Final salary pension scheme

[driver333]

Hi,

I’m starting with southeastern this month and wondered if someone could break down how the final salary pension scheme works exactly.


Thanks

 

[NorthDiver]

Defined benefit schemes work by averaging your (final average penionable pay x number of years worked) / 60 so if your final salary was £50k and you worked for 30 years you would get (£50k x 30) / 60 = £25k / year for life + lump sum of £31250.

The differ from normal workplace pensions in that there is no pot of money, it's instead years worked and is paid for life rather than a pot of money that reduces over time. You can save extra with payroll decuctions and buy extra pension in the form of annuity, but there are other options for the voluntary contributions.

 

[driver333]

Defined benefit schemes work by averaging your (final average penionable pay x number of years worked) / 60 so if your final salary was £50k and you worked for 30 years you would get (£50k x 30) / 60 = £25k / year for life + lump sum of £31250.

The differ from normal workplace pensions in that there is no pot of money, it's instead years worked and is paid for life rather than a pot of money that reduces over time. You can save extra with payroll decuctions and buy extra pension in the form of annuity, but there are other options for the voluntary contributions.

Thank you for the information I appreciate taking the time to respond!

I get it now, but how did you work out the lump sum exactly? Thanks tho this has helped a lot!

 

[NorthDiver]

lump sump is divided by 40 rather than 60 so for 30 years worked at a final average pensionable salary of £50k you get (£50k x 30) / 40 = £37500 * I caculated it wrong before.

 

[ThunderPumpkin]

Hi,

I’m starting with southeastern this month and wondered if someone could break down how the final salary pension scheme works exactly.


Thanks

Once you get into the Defined Benefit scheme, I strongly advise you to set up and start paying into Brass. Pay whatever you can. It’s an AVC on top of paying your normal pension contribution which you can take tax free with your railway pension.

Anything paid into a pension is tax free and attracts tax relief. If you ever max the Brass and can afford to pay more you can then set up AVC Extra too

Having time on your side is key so for younger drivers putting into Brass can make a big difference to their railway pension

 

[Snow1964]

Once you get into the Defined Benefit scheme, I strongly advise you to set up and start paying into Brass. Pay whatever you can. It’s an AVC on top of paying your normal pension contribution which you can take tax free with your railway pension.

Anything paid into a pension is tax free and attracts tax relief. If you ever max the Brass and can afford to pay more you can then set up AVC Extra too

Having time on your side is key so for younger drivers putting into Brass can make a big difference to their railway pension

The contributions are tax free (reduces your taxable pay), so if 40% of your extra salary would have been tax & 2% NI, you only see 58% off your take home net pay, but 100% goes into pension.

One slight correction, When you draw pension, can take upto 25% as tax free lump sum (upto a max tax free of about £260k), all the rest is taxable (probably at 20%, because state pension uses up most of tax free allowance).

Although if have massive pension, might hit 40% tax rate (but if your pension is above about £50k per year, or £1m in a pension fund pot then there are lifetime limits, and tax gets more complicated and is best discussed with IFA or tax or pensions advisor)

Every now and then there are suggestions Government will restrict tax relief on pension contributions, but at moment can avoid 40% tax at contribution time, but likely to pay 20% as a pensioner (so net 20% tax break)

 

[driver333]

Once you get into the Defined Benefit scheme, I strongly advise you to set up and start paying into Brass. Pay whatever you can. It’s an AVC on top of paying your normal pension contribution which you can take tax free with your railway pension.

Anything paid into a pension is tax free and attracts tax relief. If you ever max the Brass and can afford to pay more you can then set up AVC Extra too

Having time on your side is key so for younger drivers putting into Brass can make a big difference to their railway pension

Thanks for the response.

I would 100% be willing to put above and beyond into another pot as I’d like to retire comfortably and at latest 60. I’m only 25 at the moment so will deffinetly take all this on board Thankyou I appreciate the advice!

The contributions are tax free (reduces your taxable pay), so if 40% of your extra salary would have been tax & 2% NI, you only see 58% off your take home net pay, but 100% goes into pension.

One slight correction, When you draw pension, can take upto 25% as tax free lump sum (upto a max tax free of about £260k), all the rest is taxable (probably at 20%, because state pension uses up most of tax free allowance).

