Glossary
Commonly Used Pension Terms
A-Day
The appointed day, 6 April 2006, when the new tax regime introduced by the Finance Act 2004 came into force
Accrual rate
The rate at which pension rights build up for each year of pensionable service. The LGPS has an accrual rate of 1/80th of final pay plus 3/80th lump sum
Active member
An employee who is currently paying pension contributions
Annual Allowance
The maximum amount of tax relievable pensions that can be built up in one tax year. This is expressed as a capital value and the amount is £225,000 for 2007/08 tax year (rising to £255,000 by 2010/11).
Additional Voluntary Contributions (AVCs)
Contributions over and above normal contributions which a member elects to pay to an occupational pension scheme.
In the LGPS additional contributions can be paid to buy additional scheme membership or to an AVC provider. Scottish Borders Council Pension Fund has established an AVC arrangement with Standard Life. Contributions are deducted from salary and tax relief is given at source.
Further information is available from the Pensions Team on Increasing Your Pension Benefits
Certificate of Protection of Pension Benefits
Under the LGPS if an active member’s pay has been reduced or the rate at which it may be increased has been restricted through circumstances beyond their control an employer can issue a Certificate of Protection of Pension Benefits. If this happens the final pay will be the best year's pay in the last five years, or the best consecutive three year average in the last thirteen years.
Civil Partnership
A civil partnership is a relationship between two people of the same sex ("civil partners") which is formed when they register
as civil partners of each other.
Concurrent Employment
When a person is employed in more than one job at the same time. This may be with the same or a different employer.
Contracted Out
The LGPS is contracted-out of the State Second Pension Scheme (S2P). This means that, up to State pension age, a member pays reduced National Insurance contributions between the Lower and Upper Earnings Limits (unless they have opted to pay the married woman’s/widow’s reduced rate of National Insurance). Instead, the LGPS must guarantee to pay someone a pension that in general is as high as what would have been earned had they been in the State Earnings Related Pension Scheme / S2P for contracted-out membership on and between 6th April 1978 and 5th April 1997. For membership after 5th April 1997, the LGPS has guaranteed that the benefits it provides will, in general, be no less favourable than those provided under a Reference Scheme prescribed under the Pensions Act 1995.
Contracted Out Money Purchase Scheme (COMP)
An occupational pension scheme, including a scheme providing defined benefits, which is contracted out on a money purchase basis i.e. where the employer pays at least minimum payments which provide the member with a protected rights pension based on the accumulated value of the fund at retirement. The minimum payment is an amount equivalent to the combined employee and employer reductions on NI contributions.
Contracted Out Salary Related Scheme (COSR)
An occupational pension scheme which is contracted out on a salary related basis i.e. by providing benefits which are broadly equivalent to or better than those specified under the reference scheme test. The LGPS is a COSR Scheme.
Prior to 6 April 1997 COSRs contracted out by providing a Guaranteed Minimum Pension.
Deferred Member
A former member of the LGPS who has left the Scheme, but still has benefits in the Scheme and will collect a pension from the LGPS on retirement. Sometimes referred to as a preserved pensioner.
Defined Benefit Scheme
A scheme where benefits are linked through a formula to the members’ earnings or length of pensionable employment.
Eligible Child
In the LGPS an eligible child is:-
• A child of the deceased’s marriage or his adopted child, or
• A child who was wholly or mainly dependent on the deceased at the time of his death.
In addition the child must be:-
• under age 17, or
• 17 or over but continuing in full time education, or undergoing training for a trade, profession or calling, or
• physically or mentally incapacitated.
Final pay
In the LGPS it is the figure used to calculate most pension benefits and is normally the pay in the last year before retirement,
or one of the previous two years' pay if that amount is higher. For a part-time employee, the figure used is normally the
pay that would have been received if a person had worked whole-time. If pay is reduced because of sickness, the final pay
is taken to be the pay that would have been received if a person had been working normally. During any period of maternity,
paternity or adoption leave in respect of which a person pays (or is deemed to have paid) pension contributions, final pay
includes the pay they would have received had they been working normally. See also Certificate of Protection of Benefits.
Final Salary Scheme
A defined benefit scheme where the benefit is related to the amount that the member is earning at the time of retirement, death or leaving pensionable employment and to the period of pensionable service. The LGPS is a final salary scheme.
Free Standing Additional Voluntary Contributions (FSAVCs)
Contributions to a pension contract, separate from an occupational pension scheme, taken out by an active member of that scheme.
Guaranteed Minimum Pension
This is the minimum pension that the LGPS must pay a member in relation to the period that they were a member of the LGPS on and between 6th April 1978 and 5th April 1997. It is calculated by reference to the State Earnings Related Pension Scheme entitlement that they would have earned if they had not been a member of the LGPS during this period.
