be preserved? 

If it is preserved does that mean upon retirement the final salary is worked out at the time of switching uplifted by inflation each year?

the reason I ask is this year I received a lot of back pay between payment errors resulting in a few months pay coming in one, pay scale adjustment and a temporary promotion period. It means that my pensionable earnings are over 60% higher than any other year and I can’t see myself being ambitious enough to earn at that level again as I am much happier with a bit less pressure. So if I switched out of classic now would this be preserved and increased by inflation until I retire? All this is assuming the rectification to classic the mccloud judgement will bring.  

I understand I couldn’t then join alpha for more than 5 years but the extra classic pension if what I say is right would almost be the same plus I would build a partnership pot.  

It all appears to work but I fear I have to be missing something and I know the knowledgeable folk here will soon tell me.  

Another reason I am considering it is I have used quite a bit of my carry forward and now this years pay will hit me with a serious annual allowance charge and it just feels wrong to pay it and then a few years later my pension will fall dramatically as my pensionable pay will be so much lower. The thing is I am worried I am letting the emotions of a big tax charge make me read the scheme rules all wrong

This site really has helped me track and understand my spending, saving and now I’m trying to get better with the retirement planning so would really appreciate some input and I apologise for the very long message. 

hugheskevi

Fphelp123 said:

I was hoping someone could explain the preserved pension in civil service to me.  If I stay in service but switch to partnership pension and stay in it for over 5 years am I correct that the classic pension will be preserved? 

Yes. A deferred award is calculated as soon as your opt-out or switch. The deferred award is cancelled if you return to the main Defined Benefit scheme within 5 years.

If it is preserved does that mean upon retirement the final salary is worked out at the time of switching uplifted by inflation each year?

Effectively yes. Your pension is calculated using final salary and service at date of leaving. This figure is then increased by inflation until you claim pension.

the reason I ask is this year I received a lot of back pay between payment errors resulting in a few months pay coming in one

The back-pay will be allocated to the time payment was due for classic final salary calculation.

It all appears to work but I fear I have to be missing something and I know the knowledgeable folk here will soon tell me. 

Classic looks at highest salary over last 3 years, so there is no hurry to switch to Partnership, you can get another couple of years of classic/alpha service and still benefit from the higher past final salary (which when used in the calculation of deferred classic award when you switch to Partnership is increased by inflation to the current date).

Fphelp123

hugheskevi said:

Fphelp123 said:

I was hoping someone could explain the preserved pension in civil service to me.  If I stay in service but switch to partnership pension and stay in it for over 5 years am I correct that the classic pension will be preserved? 

Yes. A deferred award is calculated as soon as your opt-out or switch. The deferred award is cancelled if you return to the main Defined Benefit scheme within 5 years.

If it is preserved does that mean upon retirement the final salary is worked out at the time of switching uplifted by inflation each year?

Effectively yes. Your pension is calculated using final salary and service at date of leaving. This figure is then increased by inflation until you claim pension.

the reason I ask is this year I received a lot of back pay between payment errors resulting in a few months pay coming in one

The back-pay will be allocated to the time payment was due for classic final salary calculation.

It all appears to work but I fear I have to be missing something and I know the knowledgeable folk here will soon tell me. 

Classic looks at highest salary over last 3 years, so there is no hurry to switch to Partnership, you can get another couple of years of classic/alpha service and still benefit from the higher past final salary (which when used in the calculation of deferred classic award when you switch to Partnership is increased by inflation to the current date).

Thanks so much for all the answers. I hadn’t realised the back pay will be allocated to the time payment was due for classic final salary calculation. You really know your pension rules hugheskevi. 

So in terms of when I get a pension savings statement will it count all of the back pay in this years pension increase? 

Basically it sounds like if it does I’ll have a big annual allowance charge to pay even though my pension won’t actually be increasing by that much in this year. If the back pay is not included then I just scrape through with the carry forward I have left. 

Also good to know I have a couple of years to actually decide whether to switch will really take any feeling of knee jerk reaction out of it. I do think for myself who wants to retire early and pursue more volunteer work building up a partnership pension for a few years might be better than alpha but those figures are for me to do. 

Really appreciate your help. 

hugheskevi

Fphelp123 said:

So in terms of when I get a pension savings statement will it count all of the back pay in this years pension increase? 

How back-dated pay is treated for pension input purposes is set out at this page of the pension tax manual (my bolding):

"...a salary increase could be granted at a date within one pension input period, but has backdated effect to a previous pension input period."

"What was paid and when is a matter of fact. Where the salary increase is awarded at a date falling within one pension input period (the current pension input period) but has backdated effect to a previous pension input period the effect of the salary increase is included in the current pension input period and not in the previous pension input period. This would not, of itself require recalculation of the previous pension input amount in order to arrive at a new opening value for the current pension input period."

It usually shouldn't really matter which year it is applied to though, due to carry-forward.

I do think for myself who wants to retire early and pursue more volunteer work building up a partnership pension for a few years might be better than alpha but those figures are for me to do.

And also consider the option of alpha with an additional personal pension, or AVC in the Civil Service scheme.

GunJack

Unless you're on a massive salary, I wouldn't have thought Annual Allowance would be a factor, usually associated with the £40k input to a DC scheme per year?? Maybe the OP could explain his thinking?

