POA Circulars

165 | 07.12.2012

Opting out of the Civil Service Pension Scheme

Following the Government’s decision to increase pension contributions from April 2012, members have raised concerns and questions over the options for opting out of the Civil Service defined-benefit arrangements.

Nothing that follows must be taken as an indication that the POA supports the idea of scheme members opting out of the Civil Service arrangements; this must be a personal choice. Indeed, the POA believes the best way for members to save for their retirement is for them to be a member of a defined-benefit scheme (Pension).

If a member is considering taking the decision to opt out, the POA strongly suggests they should take independent financial advice before doing so. This of course would be at the member’s own expense.

Nothing in this circular should be construed as financial advice.

Q. Can I opt out of Classic/Classic Plus/Premium/Nuvos?
A. You can opt out of the defined-benefit arrangements. However, you will be giving up a number of very valuable benefits.

Q. If I opt out what benefits will I lose?
A. You will have to pay increased National Insurance (NI) contributions (approximately 1.4% greater), since Classic, Classic Plus, Premium and Nuvos are currently contracted out of the State Second Pension (S2P), and if you opt out you will be contracted into the S2P. Thus since the defined benefit schemes are contracted out of the S2P, you and your employer pay lower National Insurance contributions;

You will be giving up significant employer contributions of between 16.7% - 24.3% of your salary.

You will not build up any pension benefits for any period that you are opted out i.e. any period of opted-out service will never count towards your pension.

If you die in service whilst still opted out of the Civil Service Pension Scheme, there is an entitlement to a lump sum payment, but this will be considerably smaller than if you had remained a member of the scheme. Members deciding to opt out of these schemes will therefore need to consider their life insurance arrangements (again another cost to the individual).

You will not be eligible to receive ill health retirement benefits (which generally involve some enhancement to service) under the scheme, although members who opt out of Classic and fall ill before age 60 may receive immediate payment of their preserved award in certain circumstances. However, this does not apply to members of Premium, Classic Plus or Nuvos.

If you are a member of Classic, you will give up the short-term dependants’ pension (3 months or extended to 6 or 9 months if there are dependent children), which is equal to the scheme member’s pensionable earnings.

Whilst the member’s service in the Civil Service will count towards a lump sum payment if the member is made redundant, the employer is not allowed under the new Civil Service Compensation Scheme rules to “top-up” the member’s compensation payment to buy-out the actuarial reduction that would apply because you are drawing the pension earlier than your normal pension age;

If you were buying added years by deduction from salary, this will cease when you opt out of the Civil Service pension arrangements. This will be permanent, so that if you opt back into the Civil Service pension arrangements, you will not be allowed to restart your added year’s contributions.

Q. What about the benefits that I have already accrued in the Civil Service Pension Scheme?
A. You will become a deferred member of the pension scheme, provided you have two or more years qualifying service. Your benefits will be preserved for payment at the scheme pension age (60–65).

Your preserved benefits will be based on your reckonable service up to the date you opt out and your pensionable earnings at that time. The preserved benefits will be increased each year in line with the consumer prices index (CPI), this figure is variable and can go down as well as up.

Q. Can I opt back into the Civil Service Pension Scheme at a later date?
A. Currently, the scheme rules allow you to opt back if you change your mind later. However, as mentioned above, any period of opted-out service will never count towards your pension.

Anyone re-joining before April 2015 will go back into the scheme of which they were previously a member.

If the scheme member does not re-join a Civil Service pension scheme before 1 April 2015, what will happen to them will depend on their age as at 1 April 2012.

If the scheme member is within 10 years of pension age on 1 April 2012, they can only return to the scheme they were in before they opted out.

If the scheme member is over 10 years and under 13.5 years from their pension age on 1 April 2012 they will return to the scheme they were in before they opted out for the unexpired period of protection under the proposed new scheme arrangements.

If the scheme member is 13.5 or more years from pension age on 1 April 2012, the scheme member will join the new pension scheme, which will be introduced from 1 April 2015.

Members of Classic have one opportunity to re-join in the same period of employment and make a satisfactory health declaration. If the member opted out with a preserved award, the two periods of service before opting out and after opting back in will be treated separately for any future award.

Members of the Premium scheme can opt out at any time. Again, scheme members will have one opportunity to re-join. If the scheme member who opted out of Premium had a preserved award and re-joins Premium at a later date, they will be able to combine the two periods of Premium membership to produce a single pension based on their final pensionable earnings at leaving or retirement. Any option to aggregate, must be exercised within 12 months of opting back into Premium.

If a scheme member opts out of Classic Plus, they have one opportunity to re-join Premium in the same period of employment. The arrangements for aggregating two periods of membership are the same as for Premium.

