Tackling pensions myths
15 October 2021
Members attending the West Midlands Police Federation online pensions meeting last week were able to find out the facts about the current situation around the police pensions schemes.
But, as places were limited for the meeting and also because there have been further discussions on our social media platforms, the Federation is seeking to dispel a few of the myths circulating among members.
MYTH 1:
Members need to make their choice about their pensions now.
FACT: Members will not have to make their choice until retirement – at which point they will be given a retirement quote which includes both potential options for them to consider before making a decision.
MYTH 2:
There will be no re-adjustments for those who retire before the remedy to the pensions discrimination is formally implemented.
FACT: Anyone who retires before the remedy is formally implemented – and legislated – can expect a re-adjustment/re-calculation once it is. This is because some issues, such as the amount of interest to be applied, have not yet been resolved and there are tax complications.
This re-adjustment will apply whether a member retires through the immediate detriment guidance or not. Currently, and down to work done between the West Midlands Police pension department and the Federation, officers can choose at the point of exit. Currently, 80 days’ notice is required so that any backdated contributions can be collected via PAYE in order that the correct level of tax relief can be applied. It is worth noting that West Midlands Police is currently one of the only forces in the country offering this to their staff.
You should always get specialist advice. Social media is not specialist advice.
MYTH 3:
Some of the pension schemes are better than others.
FACT: It is simply not true to say that one scheme is better than another per se. It is a matter of personal circumstances for each individual officer.
For example, contributions are lower in the 2015 CARE Scheme than the 1987 Police Pension Scheme (PPS) but higher than NPPS 2006. The lump sum payable on death is higher in NPPS 2006 and PPS 2015 than in PPS 1987. PPS 1987 will only pay a spouse’s pension to a legal spouse or civil partner (and this ceases on re-marriage/co-habitation) whereas the two later schemes provide life-time spouse/civil partner/adult partner pensions. We are aware of cases where widows and widowers have faced heartbreaking choices between financial security and the possibility of finding happiness as a result of the police pension rules.
The accrual rate in the 2006 scheme is less than that of the 2015. There is also no maximum service in the 2015 scheme.
There are other examples too but suffice to say members should consider their retirement options very carefully and seek professional financial advice if they are at all unsure what is the best choice for them.
MYTH 4:
All officers will be better off returning to their original pension schemes.
FACT: This is not true at all.
A member was recently seen to ask advice on a social media forum. They were ill-health retired from West Midlands Police with combined values in 1987 and 2015. In the future they will have the choice to have all benefits paid from the 1987 or remain combined across the two schemes. The advice of social media was they would be better off asking for all benefits from 1987. For this individual this was NOT TRUE and taking this advice could have cost that individual up to £121,000.
Follow this explanation:
An enhanced 2015 pension is calculated as the lesser of:
(a) Total accrued earned pension x 3; or
(b) (Final pay)/55.3 x (Assumed period of pensionable service to NPA)/2
So a PC who joins at 20-years-old on 1 April 2004 would have 11 years’ service in the 1987 scheme and seven years’ service in the 2015 scheme as of 1 April 2022.
If they were given an enhanced upper tier IHR on 1 April 2022 when they are 38 then their pension would be:
1987 pension – 20/60th of final salary = £13.7k pa
2015 pension – the lesser of £15.6k pa or £8.2k pa
So their total pension would be £21.9k pa from which the max lump sum would be £119.7k (gross) and a pension then of £15.5k pa.
Should they then opt for 1987 scheme benefits for the duration of the remedy period then their pension would be 25/60th of final salary, which is £17.1k pa from which the max lump sum would be £109.8k (gross) and a pension then of £12.8k pa.
So, in conclusion, this individual would be worse off by as much as £10k on their max lump sum and £2.7k pa if they were to opt for 1987 scheme benefits for the remedy period.
If we then say they have a life expectancy of 79 (currently the national average for a man) that would mean a total loss of about £121,000 over this period. Assuming they took the maximum lump sums at retirement.
Following social media advice could have cost this officer £121,000.
Please get individual advice before acting on views posted on social media. Pensions are complicated, all factors need to considered and you need professional advice.
There are other circumstances where officers could get better benefits under the 2015 scheme. Those previously fully protected by age but late joiners, so if, for example, someone joined in 2005 at the age of 45 they would have been fully protected and maybe get to 20 years’ service at the age of 65 so 1/3rd (0.33) final salary in the 1987 scheme. They will now move across to the 2015 scheme with 17 years’ service and accrue a further three years in the 2015 scheme at that point. This would be a higher pension due to accrual (0.34) and actuarial increases to the 2015 scheme beyond 60 that the other two schemes do not have.
Those who joined young and want to work on until 55 or later can now accrue a pension in excess of 2/3rd of their final salary, particularly if they were fully protected or close to full protection. This would not have been possible with the 1987 pension scheme.
We have done the work with the actuary to show that the 2015 scheme may perform better during the remedy period than the 2006 pension for a good many members.
