When you come to work at a university in the UK, you can build up pension benefits from both an occupational pension scheme and the state pension scheme.
2. Occupational pension schemes
An “occupational”‘ pension scheme is a pension scheme which is offered by your employer. This is an important benefit for university employees because the employer also makes a significant financial contribution to building up your pension benefits. The main schemes offered by universities are:
You will automatically join the scheme which is available at the university where you are employed. Your university will tell you which this is and send you the full details. If you do not want to join the scheme, you will need to tell your university’s pensions team and complete a form to opt out of the scheme.
How it works
You pay a percentage of your salary each month, the percentage is predetermined and will depend on your salary. This is taken from your pay before it is taxed, so you pay less tax. Your National Insurance contributions are also lower because this pension replaces an “additional” part of your state pension.
You can make extra payments, called Additional Voluntary Contributions (AVCs), to buy increased pension benefits.
Your employer also pays a significant amount towards your pension.
The benefits provided by the scheme fall into three categories:
Pension – Your pension starts to be paid when you retire and is paid for the rest of your life. The amount paid depends on which scheme you were a member of, the amount of time you were a member of the scheme (called your “length of service”), and your salary. The calculation of the amount you’ll receive each year is different for each scheme. USS introduced a new scheme in 2011 for new entrants only: the Career Revalued Benefits scheme. Individuals who were members of USS before 01 OCtober 2011 are eligible for a Final Salary scheme.
As an example (correct at the time of writing, October 2011), the annual pension for members of TPS is calculated as:
1/60 x final salary x length of service – where “final salary” is your average annual salary in the 12 months prior to you leaving the scheme, whether upi left to move to another job or to retire.
So, if you were a member of the scheme for three years and left with a salary of £30,000 per year, your pension would be: 1/60 x £30,000 x 3 = £1,500 per year.
This pension is increased on a yearly basis to keep pace with cost of living increases.
In TPS you can choose to take a tax-free cash amount at retirement (called a “lump sum”) and a smaller annual pension. In USS and LGPS a tax-free cash sum is paid in addition to the pension.
Life insurance - If you die while you are paying into one of these schemes, your dependants will receive a lump sum of three times your salary. Your spouse, civil partner or other dependant will also receive a pension. If you die after you have stopped paying into the scheme, a lump sum and/or a reduced pension may be paid to your spouse, civil partner or other dependant.
Ill health benefits – If you become too ill to work, your pension will start to be paid immediately. How much you will receive depends on the scheme, your length of service and whether you are likely to be able to work again in future.
Moving pensions benefits in and out of the scheme
Usually you can move benefits from previous pension schemes into your new scheme. Moving previous benefits in this way is known as a “transfer in”. The transfer in is based on a monetary value known as a transfer value. It buys an extra period of membership or an extra amount of benefit in the new scheme, which may not be the same as the period of membership or the benefit you’ve had in your previous scheme.
When you leave the scheme, you can move benefits to another scheme with a new employer. Moving benefits in this way is known as a “transfer out”. There may be time restrictions on when you can transfer in and out.
If you want to transfer from or to a non-UK scheme, it must be one which meets UK requirements (set by the UK tax authority). These schemes are known as Qualifying Recognised Overseas Pensions Schemes, or QROPS. The HMRC website gives a list of schemes which are recognised as QROPS.
If you are transferring out to a non-UK scheme, the scheme must be willing to accept the transfer, and the tax authorities in that country must allow the transfer. The transfer may be subject to tax in the UK and the destination country.
Neither the International Staff website staff nor your own pensions team will be able to advise whether you should transfer benefits in or out. You may wish to seek independent financial advice.
What happens if you leave before entitlement age?
There are three choices which may be available:
• If you have less than two years’ scheme membership you could take a refund of your contributions. Tax and national insurance will be deducted from the refund before it is paid to you.
• Leave the pension you’ve built up where it is. This is called “deferred benefits”. Your benefits are increased in value each year in line with the cost of living. Your revalued pension is then paid when you reach retirement age.
• Move your benefits to another pension scheme with your new employer. This is called a “transfer out” (see above).
When and how is the pension paid?
The pension will start to be paid at the scheme’s retirement age, usually 65, or when you retire, whichever is later. If you agree early retirement or redundancy with your employer, the pension may be paid out early, from age 55 onwards, but the benefits may be reduced in this case.
The pension will be paid monthly and is subject to UK tax rules. If you retire outside the UK your benefits are not affected but you will need to contact the UK tax authorities regarding your tax situation. The pension will be paid into a UK bank account, or it may be possible to pay it into a bank account outside the UK in local currency. There will be a small monthly admin fee for this service.
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3. Basic State Pension scheme
The Basic State Pension is a benefit that you build up by paying National Insurance contributions as you work. These contributions are automatically deducted from your pay whilst you are working in the UK. This scheme is compulsory; you cannot choose not to join it.
How it works
You build up 1/30 of the Basic State Pension amount for every year you pay National Insurance contributions during the course of your work in the UK. The minimum amount of time you need to work in the UK to start building up a pension is one year. To get a full Basic State Pension you must have paid National Insurance contributions for 30 years.
The State Pension amount changes every year in April. The Directgov website gives the current amount.
If you leave the UK, you will need to let the Pension Service know your new address. To do this, contact the International Pension Centre. The Directgov website gives the contact details.
When and how is the pension paid?
The pension is paid to you when you reach State Pension age (which may be different to the retirement age for your occupational pension scheme). This is currently age 65, but will increase to age 66 by 2020 (and may increase further). See the Directgov website for more details.
About four months before the pension becomes payable, you will receive a claim form from the Pension Service. You must claim your pension using this form.
If you are still living in the UK at State Pension age, the pension will be paid into your bank account. See the Directgov website for more details.
If you live outside the UK at State Pension age, the pension can be paid to you in most countries. It can be paid into a bank account in your country of residence, in which case it will be converted to local currency. It can also be paid in sterling into your UK bank account, or paid via a third party agency in certain countries.
If you live in the UK, the amount of the State Pension you receive will increase every year in April. If you live outside the UK permanently, you will get the yearly increase in certain countries. Otherwise, the amount you are paid does not increase.
The Directgov website gives more information for people living outside the UK at retirement. (Note – this link is for Britons living abroad, but the same rules apply for non-UK nationals)
You don’t have to stop working or claim your State Pension when you reach State Pension age. You can delay, or “defer”, the date on which you start to receive your State Pension. You can then claim extra State Pension or a lump sum at a later date. There may be some restrictions on this if you are not a UK national or if you live abroad at State Pension age. See the Directgov website for more details.
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