If a scheme member opts out of Nuvos they have one opportunity to re-join Nuvos in the same period of employment. If the scheme member left Nuvos with a deferred award and re-joins Nuvos at a later date, their earlier service is effectively joined with the current service, producing a single pension at next leaving or retirement. If scheme members do not want their benefits aggregated, they must choose within the first 12 months of re-joining Nuvos to keep them separate.

Q. What happens if I opt out of the Civil Service Pension Scheme for a second time?
A. If you opt out again, you will not be allowed to opt back into the Civil Service pension arrangements for a second time.

Q. If I opt out of the Civil Service arrangements what are my options as far as providing a pension are concerned?

A. If you opt out you have to have to do one of the following:
You may be able join the Partnership Pension Scheme (the Civil Service defined-contribution scheme);

You can take out a Civil Service Stakeholder Pension;

You can make your own arrangements and take out an approved Personal Pension (which is also a defined-contribution scheme);

You can go into the State Second Pension (S2P).

Note: From 6 April 2012 you will have to pay the higher National Insurance contributions and receive the State Second Pension, even if you join the Partnership scheme, take out a Stakeholder Pension or make your own pension arrangements (Personal Pension).

Partnership Pension

Q. Can I join the Partnership scheme if I am a member of the Civil Service Pension arrangements?
A. No, it is not possible to move to Partnership from Classic, Classic Plus or if you opted for membership of Premium in October 2002, as of the 2002 options exercise.

However, if you joined Premium after 1 October 2002, or are a member of Nuvos you have one opportunity to switch to the Partnership scheme. You must switch on either 1 April or 1 October each year.

Q. What is the Partnership Pension Scheme?
A. Partnership is a Stakeholder Pension, which is a type of Personal Pension. The employee and employer contributions are invested and generate a pension pot (cash sum). At retirement, this cash is used to buy a pension (usually called an annuity) from an insurance company.

Q. How much do I pay under Partnership?
A. You can open a Partnership account without having to pay contributions if you don’t want to. Or you can, if you wish, pay up to 100% of your pensionable earnings.

Q. How much will the employer pay into a Partnership Pension?
A. Your employer will pay contributions to your Partnership account, even if you decide not to contribute. They will pay:

An age-related contribution, between 3% and 12.5%

A matching contribution, payable if you do decide to contribute – of up to an extra 3% of your pensionable earnings

Q. When can I take my Partnership Pension?
A. You can currently take your pension at any time between the ages of 55 and 75.

Q. Can I opt to re-join the Civil Service Pension arrangements if I am a member of the Partnership scheme?
A. It is possible to switch back to Premium and Nuvos on one occasion from Partnership. However, you must switch on either 1 April or 1 October each year.

Stakeholder Pension

Q. What happens if I decide to join the Civil Service Stakeholder Pension arrangements?
A. Generally, the Stakeholder Pension operates in a similar way to the Partnership Pension arrangements.

However, it is important to note that there is no employer contribution to a Stakeholder Pension, so the size of the pension fund will depend on the contributions made by the member.

Personal Pension

Q. What happens if I decide to make my own arrangements and take out a Personal Pension?
A. Again, Personal Pensions operate in a similar way to a Stakeholder Pension.

There are no employer contributions to a Personal Pension and thus the fund built up will depend on the level of the employee’s contributions.

State Second Pension (S2P)

Q. What is the State Second Pension?
A. The State Second Pension (S2P), sometimes called the Additional State Pension, is paid on top of the Basic State Pension. It used to be called the State Earnings Related Pensions Scheme (SERPS).

If you are an employee, and not a member of the Civil Service Pension Scheme, you’ll be entitled to receive the S2P if you pay the full rate National Insurance contributions. The amount you receive depends on your National Insurance contributions. The S2P is paid at the State retirement age.

The Government’s current plans for the State pension age are initially to harmonise for men and women at age 65 by 2018, and then increase the State pension age to 68.
Members can identify their own State pension age by visiting the following website:
https://www.gov.uk/calculate-state-pension

Q. What are the current contributions paid by employers to the current Civil Service Pension Schemes (Classic, Classic Plus, Premium and Nuvos)?
A. Salary Band (£) Employer contribution rate from 1 April 2012

Band 1 – 21,500 and under 16.7%

Band 2 – 21,501 to 44,500 18.8%

Band 3 – 44,501 to 74,500 21.8%

The summary contained in this circular setting out the options for members who are considering to opt out of the Principle Civil Service Pension Scheme have been drafted as an aide memoir. I will remind you this is not financial advice or advice in relation to your pension, this is merely information to assist members and to remind them to seek independent financial advice before making any decision in respect of their personal pension.

The POA are not responsible for advising members on pensions but will always endeavour to assist where appropriate.

Please draw the contents of this circular to your members.

Thanking you in anticipation for your support and co-operation.
 

 

 

Yours sincerely

 

  

STEVE GILLAN
General Secretary