Fphelp123

GunJack said:

Unless you're on a massive salary, I wouldn't have thought Annual Allowance would be a factor, usually associated with the £40k input to a DC scheme per year?? Maybe the OP could explain his thinking?

Things work differently with a DB pension where the increase in pension from one year to another is used to calculate the pension input amount. So a £5k increase in my pension gives a pension input of £95k-ish for the year and my increase will be even well above that due to all the extra pay, back pay and other elements plus I had already used a lot of my carry forward. 

I fully understand that in normal circumstances that would be great as I would have a big pension but if I don’t leave the scheme I will lose it as my pay goes back to normal so won’t have this years pay as a big final salary. 

Fphelp123

hugheskevi said:

Fphelp123 said:

So in terms of when I get a pension savings statement will it count all of the back pay in this years pension increase? 

How back-dated pay is treated for pension input purposes is set out at this page of the pension tax manual (my bolding):

"...a salary increase could be granted at a date within one pension input period, but has backdated effect to a previous pension input period."

"What was paid and when is a matter of fact. Where the salary increase is awarded at a date falling within one pension input period (the current pension input period) but has backdated effect to a previous pension input period the effect of the salary increase is included in the current pension input period and not in the previous pension input period. This would not, of itself require recalculation of the previous pension input amount in order to arrive at a new opening value for the current pension input period."

It usually shouldn't really matter which year it is applied to though, due to carry-forward.

I do think for myself who wants to retire early and pursue more volunteer work building up a partnership pension for a few years might be better than alpha but those figures are for me to do.

And also consider the option of alpha with an additional personal pension, or AVC in the Civil Service scheme.

Thanks yet again, I understand the rationale behind the pension input, for me if I had it in previous years it would equate to a bit more carry forward as it is an amalgamation of a pay fix over more than 3 years but it would get very confusing for HMRC any other way. 

Am I correct in thinking that if I join alpha in under 5 years after moving to partnership then the final salary used to work out the classic pension will be that salary as opposed to the one when I leave classic? I see lots on the csp website about when moving from classic to alpha as we all will next April the classic is banked which I think is different to being preserved?

am I correct that classic pension would not be treated this way if I moved to partnership even if I moved from alpha after next years move for everyone to alpha?

hugheskevi

Fphelp123 said:

Am I correct in thinking that if I join alpha in under 5 years after moving to partnership then the final salary used to work out the classic pension will be that salary as opposed to the one when I leave classic? I see lots on the csp website about when moving from classic to alpha as we all will next April the classic is banked which I think is different to being preserved?

If you leave and then rejoin alpha within 5 years of leaving, the classic deferred award created at the point you left is cancelled. The gap between date of opt-out and rejoin is ignored for final salary purposes, so effectively you just carry on from the point you left in final salary terms, with the standard 3 year look-back in place. That means the final salary used to calculate classic benefit would be based on best salary in last 3 years from time of exit, so the period of higher pay may drop out of the calculation.

"Banked" is different to preservation, banked just means moving to alpha for future accrual whereas preservation means leaving the scheme and becoming a deferred member).

am I correct that classic pension would not be treated this way if I moved to partnership even if I moved from alpha after next years move for everyone to alpha?

Moving to Partnership means becoming a deferred member of classic (as well as a deferred member of alpha). Whilst you are an active member of classic, final salary is best on best salary in last 3 years. When you become a deferred member the final salary is calculated at that date, based on best salary over last 3 years at that time.

Note that the 3 year look back is done by taking salary in 12 months to date of exit, then stepping back 90 days and looking at salary in the preceding 12 months to that date, then stepping back another 90 days, and so forth until the last 3 years has been covered. You may need to time your exit carefully to ensure your best 12 months fall neatly into one of the look-back periods.

Fphelp123

hugheskevi said:

Fphelp123 said:

Am I correct in thinking that if I join alpha in under 5 years after moving to partnership then the final salary used to work out the classic pension will be that salary as opposed to the one when I leave classic? I see lots on the csp website about when moving from classic to alpha as we all will next April the classic is banked which I think is different to being preserved?

If you leave and then rejoin alpha within 5 years of leaving, the classic deferred award created at the point you left is cancelled. The gap between date of opt-out and rejoin is ignored for final salary purposes, so effectively you just carry on from the point you left in final salary terms, with the standard 3 year look-back in place. That means the final salary used to calculate classic benefit would be based on best salary in last 3 years from time of exit, so the period of higher pay may drop out of the calculation.

"Banked" is different to preservation, banked just means moving to alpha for future accrual whereas preservation means leaving the scheme and becoming a deferred member).

am I correct that classic pension would not be treated this way if I moved to partnership even if I moved from alpha after next years move for everyone to alpha?

Moving to Partnership means becoming a deferred member of classic (as well as a deferred member of alpha). Whilst you are an active member of classic, final salary is best on best salary in last 3 years. When you become a deferred member the final salary is calculated at that date, based on best salary over last 3 years at that time.

Note that the 3 year look back is done by taking salary in 12 months to date of exit, then stepping back 90 days and looking at salary in the preceding 12 months to that date, then stepping back another 90 days, and so forth until the last 3 years has been covered. You may need to time your exit carefully to ensure your best 12 months fall neatly into one of the look-back periods.

Thanks that all makes sense now. Really appreciate the information.