Your USS Journey

Every effort has been made to present accurate information. Members are advised to check with their employer and/or the USS guides to confirm their understanding before acting on any information given. This presentation may be recorded for training and audit purposes.

Presentation for USS membersColin Busby and Eifion Morris APMI

Transition

The review of USS

Changes affecting current members

Changes affecting new joiners

Tax relief restrictions from 2011

Your questions

The Review of USS

Review of USS

Why review?

• Increasing longevity• Salary increases impact on pension costs• Investment volatility• Employer contribution increase of 2% wef October 2009• Pensions Regulator

• Valuation 31 March 2011• Possibility of deficit contributions

Review of USS

Changes affecting current members – Final salary section

Changes affecting current members 1 April 2011

Final Salary Intact

Higher Normal Pension Age

Higher Normal Pension Age (NPA)

What is Normal Pension Age?

• USS has always had age 65 Normal ‘Retirement’ Age• In practice all members could have a full pension at age 60 (assuming employer consents and retiring from active service)

• NPA will mean that you could still retire before 65 but service after 31 March 2011 will be reduced for each year/part year earlier than age 65• Unless employer augments benefits or retirement due to redundancy (later slide)

Exemption for those aged 55 or over on 1 April 2011

• Anyone with a birthday on or before 1 April 1956 exempt from the NPA change only

Normal Pension Age (NPA)65Example –retiring at 60 with employer consent

• 30/80 X £45,000• Total =£16,875.00 pa

Before change

Age at 31 March 2011 50Service to 31 March 2011 20 yearsService since 31 March 2011 10 yearsPensionable salary £45,000.00

I’m buying extra service to retire at 60

You can still access your pension at 60

• Although it may be lower

You will still get the full value of the extra service you’re buying

• On retirement from active membership you can still draw benefits from Added Years in full from the age chosen when contract taken out

Change to early retirement terms

Redundancy

• wef 1 April 2013 provision of full early retirement pension ends• No exemptions

Retirement at request of employer

• wef 1 April 2011 provision of full early retirement pension ends• No exemptions

Normal Pension Age to be linked to rise in State Pension Ages

NPA to increase in line with State Pension Ages

• 1 April 2026 66• 1 April 2036 67• 1 April 2046 68

Retirement before NPA will be classed as early retirement

Contribution increase to 7.5%

Salary (pa) Cost from take-home pay at 6.35% (per month)

Cost from take-home pay at 7.5% (per month)

Impact on take home pay each month

£10,000 £36.00 £43.60 - £ 7.60£15,000 £50.00 £61.80 - £11.80£30,000 £94.00 £116.80 - £22.80£45,000 £139.00 £173.60 - £34.60£60,000* £317.50 £375.00 - £34.50 £75,000* £186.00 £243.40 - £57.40

Increase from 6.35% to 7.5%

* 40% tax relief applied

Pension increases change

Current practice

• Rules state that pensions (in payment and for deferred members) are reviewed each April in line with increases to ‘official pensions’• ‘official pensions’ = Civil Service, Police, Teachers, NHS, state pensions increased in same manner

Pension increase change

Change due to scheme review

• Pensions for future service to be reviewed in line with Consumer Price Index(CPI) rather than ‘official pensions’

• 5% cap to pension increase for service after 31 March 2011

Change due to legislation change• Government announced on 8 July that ‘official pensions’ would in future increase

in line with CPI, not Retail Price Inflation (RPI)• CPI historically 0.5% lower

• USS rules state that pensions in payment rise in line with ‘official pensions’ • USS Pensions wef 1 April 2011 to increase in line with CPI

• Affects all pensions in payment now and in the future• No cap

Deferred pension increases

Deferred pensions to increase by lower of CPI or 2.5%

• Only affects leavers after 31 March 2011• All benefits increased by CPI, limited to 2.5% max• Pre-31 March 2011 benefits not subject to cap of 2.5%

Flexible retirement

Flexible retirement from age 55

• Subject to consent of employer and USS

2 ‘Flexes’ possible, 3rd is full retirement• Hours must reduce by at least 20%• Draw up to 80% of benefits (minimum 20%)• Early retirement reductions apply before age 60

You continue to build up benefits

• If you flex, you continue to build up further benefits on a part-time basis and remaining benefits based on future full-time equivalent pensionable salary

What stays the same?

