How does integration work?
Normally, it is taken into account as a reduction from the amount of your earnings which are used to calculate your pensionable salary. This is important as then not all of your earnings are being used to calculate your pensionable salary.
Not all pension schemes use integration – but a significant minority do.
Integration, (sometimes called ‘offset’), is important to you IF your pension scheme takes State Pensions into account in calculating your pensionable salary.
This can be demonstrated in the following example:
Example:
You join a defined benefit scheme that makes use of ‘integration’ to make an allowance for the Basic State Pension.
Your basic salary is £42,000 p.a. with £6,000 of annual bonus.
The current Basic State Pension for a single person is £4,381 (tax year 2006/2007).
For pension purposes, let’s say your pensionable salary is defined in the Scheme Rules as:
basic salary – Basic State Pension = pensionable salary
So, your pensionable salary is:
£42,000 - £4,381 = £37,619 p.a.
Hence, whilst your total pay is £48,000, your pensionable salary is considerably lower. This has two effects:
1. Your contributions to the pension scheme will be lower if they are based upon the lower calculation (as they normally are) - i.e. in the above example, if you contribute 7% of your pensionable salary, you will pay 7% of £37,619 - rather than 7% of £48,000.
2. Your pension benefits at retirement will be based on your pensionable salary (or final pensionable salary). In this example, if you were retiring now, your pension would be based on £37,619 p.a. rather than on your earnings of £48,000 p.a.
Typical reduction to earnings to calculate pensionable salary
Often, a scheme that uses ‘integration’ will reduce members’ earnings which are used to calculate pensionable salary by a proportion of the Lower Earnings Limit (LEL). The LEL is the amount of income you must receive before you start to pay National Insurance Contributions and is in monetary terms, virtually the same as the Basic State Pension.
The amount of reduction used will be defined in the Scheme Rules. It can be more or less than the Lower Earnings Limits or any other reduction it chooses.
Common rates of reduction are:
- a reduction of 75% of the LEL
- a reduction equal to the LEL
- a reduction of 150% of the LEL.
Summary
People seldom have identical pensions and you should avoid drawing comparisons with colleagues whose circumstances may at first appear the same but could emerge as having significant differences.
This is not an authoritative document. Seek professional advice from an appropriately experienced and qualified adviser.
Does my scheme integrate with the State Pension v3.0 Active
Last updated 18/01/2007
