Employers' Guide
Section 9 – Calculating Retirement Benefits
Contents
1. Calculating retirement benefits 2. Defining average salary 3. Restrictions 4. Case Studies1. Calculation of retirement benefits
The way retirement benefits are calculated is set out below. There is a reduction if the member takes ARB.
Pension - 1/80 of final average salary for each year of reckonable service.
Lump Sum - 3/80 of final average salary for each year of reckonable service. There is no automatic pension lump sum for members who join the TPS on or after 1 January 2007. There is however, the option to take a tax-free lump sum, up to 25% of fund value, by surrendering £1 of pension for £12 of lump sum.
Reckonable service is the number of years and days the member has been in the TPS (that is, in pensionable employment), plus any other service they may be entitled to take into account. This could be service they have transferred from another pension scheme, or any added years they have bought in.
Back to the top2. Defining average salary
The member left service before 1 January 2007
- The highest amount of full salary for any consecutive 365 days of reckonable service, whether continuous or not, during the last three years of reckonable service.
- Reckonable service is those years and days that count towards pension benefits.
The member was in service before 1 January 2007, but retires before 31 December 2008
The best of the following calculations will be used.
- The highest amount of full salary for any consecutive 365 days of reckonable service, whether continuous or not, during the last three years of reckonable service.
- The salaries for each of the last 10 calendar years are increased using the retail price index. Then the average of the best consecutive three years’ re-valued salaries in those 10 calendar years is used.
- The pensionable salary received in the last 12 months before the date of retirement.
The member retires after 31 December 2008
The better of the following calculations will be used.
- The salaries for each of the last 10 calendar years are increased to current day value using the retail price index. The average of the best consecutive three years re-valued salaries in those 10 calendar years is used.
- The pensionable salary received in the last 12 months before the date of retirement.
3. Restrictions
If the member joined the scheme on or after 1 June 1989, the earnings cap will apply.
Where the method of calculating benefits is based on 365 days, if the rate of salary has increased by more than 10% above the standard salary increase in your sector or institution in the three years leading up to retirement, the full amount will not be used in the calculation of retirement benefits unless the employer pays an additional contribution to the scheme
In those circumstances, when the application for retirement benefits is received, we will calculate benefits on both the restricted and unrestricted average salaries and notify you of the sum required (known as 'additional contribution'). If you pay the additional contribution, the member will receive retirement benefits calculated on the unrestricted average salary.
It is not possible to anticipate whether this provision might apply in any individual's case (and if so, what the impact might be) in advance of retirement. It is only at retirement that TP will be in a position to determine the average salary period and assess salary progression against standard pay awards during that period.
Any retirement benefit calculations that we make can only be done on receipt of validated salary rates that have been provided by the employer. However, in no circumstances will we undertake calculations of estimates on behalf of employers on the basis of potential or hypothetical salary figures.
Back to the top4. Case Studies
Calculation of Retirement Benefits Taking Account of New Average Salary Provisions Effective 1 January 2007 :
Fictional Member: Retiring on 1 September 2006.
Start date of pensionable employment: 1.9.1996
End date of pensionable employment: 31.8.2006
Total Pensionable Service: 18 years 000 days
Last 10 Calendar Years:
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Click on picture to view larger image
Reckonable Average Salary Calculation:
Will be the better of:
Calculation 1 – best consecutive 1095 pensionable days in last 10 Calendar Years based on re-valued salary rates .
10 Calendar Year Average Salary Period = 1 September 1996 to 31 August 2006.
Best 3 years average Salary Period =
01.04.2000 to 31.03.2001 |
38745.00 |
365 |
= |
14141925 |
01.04.2001 to 31.08.2001 |
38745.00 |
153 |
= |
5927985 |
01.09.2001 to 31.03.2002 |
39817.00 |
212 |
= |
8441204 |
01.04.2002 to 31.03.2003 |
39817.00 |
365 |
= |
14533205 |
|
|
1095 |
|
43044319 |
Divided by 1095 = 39309.88
Average Salary: £39309.98
Deemed Date for Future Increases: 11.04.2006 day after date to which salary rates revalued.
Calculation 2 – the last consecutive 365 pensionable days based on un – revalued salary rates.
01.09.2005 to 31.03.2006 |
27801.00 |
212 |
= |
5893812 |
01.04.2006 to 31.08.2006 |
28005.00 |
153 |
= |
4284765 |
|
|
365 |
|
10178577 |
Divided by 365 = 27886.51
Average Salary: £27886.51
Deemed Date: 1.9.2006
Calculation 3 – the best consecutive 365 pensionable days in the last 1095 consecutive pensionable days.
