Does my scheme integrate with the State Pension? Preserved Members
This Quicknote is written for people who are preserved members of a defined benefit scheme.
Integration
Integration is a way of designing a defined benefit scheme to take account of pension benefits being paid by the State. At State Pension Age you will be entitled to receive your Basic State Pension. The amount of Basic State Pension you will get will depend upon your contribution record which will include credits made by you or on your behalf.
Any Basic State Pension you will receive is paid in addition to any other pension entitlement you will receive from other arrangements (for example, your preserved benefit, or personal pension plan).
How does integration work?
Normally, it is taken into account as a reduction from the amount of your earnings which were used to calculate your pensionable salary whilst you were an active member of the pension scheme. This is important as then not all of your earnings would have been used to calculate your pensionable salary (or final 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 took State Pensions into account in calculating your pensionable salary.
This can be demonstrated in the following example:
Example:
You left a pension scheme in September, 2001 and in calculating your preserved pension, the scheme made use of ‘integration’ to allow for the Basic State Pension.
Your basic salary was £42,000 p.a. with £6,000 of annual bonus.
When you left, the scheme calculated your preserved pension based on your pensionable salary. At the time, the Basic State Pension for a single person was £3,770 p.a. (tax year 2001/2002).
For pension purposes, let’s say your pensionable salary (or final pensionable salary) was defined in the Scheme Rules as:
basic salary – Basic State Pension = pensionable salary
So, your pensionable salary was -
£42,000 - £3,770 = £38,230 p.a.
Hence, although your total pay was £48,000, your pensionable salary was considerably lower.
Your preserved pension benefits will be based on your pensionable salary (or final pensionable salary). In this example, if you had 20 years pensionable service and the accrual rate (part of the formula used by a defined benefit scheme to calculate your pension) was 60th’s, your preserved pension would be:
Pensionable Service, 20 years
Final Pensionable Salary, £38,230
‘Accrual rate’, 1/60th
Preserved pension at date of leaving:
20 years x £38,230
60
= £12,743.33 p.a.
If your preserved pension had been based upon your full earnings, it would have been:
Pensionable Service, 20 years
Final Pensionable Salary, £48,000
‘Accrual rate’, 1/60th
Preserved pension at date of leaving:
20 years x £48,000
60
= £16,000 p.a.
Typical reduction to earnings to calculate pensionable salary
Often, a scheme that uses ‘integration’ will have reduced members’ earnings which were 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 Preserved
Last updated 18/01/2007