Although if have massive pension, might hit 40% tax rate (but if your pension is above about £50k per year, or £1m in a pension fund pot then there are lifetime limits, and tax gets more complicated and is best discussed with IFA or tax or pensions advisor)

Every now and then there are suggestions Government will restrict tax relief on pension contributions, but at moment can avoid 40% tax at contribution time, but likely to pay 20% as a pensioner (so net 20% tax break)

Thank you for your in depth explanation I love it!

So the more I add to my pension voluntarily the less tax I essentially pay? If so then that’s a right result!

 

[Snow1964]

So the more I add to my pension voluntarily the less tax I essentially pay? If so then that’s a right result!

Yes, and if you have children it can be better than that, because there is a child benefit withdrawal taper if your gross pay is between £60k and £80k. If earn under £60k has no effect, but above that the amount going into pension comes off first so lose less child benefit.

A few years ago (when taper was 50-60k), I worked with someone with 4 children and he earned about 62k, the marginal rate (tax plus child benefit withdrawal) was something like 85%, so by sticking in 12k into pension, only lost about 2k net take home. Since taper is now doubled and spread over £20k not going to be 70+% marginal rates

EDIT just remembered, even if children are over 18 and at University because the pension contribution comes off first, it affects the ratio of full maintenance loan and parents contribution, so again can be saving higher overall marginal rate than just 40%, maybe nearer 50%

 

[JT7988]

Yes, and if you have children it can be better than that, because there is a child benefit withdrawal taper if your gross pay is between £60k and £80k. If earn under £60k has no effect, but above that the amount going into pension comes off first so lose less child benefit.

A few years ago (when taper was 50-60k), I worked with someone with 4 children and he earned about 62k, the marginal rate (tax plus child benefit withdrawal) was something like 85%, so by sticking in 12k into pension, only lost about 2k net take home.

This is all great info and knowledge shared thanks very much.

 

[driver333]

Yes, and if you have children it can be better than that, because there is a child benefit withdrawal taper if your gross pay is between £60k and £80k. If earn under £60k has no effect, but above that the amount going into pension comes off first so lose less child benefit.

A few years ago (when taper was 50-60k), I worked with someone with 4 children and he earned about 62k, the marginal rate (tax plus child benefit withdrawal) was something like 85%, so by sticking in 12k into pension, only lost about 2k net take home.

EDIT just remembered, even if children are over 18 and at University because the pension contribution comes off first, it affects the ratio of full maintenance loan and parents contribution, so again can be saving higher overall marginal rate of nearer 50%this is really good

Yes, and if you have children it can be better than that, because there is a child benefit withdrawal taper if your gross pay is between £60k and £80k. If earn under £60k has no effect, but above that the amount going into pension comes off first so lose less child benefit.

A few years ago (when taper was 50-60k), I worked with someone with 4 children and he earned about 62k, the marginal rate (tax plus child benefit withdrawal) was something like 85%, so by sticking in 12k into pension, only lost about 2k net take home.

EDIT just remembered, even if children are over 18 and at University because the pension contribution comes off first, it affects the ratio of full maintenance loan and parents contribution, so again can be saving higher overall marginal rate of nearer 50%

This is great to hear as I have 2 childeren so sounds like I’ve deffinetly made the right switch to the railway!

I’m sure all this would be explained to me or I can look further into it when signed up the pension scheme right?

 

[Belperpete]

Not sure if this is still the case, but at one time if you paid into BRASS, then your employer would match your payments (up to a certain limit). So effectively a way of getting extra money out of your employer!

The general recommendation is to pay as much as you can into a pension as soon as you can, because that way it has longest to accumulate. A pound paid in at 25 gets you much more pension than a pound paid in at 50. But if you are only 25, you might want to consider if there are other things you want to be saving up for, such as a deposit on a house.

 

[driver333]

Not sure if this is still the case, but at one time if you paid into BRASS, then your employer would match your payments (up to a certain limit). So effectively a way of getting extra money out of your employer!

The general recommendation is to pay as much as you can into a pension as soon as you can, because that way it has longest to accumulate. A pound paid in at 25 gets you much more pension than a pound paid in at 50. But if you are only 25, you might want to consider if there are other things you want to be saving up for, such as a deposit on a house.