In this case this will be the same as calculation 2.
The Best Average Salary:
The calculation of benefits will therefore be based on the average salary at calculation one:
18.000 (pensionable service) x 39309.98 (uplifted average salary) divide by 80 =
£8844.75 (Annual Pension) and £26534.25 (lump sum) payable from 1 September 2006.
2nd Bite PI is still outstanding from 11.04.2006 up to the payable date of 1 September 2006 .
Re-calculation in April 2007 – to apply 2nd Bite PI.
A recalculation of retirement benefits will be done to ensure the uplifted Annual Salary rates include the relevant 2nd bite PI increase thus bringing them up to the value as at the payable date of the award. This will ensure any additional lump sum and pension arrears are paid.
In the first calculation the salary rates have only been revalued up to 11.4.2006 (first bite PI) where the deemed date was prior to 11.4.2006. We now need to revalue the salary rates up to the payable date of the award of 01.09.2006 by applying 2 nd bite PI.
See below the revalued salary rates including 2nd bite. Please note I have based these figures on an estimated 2 nd bite PI increase of 1.13% from 11.4.2006 up to 1.9.2006.
Last 10 Calendar Years:
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The system will determine the best average salary and Recalculate the benefits on this deducting what has previously been paid to determine any additional lump sum and arrears due.
Calculation 1 – best consecutive 1095 pensionable days in last 10 Calendar Years based on re-valued salary rates.
Best 3 years average Salary Period =
01.04.2000 to 31.03.2001 |
39183.00 |
365 |
= |
14301795 |
01.04.2001 to 31.08.2001 |
39183.00 |
153 |
= |
5994999 |
01.09.2001 to 31.03.2002 |
40267.00 |
212 |
= |
8536604 |
01.04.2002 to 31.03.2003 |
40267.00 |
365 |
= |
14697455 |
|
|
1095 |
|
43530853 |
Divided by 1095 = 39754.20
Average Salary: £39754.20
Deemed Date for Future Increases to Annual Pension: 01.09.2006 day after date to which salary rates revalued.
Calculation 2 – the last consecutive 365 pensionable days based on un – revalued salary rates.
NO Change:
Average Salary £27886.51
Deemed Date 1.9.2006
Calculation 3 – the best consecutive 365 pensionable days in the last 1095 consecutive pensionable days.
In this case this will be the same as calculation 2 – NO Change.
Calculation 1 is still the most beneficial average salary benefits will therefore be calculated on this:
18.000 (pensionable service) x 39754.20 (uplifted average salary) divide by 80 =
£8944.70 (Annual Pension) and £26834.10 (lump sum) payable from 1 September 2006.
Arrears of pension:
Arrears of pension will be due from 1.9.2006 up to 11 April 2007 based on the difference between £8944.70 and the rate of £8844.75 that was paid i.e. £99.95 a year. This would be approximately £61.00 gross for the period of the arrears.
Deemed Date for Future Increase on Annual Pension: 01.09.2006 day after date to which salary rates re-valued.
Increased Lump Sum:
£26834.10 Less Lump Sum Paid of £26534.25 = Credit Balance Due of £299.85
Annual Pension Rate payable from 11 April 2007.
The pension rate of £8944.70 will be due an increase from the deemed date of 1.9.2006 up to 11 April 2007.
Based on 1.58% increase for this 7 month 11 day period the pension rate would be increased to £9086.02.
The deemed date for the next increase due in April 2008 would be 12.04.2007.
Back to the topExample Phased Retirement & Final After Phased Retirement Calculation:
First Phased Retirement:
- Member Retires on Actuarially Reduced Phased Retirement grounds at age 55:
- Annual salary drops from £36,000.00 to £27,000.00 (25%).
- The member’s average salary is £35,000.00 and the deemed date is 1.9.1999 (hypo calculation).
- The member wishes to take 50% of their accrued retirement benefits.
Step 1. Calculate the total pensionable service accrued up to the effective date (retirement date) in the usual way.
- In 2007, at age 55, the member will have accrued 25 years service for personal benefits and 10 years 127 days for Family benefits.
Step 2. Determine the amount of service to be used in the calculation of the phased retirement benefits.
- Member has elected to take 50% of their personal benefits at this time. These benefits will be subject to actuarial reduction as the member is under Normal Pension Age (NPA).
