Advice for those considering opting out of pension scheme

We are concerned that, with the introduction in April of the first stage of contribution increases as part of the government's raid on our pensions, some members may be considering opting out of the scheme.

This guide does not represent financial advice, but it explains the potential consequences of opting out.

Firstly, it is important to emphasise that, instead of members leaving their civil service scheme, our strategy is to continue to fight with other public sector unions against what the government is trying to do.

It is also very important to fully consider all of the implications of opting out.

Benefits are defined

Clearly, an occupational pension – particularly one which bases your pension on your salary, known as defined benefit (DB) – provides you with better provision in your retirement than no scheme at all. The classic, premium and nuvos civil service schemes are all DB schemes.

Your civil service scheme is also generally more likely to give you a better pension than a privately purchased one where your contributions would be invested in the stock market and retirement benefits based on the fund's eventual value.

These sorts of schemes, known as defined contribution (DC), are vulnerable to fluctuations in stocks and shares. An example in the civil service is the partnership scheme.

Your occupational pension is a very important part of your overall reward package and should not be abandoned without careful consideration.

While we can not offer financial advice, here are some answers to commonly asked questions.

What are the immediate consequences of opting out and staying in work?

The first change would be that your current pension stops accruing benefits and is deferred, meaning it is frozen.

Also, your national insurance contributions would increase by 1.4%. This is because the principal civil service pension scheme is contracted out of the state pension scheme. When someone stops being a member of a 'contracted out' scheme, they are contracted back into the second state pension scheme, and their NI contributions rise.

You would also lose tax relief on your contributions. This would depend on what you pay now, but for some it may end up costing more than the contribution increase.

Finally, new rules on auto-enrolment into a pension mean that from late 2012 anyone not in an occupational pension scheme will be automatically enrolled into their employer's qualifying scheme.

Some members may opt out of classic and be auto-enrolled into nuvos. Separate advice will be available on this.

Is anyone better off if they opt out?

For the vast majority of people the defined benefit provision of the principal civil service pension scheme is better than any defined contribution provision, in and out of the civil service.

However, for a very small number of people with very long service, aiming to retire in two or three years, and who are now experiencing a pay freeze, it could be more beneficial to opt out or pay contributions into the partnership scheme. We would not advise anyone to do this without taking specific financial advice.

Is opting out and doing nothing an option?

This is very high risk. Longer term opting out, and becoming a member of the second state pension, could be cheaper as contributions rise.

But the second state pension is going to be abolished. The current government proposals suggest that the new flat rate pension for those who retire after 2015 will subsume any second state pension benefits accrued.

Will contributions keep on going up?

Contributions will increase in 2013 and 2014, and the proposed new scheme in 2015 will have an average contribution of 5.6%.

Will there be further changes in the pension age?

Yes, the government is putting in place an auto-review mechanism to increase further the pension ages if statistics show people are expected to live longer than current estimates.

People could be continuing to pay more and more while the age at which they can draw their pension gets further and further away.

This is why we are committed to fighting these changes alongside other unions.

More information is available on our financial planning helpline for members. Call 0870 900 5320, quoting reference PCU/08/AFJA.

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