Okay thanks for the info, it’s definitely something I’ll have to look into them and find out more about.

I will definitely be paying as much as I can. I’m already paying two separate private pensions currently. Unfortunately, I already have my own house so it’s a case of I just want to make sure I can retire at an earlier age!

Thanks

 

[Belperpete]

If you intend to keep paying into these private pensions in addition to the company scheme and BRASS, or already have a significant sum in these two schemes, I would strongly advise you to get some expert financial advice, from an advisor specialising in pensions (once you have full details of your company scheme). There are annual limits on how much can be paid in, but also a lifetime limit - exceeding either of these can have big negative tax implications.

It might also be worth asking if you would be allowed to transfer your previous pensions to either buy extra years service in your new defined benefit pension, or transfer them into your BRASS pot. If either of these options is possible, then you should certainly get specialist advice before proceeding.

Unfortunately, I already have my own house

That is not what I would call unfortunate! But if you have cash to spare, and are paying a mortgage, it might be worth considering the pros and cons of paying more to pay off the mortgage early compared to paying more into BRASS for example. Again, an area where specialist advice is really needed.

 

[Merle Haggard]

Not sure if this is still the case, but at one time if you paid into BRASS, then your employer would match your payments (up to a certain limit). So effectively a way of getting extra money out of your employer!

The general recommendation is to pay as much as you can into a pension as soon as you can, because that way it has longest to accumulate. A pound paid in at 25 gets you much more pension than a pound paid in at 50. But if you are only 25, you might want to consider if there are other things you want to be saving up for, such as a deposit on a house.

My understanding at the time was that the source of the BRASS matching contributions was in reality the excess in the Pension Fund.

//

The downside to BRASS, in my opinion, was that it (maybe still is) had to be invested in one of a choice of funds which didn't seem to havre any objectives regarding returns.

 

[TrainSailing]

It’s worth mentioning you may not be able to join the defined benefit scheme immediately upon joining the company.
At my company you needed 2 years service before you could join the DB scheme. First two years we paid into the defined contribution scheme.

My understanding at the time was that the source of the BRASS matching contributions was in reality the excess in the Pension Fund.

//

The downside to BRASS, in my opinion, was that it (maybe still is) had to be invested in one of a choice of funds which didn't seem to havre any objectives regarding returns.

Yes this is still the case. You have a choice of funds in which you can invest your BRASS funds into. Some very low risk such as deposit funds and bond funds and others more High risk which invest primarily in shares. No projected returns they are just labelled Low/medium/high risk. You can look at the past returns of each to get a rough idea of what you might expect in the future.

 

[12LDA28C]

Not sure if this is still the case, but at one time if you paid into BRASS, then your employer would match your payments (up to a certain limit). So effectively a way of getting extra money out of your employer!

The general recommendation is to pay as much as you can into a pension as soon as you can, because that way it has longest to accumulate. A pound paid in at 25 gets you much more pension than a pound paid in at 50. But if you are only 25, you might want to consider if there are other things you want to be saving up for, such as a deposit on a house.

This is not still the case, it was known as BRASS2 and finished some years ago. BRASS contributions are no longer matched by your employer but of course staff can still make their own BRASS contributions as they see fit, up to the maximum allowed.

Okay thanks for the info, it’s definitely something I’ll have to look into them and find out more about.

I will definitely be paying as much as I can. I’m already paying two separate private pensions currently. Unfortunately, I already have my own house so it’s a case of I just want to make sure I can retire at an earlier age!

Thanks

Beware if you want to retire at an earlier age - you'll see your pension reduce quite quickly the earlier before due retirement age you take it, on a sliding percentage scale.

 

[muz379]

Also worth bearing in mind if you do set up contributions to Brass that you can also choose different fund types for your money to be invested in , or you can choose one of the RPS managed funds but if you are doing this its important that you give as accurate as possible a Target Retirement age . Personally most people I know manage their own funds and select a ratio of higher and lower risked investments .

The Railway pension scheme website is pretty good for that kind of thing .

 

[aleph_0]

Firstly, would emphasise the importance of doing your own research here, whether you pay additional contributions is a judgement call based on your current life situation, retirement plan etc. RailPen should have a document describing the exact terms for your 'section' of the scheme.