Death in service benefits• For existing contracts• For new contracts for final salary members

Incapacity benefits

Added years AVC contracts

USS money purchase AVCs (Prudential)

Transfers-in

Employer still contributes 16% of salaries

Changes affecting new entrants after 31 March 2011

New section of scheme

Any new joiner after 31 March 2011 who has not been in the final salary section within 6 months of joining will join new section

• Members rejoining within 6 months of leaving final salary section can rejoin final salary section

How does new section work?

Pension calculated each year & ‘banked’

• Formula is 1/80 X Salary for year• Plus 3 X Pension as tax-free cash

Banked pension & cash increased each year by inflation

• Increases limited to a max of 7.5%

Scheme design to be confirmed

New section - Example

Pension calculation Pension for year Banked pension

Salary in year

£40,000 1/80 X £40,000 £500.00 £500.00

£42,000 1/80 X £42,000 £525.00 £1,025.00

£43,500 1/80 X £43,500 £543.75 £1568.75

£45,000 1/80 X £45,000 £562.50 £2131.25

TOTAL £2131.25 pa

We now need to add inflation

New section - Example

Pension for year Inflation calculation Banked

pension

£500.00 £500.00 X 1 £500.00£525.00 (£500.00 X 1.02) + £525.00 £1,035.00£543.75 (£1,035.00 X 1.03) + £543.75 £1,609.80

£562.50 (£1,609.80 X 1.015) + £562.50 £2,196.45

TOTAL £2,196.45 pa

Final salary pension would have been

4 X 1/80 X £45,000.00 = £2,250.00 pa

Tax-free cash of 3 X pension in addition

New section vs Final Salary

New section

Pension built up each year then revalued in line with inflation

1/80th formula + 3 X pension cash

6.5% contribution

Age 65 NPA

Cost sharing

Cost sharing

Historically employer has met full cost of benefits(in excess of employee contribution of 6.35% of salary)

Future rises in costs shared 35:65 between members and employers

Contribution rates reviewed normally every 3 years

Consultation exercise

Consultation

Employer Consultation exercise begins October 2010

• Your chance to voice an opinion• Trustees must consider opinions raised• Consultation period to last more than statutory 60 days

Consultation website

Tax relief proposals from April 2011

Government propose to restrict tax relief on pension from 1 April 2011

Original plans aimed at true ‘high earners’

• Aimed primarily at those earning more than £130,000

Revised plans impact large percentage of USS members

• Could affect members earning more than £50,000 (approx)

Tax relief changes – current system

Tax relief

• Currently you receive 20%/40% tax relief on all contributions

Current limit on maximum pension pot is a capital value of £1.8 million

• Not many USS members affected

Tax relief changes – new system (proposal)

Increase in pension value each year measured

• Capital value = Growth in pension X factor (potentially 23)

If capital value more than limit (£30,000 - £45,000 TBC) tax charge applies

• Tax charge via annual return• Always in arrears• Clarification on how charge will be met

AVC options for final salary members

AVC Options

Two USS options for increasing your pension and/or tax-free cash

• Added years AVC• and/or• Money Purchase AVC (Prudential)

Other savings/investments available

Comparison

Added years Money purchase

Up to 100% £

Tax relief

Flexibility

Tax-free cash

15% maximum £

Tax relief

Certainty

Tax-free cash

Added years modeller

Prudential AVC calculator

• Website www.pru.co.uk/uss

Beat the tax man

Proposed tax changes effective 1 April 2011

• Pay AVCs up to 100% of your salary and save 20%/40% tax• Remember :-

• £100 contribution = £125 @ 20% or £167 @ 40% tax band• Potential to take Money Purchase fund as tax-free cash at retirement

In this tax year you can:-

How to pay AVCs – Added Years

Added Years

Use modeller on www.uss.co.uk

Contact Pensions Office

Summary of changes

Final salary calculation retained for existing members and certain re-joiners

• Normal Pension Age now 65 (for future service)• Contribution rate increase to 7.5%• Pension increase changes• Flexible retirement• Changes for retirements at employer request/redundancy• New section of scheme for new entrants

More information

• Consultation exercise– Starts October 2010

• Pensions office contacts• USS website – www.uss.co.uk• Prudential – www.pru.co.uk/uss