HM Revenue and Customs (HMRC)
Formed in 2005, following the merger of the Inland Revenue and HM Customs and Excise. Responsible for the tax approval of pension schemes and taxation of contributions and benefits.
Lifetime Allowance (LTA)
Overall maximum capital amount of tax relievable pension savings that any one individual can build up in all pension arrangements. This is £1.6 million in 2007/08 and rising to £1.8 million by 2010/11.
Money Purchase Scheme
A pension scheme which provides member’s benefits by reference to the contributions paid into that scheme.
Occupational Pension Scheme
A scheme established by an employer to provide pensions for employees on leaving pensionable employment. The LGPS is an Occupational Pension Scheme
Pay
In the LGPS it is your normal salary or wages plus any shift allowance, bonuses, contractual overtime, Maternity Pay, Paternity Pay, Adoption Pay, and any other taxable benefit specified in the member's contract as being pensionable. Pay does not include non-contractual overtime, travelling or subsistence allowances, pay in lieu of notice, pay in lieu of loss of holidays, any payment as an inducement not to leave before the payment is made, nor (apart from some historical cases) the monetary value of a car or pay received in lieu of a car.
Pensioner Member
A former employee who is in receipt of a pension from the LGPS.
Personal Pension Scheme
A scheme previously approved by the former Inland Revenue which was not an occupational pension scheme. A personal pension scheme can be a stakeholder pension scheme if the necessary conditions are met.
Policy Statement
This is a statement that your employer and your administering authority must produce, setting out the policies that they have resolved to follow in exercising certain discretions under the LGPS. Other discretions may also be included. You should be notified of the policies contained on the Statement and where changes are made, you should be notified within one month of the change occurring. You may ask your employer and your administering authority for the latest copy of their Policy Statements.
Preserved Benefit
A benefit that a member has already earned from an occupational pension scheme when ceasing to be an active member before normal pension age. Sometimes referred to as a deferred benefit.
Protected Rights
The benefits paid by a pension scheme which is contracted out on a money purchase basis the benefits of which mainly derive from contracted out rebates and associated investment returns.
Protected Member
If you are contributing to the LGPS on 30 November 2006 you may have protected rights regarding early payment of your benefits.
• If you will be age 60 or over by 31 March 2020 and choose to retire before age 65, then, provided you satisfy the 85-year
rule when you start to draw your pension, the benefits you build up to 31 March 2020 will not be reduced.
• If you will be under age 60 by 31 March 2020 and choose to retire before age 65, then, provided you satisfy the 85 year
rule when you start to draw your pension, the benefits you build up to 31 March 2008 will not be reduced.
The Pensions Team can provide you with a quotation and your employer can agree to waive any reduction on compassionate grounds.
Reference Scheme (Test)
The test required in order for a scheme to be able to contract out after 5 April 1997 on a COSR basis. The benefits provided by a COSR scheme must be at least as good as or better than those provided under the reference scheme defined for contracting out purposes.
Retail Price Index (RPI)
This shows the changes in the cost of living. It reflects the movement of prices covering a range of goods and services over time. The amount by which pensions are increased annually is based on movement in the RPI during the 12 months to September.
Rule of 85 (85 Year Rule)
The Rule of 85 is satisfied if your age at the date you draw your benefits and your scheme membership add up to 85 or more
(part years are ignored). If you are part-time, your membership counts towards the rule of 85 at its full calendar length.
If your benefits are deferred the rule is satisfied if your age at the time you draw your benefits and the membership you
would have had in the LGPS add up to 85 or more (part years are ignored).
Section 9 (2B) Rights
Rights to benefits (other than benefits from AVCs) under a COSR which are attributable to contracted out employment after 5 April 1997.
They relate to all benefits payable under the scheme not just the minimum level of benefits required under the reference scheme test.
Stakeholder Pension Scheme
A money purchase scheme that satisfies standards laid down relating to cost, access and terms and is recognised by HMRC as a stakeholder pension scheme.
State Earnings Related Pension Scheme (SERPS) The State Earnings Related Pension Scheme (SERPS) is an earnings-related element of the State Scheme. Benefits are paid by
the Department for Work and Pensions (the old DSS) and are based upon any National Insurance contributions a person paid between
the Lower and Upper Earnings Limits between 6 April 1978 and 5 April 2002 (with a maximum of 20 years counting). Benefits
cannot be paid before State pension age, and have been reduced for people who retire after 1998.
State Pension Age (SPA)
This is currently age 65 for men and 60 for women, but from 2010 will change for women, so that by 2020 SPA will have been equalised at age 65.
There are further proposals to increase SPA from 65 to 68 between 2024and 2046.
Unified Solutions.