Moving from CARE to Final Salary - should I?

Dlaishley

Hi, can a pension person please help?

I've got the one-off option to move from CARE to Final Salary.

I am 48. I earn a reasonable salary and I'm not planning to progress my career any further so not expecting any huge pay rises.

Both schemes are 1/60th

I have been there for 5 years now. I am planning to go part time towards the end of my career but I am happy to return full time towards the very end if my pension needs it.

Both schemes provide a similar spouses/dependants pension and lump sum if I die of 4x lump sum and 50% pension, except the Final Salary pays lump sum and pension if deferred whereas CARE only pays out what has been acrrued.

The final salary is calculated on last 12 months, less 75% of the basic state pension, multiplied by years of service and divided by the scheme accrual rate of 60. Current contribution rate is 7% with employer 9.3%. It has a pay cap for increases in line with RPI.

CARE is calculated 1/60th and revalued in line with CPI. Current contribution rate is 7.24% employer 10.86%

Please can anybody offer advice as to whether I should stay in CARE, or move to Final Salary,
or whether it's worth taking the pot and moving it to DC?
I may even be able to move to Final Salary and then go back to CARE if my plans change (I'm not sure if I can do that).
I'm really confused as I know people at work who have had advice and stuck with CARE but I thought Final Salary was the holy grail of pensions.

Thank you!

Marcon

Dlaishley said:

Hi, can a pension person please help?
 I've got the one-off option to move from CARE to Final Salary. I am 48. I earn a reasonable salary and I'm not planning to progress my career any further so not expecting any huge pay rises. Both schemes are 1/60th, I have been there for 5 years now. I am planning to go part time towards the end of my career but I am happy to return full time towards the very end if my pension needs it. Both schemes provide a similar spouses/dependants pension and lump sum if I die of 4x lump sum and 50% pension, except the Final Salary pays lump sum and pension if deferred whereas CARE only pays out what has been acrrued.

Lump sum based on what? If it's salary, then it's unusual to get that sort of lump sum paid out in deferment.

Dlaishley said:

The final salary is calculated on last 12 months, less 75% of the basic state pension, multiplied by years of service and divided by the scheme accrual rate of 60. Current contribution rate is 7% with employer 9.3%. It has a pay cap for increases in line with RPI.
CARE is calculated 1/60th and revalued in line with CPI. Current contribution rate is 7.24% employer 10.86%

How is pensionable salary calculated for the CARE scheme?

Ignore the employer contribution rate. It's purely notional and the employer is on the hook for whatever is needed to ensure the fund can pay out the promised benefits.

Dlaishley said:

Please can anybody offer advice as to whether I should stay in CARE, or move to Final Salary, or whether it's worth taking the pot and moving it to DC? I may even be able to move to Final Salary and then go back to CARE if my plans change (I'm not sure if I can do that). I'm really confused as I know people at work who have had advice and stuck with CARE but I thought Final Salary was the holy grail of pensions. Thank you!

If you need advice, then you need a regulated financial adviser. Who gave your colleagues advice - someone who fits that description, or their mate down the pub (if the latter, probably not a good idea to rely on it!). Have you asked if you can have projections based on your current salary and retirement at the scheme's normal retirement age? There'll be a lot of guesstimation involved but it might help clarify your thinking.

ewaste

"Final Salary"

Since 2012 there has been a Pensionable Pay Cap of RPI +0.5%, this changed to flat RPI in 2016. In 2030 the methodology used to calculated RPI changes to that used by CPI-H therefore reducing the scope of all service pensionable pay increasing vs CPI.

Promotional pay increases, if they result in a change of Grade or Band, are Pensionable for future service only. These are calculated separately e.g. if a member gets a £10k promotional pay rise this is calculated as £10k/60 X years from the date of the promotional pay rise, no deduction is made for the BSP. Note:- Promotions that don't result in an change of Grade or Band are still subject to the Pensionable Pay Cap. 

There is also, as mentioned, a deduction made from pensionable pay of 0.75x the Basic State Pension, this lower figure is what benefits are then accrued on at a rate of 1/60th. We'll call this "Scheme Pensionable Pay"

(Headline Pay) £30,000 - 75% of the (BSP) £6,091.80  = (Scheme Pensionable Pay) £23,908.20 / 60 = £398.47 of 'Notional' accrual.

Therefore the headline pay figure for the role and the pensionable pay can vary significantly after a period of time. The Basic State Pension has been increasing faster than both headline and pensionable pay therefore the "Scheme Pensionable Pay" on which benefits are calculated has been dropping and the value of previous accrual has arguably been dropping as well. 

It's still 'technically' final salary in that benefits are calculated on the "Scheme Pensionable Pay" / 60 X Years of Service. 


"CARE"
There is no pensionable pay cap, there is no basic state pension deduction. Pensionable pay is the headline pay for the role / 60. 

(Headline Pay) £30,000 / 60 = £500 per year of pension accrued. 

