The Regulations finally wiping out the 85 test have now gone through Parliament. But it’s not all bad news, so read on for a quick summary...
As we’ve reported, the 85 test has been ‘on its last legs’ for some time, having been dropped in April 2004, then briefly reinstated. But it is now due to be dropped once again from this October - so what will this mean to you?
lf you choose to retire before 65, then you will find yourself in one of these three groups:
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 No change: if you joined at 45 or over, and don’t have any other membership, then you were never going to pass the 85 test, and were going to face early retirement reductions anyway. So the changes won’t affect you.
Age protected group: if you were born before 1 April 1953, and will pass the 85 test before 1 April 2013, and you retire by then, you are protected from the changes.
Partially protected group: if you don’t fall into the first 2 groups, then you will be partially protected. The value of your benefits built up before October 2006 won’t be affected. But benefits from this date will be reduced if you draw them before 65.
By the way, the early retirement reductions don’t apply if your employer retires you for some other reason - for example ill health or redundancy - and in fact over half of our members retire in this way. Out of the remaining members who choose to retire, some fall into the no change or age protected groups already described. So overall, these 85 test changes will only affect a minority of members.
PS: In case the 85 test is still new to you, you do it by adding your retirement age to your membership (ignoring part years, and counting part time membership in full).
So that’s the main change many members were interested in, but there are plenty of other changes too - most of them bringing our Scheme in line with the so called A Day changes introduced from April, which remove many of the old tax restrictions on building up and drawing pension benefits...
Active members can now take a bigger lump sum, by giving up some pension at a rate of 12:1. In other words every £1 of yearly pension you give up creates an extra £12 lump sum. There are still limits on how far you can take this, but generally there’s much more scope than before. Unlike the ‘old system’, choosing the bigger lump sum doesn’t affect long term survivor pensions.
There was no mention in the regulations of taking a tax free lump sum directly from any AVCs you are paying. But if you turn your AVCs into a pension from us*, you could then convert some of this ‘pensions value’ into a lump sum at the rate of 12:1, as described above.
*This involves buying a scheme annuity or transferring the AVC to count as scheme membership. Please ask if you need to know more.
The bigger pension option (by giving up lump sum) has now been dropped.
The old 40 year maximum is dropped. So if you joined at 16, for example, we will be able to base your benefits on 44 years at 60. If this applies to you, and you are currently on a contributions holiday (waiving your contributions) this has to end, and you will start paying in again. The period you hadn’t paid for will now count (but your employer may ask you to pay back the contributions you would have paid).
The 2 main ways of topping up are AVCs and buying extra years. Until now you could only pay up to 15% of your pay in pension benefits, which limited the amount you could pay in to either of these. There were also benefit limits, which limited long serving members in what they could do.
These limits have now gone, although there is a new one off limit of 6 2/3 years when it comes to buying extra years.
The main restriction now on how much any of us can build up in our total pensions pot will be governed by
a new limit, called a lifetime allowance which has been set by the taxman (HM Revenue & Customs or HMRC to give them their proper name). But this is only likely to interest high earners as the allowance for the 2006/2007 tax year is £1.5 million.
To put this in perspective, even if you retire on £40,000 with 40 years’ membership, you will have only used up £860,000 of your lifetime allowance.
If your employer gives you the option of working beyond 65, as well as building up more membership, your benefits will get a percentage enhancement too.
Children’s pensions generally stop at 17, but can carry on later if the child is in full time education/training. Any which come into payment after 5 April 2006 must stop at 23, even if the education/training continues to a later age. If the child is dependent because of disability the pension can carry on for their lifetime.
No change to the method of paying back periods of strike (this was originally in the draft regulations, but was not in the actual regulations).
As long as you are 50 or over, you may be able to carry on working for your employer in some reduced capacity and draw your benefits. This is only possible if your employer agrees to it, and reduces your hours or your grade.
We are currently putting together a Pension Power newsletter, which will go over the points in this bulletin in a little more detail, so watch out for that soon.
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