Posted October 10th, 2010
I am often asked what the differences are between defined benefit (or final salary) schemes and defined contribution (or money purchase) schemes and why those differences are important in the context of pension sharing and divorce.
Defined benefit / Final salary
As the name suggests the final pension received in retirement is defined in advance, based on an accrual basis (for example, 1/60th or 1/80th), the length of pensionable service and the level of pensionable salary at retirement.
So for someone with 40 years service on a final pensionable salary of £40,000 in an 80ths scheme the pension payable in retirement will be £20,000 per annum.
This pension will increase each year in line with the escalation provided by the scheme (this can vary) and the employer / pension scheme carries the investment and inflation risks.
Pension Sharing
The benefits provided on pension sharing vary between schemes and these should be reviewed carefully before proceeding as often the risks of providing the benefits change hands!
On an internal pension transfer, sometimes the benefits available to the pension credit member are defined benefits, which is the case with the Public Sector Pension Schemes. These defined benefits are often very valuable to the pension credit member and it would be unusual not to advise that these should be taken.
Alternatively, the pension transfer may be placed in a money purchase arrangement often known as the default option. Here, the risks pass to the pension credit member (see below).
On an external transfer, there will be no defined benefits available (unless an annuity is being purchased) and the pension share will be placed in an individual pension arrangement. Again the risks are passed on.
Defined Contribution / Money purchase
In a defined contribution / money purchase arrangement the amount being paid into the pension scheme is defined at say 3% or 5% of salary but the final benefits are not fixed.
Instead, the final pension available is a function of the amount invested in, the investment return and prevailing annuity rates. Therefore, the pension scheme member carries all the risks.
Pension Sharing
When looking at pension sharing and money purchase schemes it is important to check what internal options are available and to check these against what is available in the pensions market.
There will be no guarantees on the income payable until an annuity is purchased and the associated risks need to be considered in the context of retirement planning goals.
If you require further information on defined benefit or defined contribution schemes, please contact us here. You can find further information on pension sharing here.
Tags: 1/60th, 1/80th, 40 years service, 80ths scheme, Accrual basis, Annuity, Default Option, Defined Benefit, Defined Contribution, Divorce, external transfer, Final Pension, final pensionable salary, Final Salary, individual pension, individual pension arrangement, inflation, internal options, internal pension, internal pension transfer, Investment, Money Purchase, Pension Credit, Pension Credit Member, Pension Scheme, Pension Sharing, pension sharing and divorce, Pension Transfer, pensionable salary, pensionable service, Public Sector, Public Sector Pension Schemes, Retirement, Risks | Posted in Pension Sharing |
Comments: No Comments yet!
Posted October 9th, 2010
The Public Sector Pension schemes – (NHS, Police, Civil Service, Local Government, Teachers, Armed Forces) are changing the way that they increase pensions in payment and revalue pensions in deferment from being linked to the Retail Price Index (RPI) to the Consumer Price Index (CPI).
RPI and CPI are measures of UK domestic inflation which are calculated by collecting a sample of prices for a selection of goods and services.
The major difference between the two measures is that RPI includes mortgage interest costs but CPI does not. Historically, this has meant that CPI has increased at a lower rate than RPI and it is therefore, expected to do so in the future.
In pension on divorce cases this change will potentially have two main knock on effects.
- It will have a negative impact on cash equivalent transfer values – the actuarial experts I have spoken with estimate that CETVs will be potentially up to 20% to 25% lower in some situations.
- It will mean that in retirement the amount of revaluation that each parties’ pension will receive will be lower.
If you would like more information on how these changes might affect you, please get in touch.
Tags: Armed Foreces, Cash Equivalent Transfer Value, CETV, CETVs, Civil Service, Consumer Price Index, Consumer Prices, CPI, Divorce, inflation, Local Government, NHS, Pension, Pension on Divorce, Pensions, pensions in deferment, pensions in payment, Pensions on divorce, Police, Public Sector Pension Schemes, Retail Prices, Retail Prices Index, revalue pensions, RPI, Teachers | Posted in Pensions & divorce |
Comments: No Comments yet!
Posted October 4th, 2010
Whilst the NHS call centre and website are saying it could be up to next April before the new cash equivalent transfer values (CETVs) / Cash Equivalent Of Benefit calculations (CTVs) commence again, I understand that the new CPI factors are now starting to become available for the Public Sector Schemes.
The Fire Service and NHS pension scheme have confirmed receipt and they will be testing their systems over the next two weeks. The other schemes – Local Government Pension Scheme, Police Pension Scheme, Armed Forces- are expected over the coming weeks.
It is hoped that the end of this embargo (see here) will be soon and we can return to normal with requesting public sector pension transfer values.
If this is something that is currently affecting you, please feel free to contact us.
Tags: Armed Forces, Cash Equivalent of Benefit, Cash Equivalent Transfer Value, CETV, CETVs, CPI, CPI Factors, CTV, CTVs, Embargo, Fire Service, Local Government, Local Government Pension Scheme, NHS Pension, NHS Pension Scheme, Pension Transfer Values, Police Pension Scheme, Public Sector, Public Sector Pension Schemes | Posted in Cash Equivalent Transfer Values |
Comments: No Comments yet!
