The New Scheme- CARE 26 th March 2015 APG Wealth Management Associate Partner Practice of St. James’s Wealth Management The Partner (Practice) represents only St. James’s Place Wealth Management plc (which is authorised and regulated by the Financial Conduct Authority) for the purpose of advising solely on the Group’s wealth management products and services, more details of which are set out on the Group’s website www.sjp.co.uk/products . The ‘St. James’s Place Partnership’ and the titles ‘Partner’ and ‘Partner Practice’ are marketing terms used to describe St. James’s Place representatives.
Transcript
The New Scheme- CARE26th March 2015
APG Wealth ManagementAssociate Partner Practice of St. James’s
Wealth Management
The Partner (Practice) represents only St. James’s Place Wealth Management plc (which is authorised and regulated by the Financial Conduct Authority) for the purpose of advising solely on the Group’s wealth management products and services, more details of which are set out on the Group’s website www.sjp.co.uk/products. The ‘St. James’s Place Partnership’ and the titles ‘Partner’ and ‘Partner Practice’ are marketing terms used to describe St. James’s Place
representatives.
Agenda
• Who we are - St. James’s Place Wealth Management
• The Pensions Market – an overview• CARE - The new scheme & What’s out there • Protection -Transitional & Tapered• Opting Out• Transfers & Purchases• Thoughts• Q&A
APG Wealth Management
• Face to Face advice• Ongoing & Relationship based• Partner practice of St. James's Wealth
Monies• Largest Stocks & Shares provider in the UK• Holistic Service – Investments, Pensions, Trust &
Tax planning
The Pensions Market – An Overview• Live longer in retirement than at work• The State Pension is getting older– age &
qualification• Final Salary Schemes are closing all around • Pension limits and allowances are reducing• A Time of Austerity• Auto Enrolment Initiative • Onus being placed on individuals • New pension freedom
The Pensions Market – an overviewLongevity
•In 1901 life expectancy was 45 years for men and 49 years for women. By 2012 this had increased to 79 years for men and 83 years for women .
•This is expected to rise further by 2032 to 83 years for men and to 87 for women.
www.kingsfund.org.uk
The Pensions Market – an overviewLongevity
•A baby girl born in 2011 has a one in three chance of living to 100 and a baby boy has a one in four chance
“I suppose that I shall have to die beyond my means.”Oscar Wilde
•Comparisons of Life Expectancy in the United Kingdoms Constituent Countries with other selected Countries. 2010-2012. United Kingdom, Statistical Bulletin. Office for National Statistics. 2012.
The Pensions Market – an overviewEmployer Provisions
•1994 all FTSE 100 companies offered Final Salary Schemes•2012 all closed to new employees•Cost of providing benefit has increased with legislation•Auto Enrolment Initiative – Employer contribution ??•Defined Benefit is rare and Defined Contribution is the Norm
The Pensions Market – an overviewThe State Pension
•State Retirement Age 65…66…67…68?•SRA in 1908 when first introduced..?•£144 / week c£7.500 pa•35 years of NI contribution a 5 year increase to contributions
The Police Pension – A quick look back• The first police pension scheme was brought in for
the Metropolitan Police in 1829 and extended to boroughs in 1859, but benefits were at employer discretion.
• The early schemes were supplemented with money from:
- fines for selling beer on Sunday - fines paid by officers for misconduct - fines for drunkenness and assaults on the police - proceeds from used clothing sales.
The Pension Regulator - Public service pension schemes A summary of governance and administration
CARE - The New Scheme• Career Average Revalued Earnings• Provisional accrual rate of 1/55.3th (equivalent to
around 1.81%) of pensionable earnings each year• No cap on how much pension can be accrued• In payment and deferred benefits to increase in line
with CPI • Average member contributions of 13.7% from April
2015 • Flexible retirement from the scheme’s minimum
pension age of 55with actuarial deductions in reference to the normal retirement age of 60 years
• Deferred pension age equal to the individual’s State Pension Age
CARE - The New Scheme• Optional lump sum by commutation at a rate of £12
for every £1 per annum of pension foregone in accordance with HMRC limits and regulations
• Abatement in existing schemes to continue • Ill-health & ancillary retirement benefits to be
based on the arrangements in the 2006 scheme • Members re-joining after a period of deferment of
less than 5 years can link new service with previous service, as if they had always been an active member
• Members transferring between public service schemes would be treated as having continuous active service
CARE - The New SchemeCareer Average Revalued Earnings, how does it work?•Build up a ‘slice’ of pension based on your salary in each year of service. •You contribute 13.7% the employer puts in 14.3%•At the end of each year, the slice is increased in line with the revaluation rate used for that scheme, CPI+1.25% to maintain the value of the pension earned. •When a member finally retires, their total pension is calculated by adding up the slices of pension they have built up each year throughout their career.
CARE - The New Scheme
Case Study 1•For example, if in a given year you are earning £28,000, your pot for that year’s membership of the new pension scheme will initially be: 1/55.3th x £28,000 = £506 of annual pension
•The pot will increase year on year by the rate of CPI + 1.25% until you retire and your pension comes into payment.
•So, if it is 10 years until you retire, and assuming that CPI is around 2% per year, that year’s pot would be worth £675 per year at the time you retire.
CARE - The New SchemeHow does this compare to the open market?