Advice for those considering opting out of their pension scheme
If any member is considering opting out then they need to very carefully consider the impact of such a decision. For those with service in PPS 1987 who join (or will join) the CARE Scheme, there are two important factors of which to be aware:
- The Final Salary Link (FSL) – the link works by using the member’s pensionable salary at the date of retirement to calculate their PPS 1987 pension. Therefore, if an officer was moved from PPS 1987 to CARE in (for example) 2018 and then retired in 2021, their PPS pension would be calculated based on their pensionable salary in 2021, not 2018. Therefore, their PPS 1987 pension continues to be increased even after they are no longer contributing to the scheme. The FSL also applies to the NPPS 2006 for members who have moved from that scheme to the CARE scheme.
- Weighted accrual – this provision works so that accrual (in excess of 20 years’ service) in the PPS 1987 is enhanced to reflect the double accrual that would have applied had the member been able to remain in PPS 87. This calculation is based on service across all police pension schemes and so if a member of PPS 1987 who was moved to CARE subsequently opted out, any future service would not count towards the calculation of weighted accrual.
- Access to N/PPS Pension – for members with service in more than one police scheme, they will be able to access their N/PPS benefits at the same age and/or service point. The service calculation is based on continuous membership across all police schemes, therefore an officer with 30 years’ continuous membership with, for example, 25 years in PPS 1987, and five years in CARE could retire and access their PPS 1987 pension and lump sum.
It is worth noting that paying into a pension may be a very good tax efficient way of saving for your retirement.
The advantages include:
- You will build up benefits towards your retirement in an arrangement which is sponsored by and underwritten by the Government.
- You receive tax relief on the contributions which you pay. You currently pay 13.44 per cent in pension contributions per month. By ceasing your payments you won’t see you wages rise by this amount as your contributions attract tax relief. Your employer pays substantial contributions towards providing your benefits under the scheme. These are only payable into the CARE 2015 Scheme, the employer will not contribute towards any individual arrangement taken out by you.
- The pension you have built up under the CARE 2015 Scheme will be revalued each year at the more generous rate of CPI + 1.25 per cent (deferred pensions are revalued at CPI).
- As an Active Member you will be able to access your benefits at an earlier age than would be the case if you opted out and became a deferred member (deferred pensions from the CARE 2015 Scheme are payable from state pension age).
- If you become permanently medically unfit and have to retire from the Force earlier than planned, the scheme provides benefits to support you.
- If you die while an active member benefits are provided for your surviving dependants.
- If you have benefits accrued under PPS 1987 or NPPS 2006, the calculation of those benefits will continue to be based on your “Final final” salary (when you eventually leave the CARE 2015 Scheme).
- If you have benefits accrued under PPS 1987 you will continue to benefit from the provision of weighted accrual.
- Finally, if you still decide to opt out of the scheme then if you were to opt back in within five years the benefits you have accrued would be reactivated so as not to be deferred until state pension age.
The current situation with the pensions remedy
The Government has set out what it plans to implement with regard to the remedy and is in the process of legislating those changes to come into law. The Force is abiding by that, putting the remedy in place now for some of those leaving with pension benefits in two schemes. However, as a Federation, we need to point out that we still strongly believe there to be further discrimination contained within the remedy and, along with the heads of all of the other representative policing bodies of England and Wales, Scotland and Northern Ireland have written to the Home Secretary pointing out the issues that need to be addressed so as to fully eradicate the unfairness that still exists.
Among the issues we want to see put right is the fact that two officers joining on the same day could be treated differently at the point of retirement simply because they were of different ages when they first joined. Associated with this is the fact that any officer that reaches 30 years’ service before the age of 55 and with combined service in the 1987 and 2015 schemes would suffer their 2015 pension becoming deferred to state pension age if they were to choose to retire at this point. They could request the pension be paid at 55 but it would then be subject to actuarial reduction from state pension age, which is likely to be well over 50 per cent. Officers retiring over the age of 55 only suffer actuarial reduction of their 2015 pension from “normal pension age” (60) rather than “state pension age” (66 and soon to be 67).
A suggested solution put forward in the letter to the Home Secretary would be for those that reach 30 years’ service before the age of 55 and with combined pension accrual in both the 1987 and 2015 pensions to be able to retire and take their 1987 pension entitlement and then be able to access their 2015 pension at the age of 55 subject to actuarial reduction from 60 or to wait until 60 to receive their 2015 scheme benefits free from any actuarial reduction.
Other issues contained within the letter that require Government attention relate to such matters as the provision of free financial advice for officers when it comes to making a remedy choice, the removal of the commutation cap from the 1987 scheme in line with all other pension schemes
The Federation’s national vice-chair, Ché Donald, made it clear that legal action would be taken if these matter were not addressed satisfactorily, this is in addition to the current Judicial Review underway regarding the treatment of part-time workers and the effect the proposed remedy will have on them.
Watch the online pensions meeting
The West Midlands Police Federation online pensions meeting last week was attended by around 100 members, and was hosted by branch chair Jon Nott and interim secretary Tim Rogers. Also on hand to give an update were national Federation vice-chair Ché Donald and secretary Alex Duncan. Police Money Matters started the evening by giving a presentation around the different pensions schemes, how they work, the proposed remedy to the discrimination found in the implementation of the 2015 scheme and what that means to people. There was also an offer for individuals to have one to one consultations and to be provided with individual figures outside the meeting. Watch the meeting – but please note the Police Money Matters input is not included in the recording.
A further online pensions meeting is being arranged in the next month so please look out for our updates and try to attend if at all possible.