As would be expected with a CARE Scheme the benefit is then revalued inline with CPI Inflation the following April based on the September CPI figure. revaluation is subject to a 5% cap but is averaged/compounded over the period of membership.

Important Note:- Pensions once in payment from the FS Scheme are increased by the Public Sector Revaluation order i.e. uncapped CPI, whereas the CARE scheme has increases capped at 5%.

@Dlaishley Can I mention the Employer?

P.S. can you edit your comment to make it a bit more readable and quotable as it's a wall of text without some formatting. I know stones in glass houses etc

Marcon

ewaste said:

@Dlaishley Can I mention the Employer?

Might be handy if you mentioned the scheme! 

hyubh

Marcon said:

ewaste said:

@Dlaishley Can I mention the Employer?

Might be handy if you mentioned the scheme! 

At the risk of looking a fool - RPS, surely...

Dlaishley

ewaste said:

"Final Salary"

Since 2012 there has been a Pensionable Pay Cap of RPI +0.5%, this changed to flat RPI in 2016. In 2030 the methodology used to calculated RPI changes to that used by CPI-H therefore reducing the scope of all service pensionable pay increasing vs CPI.

Promotional pay increases, if they result in a change of Grade or Band, are Pensionable for future service only. These are calculated separately e.g. if a member gets a £10k promotional pay rise this is calculated as £10k/60 X years from the date of the promotional pay rise, no deduction is made for the BSP. Note:- Promotions that don't result in an change of Grade or Band are still subject to the Pensionable Pay Cap. 

There is also, as mentioned, a deduction made from pensionable pay of 0.75x the Basic State Pension, this lower figure is what benefits are then accrued on at a rate of 1/60th. We'll call this "Scheme Pensionable Pay"

(Headline Pay) £30,000 - 75% of the (BSP) £6,091.80  = (Scheme Pensionable Pay) £23,908.20 / 60 = £398.47 of 'Notional' accrual.

Therefore the headline pay figure for the role and the pensionable pay can vary significantly after a period of time. The Basic State Pension has been increasing faster than both headline and pensionable pay therefore the "Scheme Pensionable Pay" on which benefits are calculated has been dropping and the value of previous accrual has arguably been dropping as well. 

It's still 'technically' final salary in that benefits are calculated on the "Scheme Pensionable Pay" / 60 X Years of Service. 


"CARE"
There is no pensionable pay cap, there is no basic state pension deduction. Pensionable pay is the headline pay for the role / 60. 

(Headline Pay) £30,000 / 60 = £500 per year of pension accrued. 

As would be expected with a CARE Scheme the benefit is then revalued inline with CPI Inflation the following April based on the September CPI figure. revaluation is subject to a 5% cap but is averaged/compounded over the period of membership.

Important Note:- Pensions once in payment from the FS Scheme are increased by the Public Sector Revaluation order i.e. uncapped CPI, whereas the CARE scheme has increases capped at 5%.

@Dlaishley Can I mention the Employer?

P.S. can you edit your comment to make it a bit more readable and quotable as it's a wall of text without some formatting. I know stones in glass houses etc

@ewaste Hi, thank you and apologies, I haven't posted on here in a long time and the whole quoting and formatting thing is new to me!

I don't know if I can mention my employer, but it is Rail Industry and yes it is RPS 65. 

 @marcon - in deferral

• the RPS lump sum pays the lesser of 4x pensionable annual salary or 5x annual pension, with a spouse/dependant pension of 50% of the deferred pension and child's pension for 2 eldest eligible children
• the CARE lump sum is equal to contributions paid by the member with a spouse/dependant pension 50% of accrued pension and a child's pension
• they are both 1/60

If either of you have experience of the schemes, would you mind sharing your views on best option based on my own situation? ie 48, not expecting to go up a band, would like to reduce hours as I approach pensionable age but happy to up them before I actually do.

Could either of you please confirm my understanding, that because both schemes are 1/60th then regardless of if I were to be part time at the end, the RPS scheme would be better because the FS element is an 'additional' amount added on to what would otherwise be CARE?

Thank you both for your help.

WYSPECIAL

Dlaishley said:

I am planning to go part time towards the end of my career but I am happy to return full time towards the very end if my pension needs it.

Will you really want to go full time after several years of being part time or will you be dreading having to do it. Will your employer definitely allow it?

ewaste

Dlaishley said:

@ewaste Hi, thank you and apologies, I haven't posted on here in a long time and the whole quoting and formatting thing is new to me!

I don't know if I can mention my employer, but it is Rail Industry and yes it is RPS 65.

No worries at all, as I say I'm at risk of throwing stones in glass houses as well because I'm not the best with post formatting either.

hyubh said:

At the risk of looking a fool - RPS, surely...

You are certainly no fool, it's RPS specifically as the OP has now mentioned RPS65 which differs from other RPS sections e.g. TOCs.

