Public Service Pensions - Glossary

Accrual rate

The rate at which benefits build up for members of defined benefit schemes. It is commonly expressed as a fraction of pensionable salary for each year (or part year) of pensionable service completed.

Accrued rights

What you have already earned in your current pension scheme and are entitled to keep.

Career average scheme

A career average scheme is a type of defined benefit scheme that builds up pension benefits each year based on the pensionable salary earned during that year. At the end of each year the slice of benefit earned is increased – typically to reflect increases in prices or earnings.

When a member leaves the scheme, their total pension is calculated by adding up the slices built up (plus increases). It averages the member’s earnings from the whole of their membership period, not just the final years, as happens in a traditional final salary scheme.

Commutation

All schemes allow members to take lump sums up to the maximum allowed by HMRC; under current legislation, these lump sums are tax free. On retirement, members are allowed to commute – or give up – some pension in exchange for lump sum. For example, a commutation rate of 12:1 means that each £1 of pension given up buys £12 of lump sum.

Consumer Price Index (CPI) – see also Retail Price Index (RPI)

These are both measures of inflation. RPI differs from CPI in the basket of goods measured and CPI does not include the cost of mortgage interest payments.

Defined benefit scheme (also known as final salary)

In a final salary scheme the amount of benefits paid at retirement is pre-determined and based on pensionable pay and how long a member has been in the scheme.

Defined contribution scheme (also known as money purchase)

Members of a defined contribution scheme make contributions into an account in their name. If it is a workplace scheme, the employer normally makes a contribution too. Members are given a choice of investment funds in which to invest their account.
Members will not know in advance how much they will have to live on when they retire because this will be determined by a number of factors including:

How much is paid in
How well the member’s chosen investment funds perform
The investment manager’s charges
How much it costs to buy a pension at retirement
The type of pension the member chooses.

Employee contribution

The amount/percentage of your monthly salary you contribute to your pension.

Employer contribution

The amount/percentage of your monthly salary your employer pays into your pension.

Final Salary scheme

In a final salary scheme, your pension is typically worked out as a fraction of your final salary for each year of service. Final salary is generally your last 12 months’ pay or your best 12 months in your last few years of service.

Normal Pension Age

The minimum age specified by the pension scheme at which members are able to retire without pension benefits being reduced for early payment.

Pension benefit

The pension (and lump sum) you receive after your retirement, or your dependents receive after your death.

Pension scheme

An arrangement that provides financial benefits: on retirement having reached a particular age; on death; or in the event of ill-health.

Pension Fund

A pension fund is usually made up of shares and other financial products. Most public service pension schemes (with the exception of the Local Government Pension Schemes) are not backed by a fund; they operate on an unfunded, pay-as-you-go basis with pensions paid from a combination of member and employer contributions and taxpayer funds.

Pension commencement lump sum/tax free cash lump sum – see also commutation

When you retire you can choose to take a proportion of your pension benefits as a tax free cash lump sum.

Pensionable earnings

Pensionable earnings are used by defined benefit schemes to calculate the member’s benefits payable. They do not affect the benefits payable to a member of a defined contribution scheme. Some schemes set member contributions as a percentage of pensionable earnings.

Pensionable service

The time period a pension member is credited as being an active member of the pension scheme which, in a defined benefit scheme, is used in the calculation of that member’s benefits.

Pensioner member

A member of a pension scheme who is receiving pension benefit.

Retail Prices Index (RPI) – see also Consumer Prices Index (CPI)

These are both measures of inflation. RPI differs from CPI in the basket of goods measured and CPI does not include the cost of mortgage interest payments.

State Pension

The Basic State Pension is paid to all workers who have paid full rate National Insurance Contributions for a specific period or have received contribution credits. A State Second Pension (S2P) is also paid to some workers but you will not receive S2P for the period you have been a member of a public service pension scheme. More information about State Pensions can be found at www.direct.gov.uk or by ringing 08456 060 265 (Text phone 0800 731 7339).

State Pension Age

The earliest age you can get your basic State Pension. It is based on your date of birth. You can find out what your own State Pension Age is by visiting www.direct.gov.uk or by ringing 08456 060 265 (Text phone 0800 731 7339).

Tax relief

Pension contributions to registered pension schemes attract tax relief. For members of public service pension schemes, tax relief is provided by calculating tax on pay after deduction of pension contributions. You receive tax relief at your highest marginal rate of tax.

Tiered contribution structure

A method of setting employee contributions so that the percentage of salary contributed depends on what your salary is. The Government has proposed a tiered contribution structure so that lower earners pay a lower contribution rate than higher earners.