25 years x 50% = 12.5 years = 12 years 182.5 days (days rounded down to 182 days).
Step 3. Calculate the phased retirement benefits using this determined service total and the average salary calculated as per the new average salary provisions.
NOTE: Family Benefits (FB) - an FB pension will not be calculated at the time of phased retirement– this will be done at final retirement.
1. Annual Basic Pension:
£35,000.00 x 12.4986/80 = £5,468.14 x 0.742 (ARB factor age 55) = £4,057.36
2. Annual deduction for NI Mod and Grad at State Pension Age (SPA):
£25.99
3. Basic Lump sum
£35,000.00 x 12.4986/80 x 3 = £16,404.41 x 0.843 (ARB factor age 55) = £13,828.92
4. Pensions Increase:
This will be applied to the benefits going into payment from the deemed date of 1.9.1999 - the factor from April 2007 tables = 1.2125.
Increased Annual Pension = £4,919.54 and Increased Lump Sum £16,767.56
NI Mod and Grad will be deducted from this pension at SPA.
Second Phased Retirement Calculation of Retirement Benefits:
Member Retires on Age Phased Retirement grounds at age 60:
- The member has accrued a further 5 years pensionable employment.
- Annual salary drops from £29,500.00 to £22,100.00 (25%).
- The member’s average salary is £35,000.00 and the deemed date is 1.9.1999 (hypo calculation).
- The member wishes to take 75% of their accrued retirement benefits.
The calculation will be done as follows:
Step 1. Calculate the total pensionable service accrued up to the effective date (payable date) in the usual way.
- The member will have accrued a total of 30 years service for personal benefits and 15 years 127 days for Family benefits.
Step 2. Determine the amount of service to be used in the calculation of the phased retirement benefits.
Total Service calculated at Step 1 (30 Years) Multiplied by
The total % the member wishes to take (75%)= 22 years 182 days Less
The amount of service used in the first phased retirement award calculation of 12 years 182 days equals:
- The amount of service to be used in the second phased retirement calculation (10 years 000 days).
Step 3. Calculate the phased retirement benefits using this determined service total and the average salary calculated as per the new average salary provisions.
For this example we will use £35,000.00 and a deemed date of 1.9.1999 (hypo calculation).
1. Annual Basic Pension:
£35,000.00 x 10/80 = £4,375.00
2. Deductions for NI Mod and Grad at SPA:
N/A – already calculated and applied to first phased retirement pension.
3. Basic Lump sum
£35,000.00 x 10/80 x 3 = £13,125.00
4. Pensions Increase:
This will be applied to the benefits going into payment from the deemed date of 1.9.1999 - the factor for the purposes of this estimate is 1.3992.
Increased Annual Pension = £6,121.50 and Increased Lump Sum £18,364.50
Final Retirement after Phased Retirement - Calculation of Retirement Benefits:
Member retires on Age Retirement grounds at age 64:
- The member has accrued a further 4 years pensionable employment.
- The member’s average salary is £35,000.00 and the deemed date is 1.9.1999 (hypo calculation).
- The member wishes to take their remaining retirement benefits.
The calculation will be done as follows:
Step 1. Calculate the total pensionable service accrued up to the effective date (payable date) in the usual way.
- The member will have accrued a total of 34 years service for personal benefits and 19 years 127 days for Family benefits.
Step 2. Determine the amount of service to be used in the calculation of the phased retirement benefits.
Total Service calculated at Step 1 (34 Years) Less.
The amount of service used in the first and second phased retirement award calculations of 22 years 182 days equals:
- The amount of service to be used in the final retirement award calculation (11 years 183 days).
Step 3. Calculate the final retirement benefits using this determined service total and the average salary calculated as per the new average salary provisions.
For this example we will use £35,000.00.
1. Annual Basic Pension:
£35,000.00 x 11.5014/80 = £5,031.86
2. Deductions for NI Mod and Grad at SPA:
N/A – already calculated and applied to first phased retirement pension.
3. Basic Lump sum
£35,000.00 x 11.5014/80 x 3 = £15,095.59
4. Pensions Increase:
This will be applied to the benefits going into payment from the deemed date of 1.9.1999 - the factor for the purposes of this estimate is 1.6487.
Increased Annual Pension = £8,296.02 and Increased Lump Sum £24,888.09
Family Benefit Pension:
£35,000.00 x 19.3479/160 = £4,232.35 including Pensions Increase = £6,977.87
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