RPS65 has some nuances to understand as mentioned in my comment previously, there are explanations at the link. https://www.mynrpension.co.uk/rps-pay/

Note that Pensionable Restructuring Premiums (PRPs) are typically important although not so much for this OP if they aren't planning on banded or graded promotions. https://cdn.rpmi.co.uk/mp-sitefinity-prod/docs/default-source/rayn/guides-for-all-members/pay-restructuring.pdf?sfvrsn=8f4d4773_2

The CARE Scheme is pretty self explanatory for those familiar with such schemes. https://www.mynrpension.co.uk/how-your-care-pension-works/

Dlaishley said:

If either of you have experience of the schemes, would you mind sharing your views on best option based on my own situation? ie 48, not expecting to go up a band, would like to reduce hours as I approach pensionable age but happy to up them before I actually do.

Could either of you please confirm my understanding, that because both schemes are 1/60th then regardless of if I were to be part time at the end, the RPS scheme would be better because the FS element is an 'additional' amount added on to what would otherwise be CARE?

If you aren't planning on seeing a numerical increase in band e.g. from Band 4 to Band 3 then the ramifications of the pensionable pay cap, especially post 2030, will be especially relevant to you. If for example you receive a pay award but the pensionable pay cap is lower than the pay award anything above the pay cap is non-pensionable in RPS65. Therefore if you manage to receive in band performance or progression related pay increases these may very well end up being above the pensionable pay cap. 

Furthermore in years like 2023 and 2024 when the Basic State Pension increases by 10.1% and 8.5% respectively, your section pay will decrease because you won't have had a pay increase of anything close to those figures. Your employer like many others in the (quasi) public sector has seen pay falling rather drastically in real terms over the past few years. Therefore the retained link to 'final salary' is actually detrimental to previously accrued benefits.

The CARE scheme however has no pensionable pay cap and previous service is revalued by CPI inflation, subject to the aforementioned revaluation cap. For the past few years this has meant that previous pension accrual has retained it's value in real terms while your salary hasn't.

However it's important to note the difference in pension increases once in payment, this could be a major deciding factor for some people.

In relation to reduced hours there is no advantage to either scheme in this respect.

In your circumstances e.g. age and career aspirations etc the CARE Scheme I'd argue stands out as the clear winner in terms of basic scheme benefits.

Beyond the basic scheme benefits both also offer the option of paying Additional Voluntary Contributions on a Defined Contribution basis only, these can be used to provide a tax free lump sum (TFLS) alongside the annual scheme pension. Note that neither scheme provides an automatic lump sum, although it is possible to commute annual pension to provide a lump sum. This is typically poor value for money and therefore it's sensible and tax efficient to make use of AVCs to provide the TFLS.

RPS65 AVCs referred to as "BRASS" does have one feature not available to CARE AVCs in that 'excess' BRASS can be inversely commuted to provide additional annual pension at 'cost neutral rates' determined at time benefits are taken.

Dlaishley

Thank you! I very much appreciate your reply. I have done some basic calcs and even without the cap there is not much in it, so I think CARE is the best option too. I have AVCs from previous pensions which I combined after taking advice when I joined CARE. I didn't realise that the schemes don't provide a lump sum so I'm very glad I've got the AVCs! Thank you for your time and patience explaining all of this to me. 👍🙂

Workerbee999

Hi. Im in the RPS too, different section but it has the same pension pay cap. I understand it means pay increases above an inflation calc would only be taken into account for future service. But I don’t know how the pay cap is calculated? What inflation rate is relevant? Is it calculated discretely each year - and if so is it tax year, service year, year from birthday - or a cumulative comparison of pay growth over service v inflation over the same time so lags between inflation and pay increases even out? What happens when pay increases are part way through the year and the average pay for that year is within the pay cap but the absolute salary isn’t?

Any explanations would be great, thanks 

ewaste

The majority of sections have a pensionable pay cap of RPI +0.25%, excluding Network Rail which is flat RPI.

This is the September rate of RPI for the previous financial year e.g. the September 2020 RPI rate is used as the Pensionable Pay Cap figure for the 2021-2022 Financial Year.

If you have a basic salary of £30,000 and receive a Pay Rise of 5% within the 2021-2022 Financial Year, you might expect your all service pensionable pay to rise to be £31,500. The September 2020 RPI rate was 1.1% (+0.25%) therefore your actual pensionable pay would rise to £30,405 due to the cap. 

Some but not all sections make use of Pensionable Restructuring Premiums for the excess above the pensionable pay cap. If your section does make use of PRPs in this manner you'd create a PRP for £1,095 pensionable for future service only, PRP guide above. 

It's also important to keep in mind the Basic State Pension deduction of x1.5 also in use for most sections i.e. approximately £12,183.60 for the 2023/2024 financial year. In April 2024 the BSP increases by 8.5% therefore the deduction becomes approximately £13,219.21

Therefore with a Pensionable Pay of £30,000 your section pay on which benefits are accrued is actually £17,816.40.

It's the interaction of these two cost control mechanisms within the scheme that becomes a major issue especially in the past few years. The link to ongoing earnings has actually resulted in the value of previous service being eroded, sometimes quite considerably in real terms. 

>>Anyone else reading please note there are fundamental differences between each RPS section.<<