•13.7% contribution on £28k salary in a 2 % CPI environment gives us £675 guaranteed in 10 years.•The same contribution in an open market defined contribution scheme at a mid growth rate of 5% would yield a lump sum of £5,155 in the same term and with inflation factored in.•This lump sum would purchase an annuity income at the average rate of 6% equivalent to £309.30. *•This would be 54% less growth than the CARE scheme
•*Ill health annuities would yield more
CARE - The New SchemeReturn on Investment and Tax efficiency
As per Example
•13.7% of £28,000 would secure an income of £507•ROI is 13% Guaranteed /real value growth over inflation •For every £1 invested from your side only 80p is deducted as contributions from pay before tax and reduced NI•20% more investment needed into an ISA
CARE - The New SchemeReturn on Investment and Tax efficiency
• “Left to the effects of inflation, your money would have lost 35% of its purchasing power over the last fifteen years. And as improved life expectancy means we can look forward to a longer retirement, the impact of inflation will become even more of a consideration. The danger of outliving our capital is a very real one.”
Source: Financial Express Analytics. Data as at 31/12/2013.
CARE - The New Scheme• Defined Benefit not based on investment returns• Employer Contributes more than the individual 14.3%• Guaranteed Return• Real growth 1.25% with revaluation over CPI• Tax relief- reduced Income Tax and NI• No limit on accrual• Fairer scheme for lower earning members• Normal Retirement age 60 years/accessible at 55
with reduction• Other Benefits: -Ill health pension, Death Benefit:
Lump Sum of 3x Final Pay, Spouse/Partner’s Pension for life
Protection
• Aim is ensure that those closest to retirement with least opportunity to adjust are protected whether full/part time
• Member needs to continue in current scheme until retirement
• “Final” Final Salary Link maintained• Double Accrual under PPS1987 preserved • Access at normal scheme retirement age for 1987 and
2006 scheme• Actuarially assessed commutation factor under 1987
scheme
Double Accrual Protection
For those police officers who remain in service after the scheme has closed (or, if applicable, after their tapered protection ends:
• The number of years that they have built up in the closed scheme remains the same
but • The accrual rate applied to the years that they
have built up gradually increases to reflect what it would have been had the scheme remained open.
Double Accrual Protection
Example:
Years/Accrual Rate x Final “Final” Salary
Without Double Accrual:16/60 x £36,000 = £9,600
With Double Accrual:16/45 x £36,000 = £12,800
Transitional Protection
• Protects the pension amount and normal pension age of the individual. Member continues as is with no change.
• 1987 Scheme members who on 1st April 2012:- 10 years or less to age 55 - 10 years or less to age 48 and 10 years or less to
a maximum unreduced pension• 2006 Scheme members who on 1st April 2012:- 10 years or less to scheme Normal Retirement Age
55 years• Member needs to remain active in relevant
scheme until retirement date to achieve protection
Tapered ProtectionThere are, in effect, four tapers applying to the 1987 scheme:1. A pure age taper applying to members aged between 41 and 45 irrespective of their service 2. An age taper applying to members aged between 34 and 38 who have at least 20 years’ service 3. A service taper applying to members with between 16 and 20 years’ service who are aged 38 and over 4. A corner taper for members close to the age and service tapers in 2 and 3 above. This can be considered as tapering on the basis of age and service since the member does not meet the service criterion in 2 to be tapered by age alone and does not meet the age criterion in 3 to be tapered by service alone.
• Officers with Tapered Protection will have 2 part pensions
• Part time work and work pattern does not affect eligibility for protection, transitional and tapered
• Double accrual is preserved in the 1987 scheme for part-time service also
• Career Break: where break is less than 5 years can benefit from protection
• It is possible for members to be covered by both 2 tapers. Where this is the case, the most favourable taper applies to the member
Opting Out
• 1987 Scheme , you cannot opt back in as scheme is closed• Before 1 April 2015 you can opt back into the 2006 scheme • After 1 April 2105 you can opt into the 2006 scheme if you
qualify for protection and do within 5 years of having opted out
• If opted out for longer than 5 years then 2015 is the only choice
• If you qualify for the transitional protection or tapering arrangements and you opt-out during the period in which you are covered by them, you will lose any future protection. If you then wanted to re-join the scheme you would be enrolled into the 2015 scheme.
Opting Out – The Disadvantages
• You will lose any access to the final salary link for the service you have accrued under the 1987/2006 scheme
• 1987 scheme - Lose double accrual enhancement and the ability to take your pension from age 50 with 25 years pensionable service. Deferred to 60.
• 2006 Scheme - you would not be able to take your full pension until age 65
• Pay more tax and NI than previous• Lose employer contribution
Pension Transfers & Purchases
• Transferred in service does count for the purposes of assessing service in relation to transitional and tapered protection.
• concept of additional years service does not work in a CARE scheme. However, contracts or agreements in place with existing final salary scheme members to purchase added 60ths or added years will be honoured.
• Members will be able to purchase an additional amount of annual pension benefit.
Thoughts
• Stay in it• A guaranteed and inflation proof income for a longer
life• Seek protection where available• Transfer in previous service (Beware the deadline)• Think Retirement not just pension• Take holistic advice to maximise returns and
minimise tax• No cost and no obligation face to face advice for
