In some situations, it could have been more than your actual term of employment if you had previously transferred-in benefits from an earlier scheme from a previous employer. Equally, your pensionable service may have excluded extended periods of leave, for example.
But your pensionable service is important because it is a key element in calculating your pension: you will get a proportion (the accrual rate) of your pensionable salary for each year (or part year) of pensionable service that you completed (check with your scheme for its actual formula).
Pensionable service can be counted in a wide range of ways, such as the number of fully completed years, or years and completed months, and some can allow for the exact number of days (such as Public Sector schemes). The method varies from scheme to scheme and will have affected the amount of benefit credited to you.
Knowing how your pensionable service worked is important
How would you like to have given your pension scheme 11 months worth of contributions for nothing? The scheme may have received your money and you got nothing in return. Seems fair? Of course not – but it may have happened under certain circumstances, especially if your pension scheme counted service in the number of completed years you served.
Example:
Let’s look at life long friends, Terry and Jim, who worked for two different employers and were both made redundant. Both were active members in different defined benefit schemes, and left their respective schemes on the same day. Each had the same pensionable salary, £39,000, and both worked exactly the same length of time. They each had 32 years, 361 days pensionable service in their respective schemes.
The Rules of Terry’s pension scheme state that pensionable service is ‘years and days completed’ so every day completed counts towards his pension benefit.
The Rules of Jim’s pension scheme state that pensionable service is ‘whole years completed’.
On leaving service, their respective pensions were:
Terry,
Pensionable Service, 32 years 361 days
Final Pensionable Salary, £39,000
‘Accrual rate’, 1/60th
Pension: 32.99 years x £39,000
60
= £21,443 p.a.
Jim,
Pensionable Service, 32 years
Final Pensionable Salary, £39,000
‘Accrual rate’, 1/60th
Pension: 32 years x £39,000
60
= £20,800 p.a.
You can see from this example that if Jim had negotiated to work just another 4 days he would have received one year’s extra pension (an extra £643 each year).
Note:
The example works the same no matter what amount of service Jim had in his last year (e.g. 10 days, 6 months, 11 months).
- If your pensionable service was counted in ‘years and days’ (as most Public Sector schemes are) this is not an issue that should have affected you.
Things you could have done – if only you had known:
If your pensionable service was counted in ‘whole years completed’ and you were only a few months into the period, it is unlikely you would have been able to negotiate a full rounding up of that year’s service. It is more likely that the more months you had completed, the better the chance you would have had of getting your pensionable service ‘bumped-up’! You could have asked for the amount you paid in (which was absorbed) to be returned to you as an addition to your redundancy.
On the other hand, if your pensionable service was counted in ‘years and months completed’ then you may have been able to negotiate rounding up your pension service to the ‘completed month’ (as every little helps).
Summary
It is important knowing HOW pension schemes work – and it doesn’t have to be difficult to understand. By understanding pensionable service, you may be able to prevent any loss of it in respect of future employment.
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 Quicknote forms part of our Module about Redundancy and should be read alongside the other Factsheets and Quicknotes in the series.
This is not an authoritative document. Seek professional advice from an appropriately experienced and qualified adviser.
Redundancy: Maximising your pensionable service v1.3 Preserved
Last reviewed 12/08/2009
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