One slight correction, When you draw pension, can take upto 25% as tax free lump sum (upto a max tax free of about £260k), all the rest is taxable (probably at 20%, because state pension uses up most of tax free allowance).

Wanted to throw a clarification over this correction. BRASS and the main scheme are considered one for this purpose. As long as BRASS works out <25% of your value, you are required to take it *all* out as cash (tax-free). If the value is above this, the BRASS funds by you additional entitlement in the main scheme (the terms of this are pretty favourable).

AVC Extra is a normal AVC style scheme.

Downside is you have choice of BRASS options, but they are somewhat limited.

So it depends what the OPs long term plans are, but its worth strongly considering the merits of BRASS.

https://cdn3.railpen.com/mp-sitefinity-prod/docs/default-source/rayn/guides-for-active-(contributing)-members/a-guide-for-brass-members.pdf?sfvrsn=18a5265a_23

 

[Ken X]

If you intend to keep paying into these private pensions in addition to the company scheme and BRASS, or already have a significant sum in these two schemes, I would strongly advise you to get some expert financial advice, from an advisor specialising in pensions (once you have full details of your company scheme). There are annual limits on how much can be paid in, but also a lifetime limit - exceeding either of these can have big negative tax implications.

It might also be worth asking if you would be allowed to transfer your previous pensions to either buy extra years service in your new defined benefit pension, or transfer them into your BRASS pot. If either of these options is possible, then you should certainly get specialist advice before proceeding.


if you have cash to spare, and are paying a mortgage, it might be worth considering the pros and cons of paying more to pay off the mortgage early compared to paying more into BRASS for example. Again, an area where specialist advice is really needed.

I would second the advice given above. A good independent financial adviser is well worth consulting. They will look at your whole financial position including your aims and ambitions before advising how to best achieve these. It should cover everything, not just pensions.

Mine worked his magic and enabled me to retire at 56. Mortgage was paid long before. Worth every penny of his commission.

 

[whoosh]

Hi,

I’m starting with southeastern this month and wondered if someone could break down how the final salary pension scheme works exactly.


Thanks

Hello, and welcome to the railway!

Well, the first thing to point out is that despite what the job adverts for railway recruitment say, it is NOT a 'Final Salary Pension'.

Before 2016 it was, and if for example you started as Trainee Driver, became a Qualified Driver, got a bumper pay deal one year for changing Terms & Conditions to be more productive, got promoted to Driver Manager, and then later became Head of Drivers, your pension would be based on your final salary as Head of Drivers - or your final salary however far along that career path you got.

That is no longer the case.

Now, each promotion, or payrise above RPI+2.5%, triggers a 'pension restructuring premium' which applies from then until you retire - not for the whole of your service as previously.

All the years and days of 'All service pensionable pay', and the 'pension restructuring premiums' are added up and averaged out.

Defined benefit schemes work by averaging your (final average penionable pay x number of years worked) / 60 so if your final salary was £50k and you worked for 30 years you would get (£50k x 30) / 60 = £25k / year for life + lump sum of £31250.

Also, it's never been quite as straightforward or as generous as divide your pay by 60 and times by the number of years upto 40 and that's your pension - as the state pension has always been a factor in the calculation.

It is now (with the word average included):

Final average salary minus 1.5 times basic state pension
Divided by 60

Times number of years service upto 40.


 BRASS
You can exchange some of your pension for lump sum, or exchange some of your lump sum for pension. For the latter, it is a good conversion figure compared to other pension schemes of trading £12 of lump sum to get £1 of yearly pension (other schemes are £20 for £1).
This means that if you save a lot into BRASS, you can have a large lump sum with your BRASS funds, and then convert the lump sum part of your normal railway pension benefits into yearly pension at that favourable rate.


If you are starting as a Trainee Driver and decide to make contributions to BRASS, then set it up when you start, and then when you pass out as a Qualified Driver, up the payments to maximum then - if you do it then, you'll never get paid that money (after tax) into your bank account, so it won't ever be money you'll be banking on day to day, and you'll never miss it or feel you're 'giving it up' by contributing to your BRASS fund instead.


Whilst not as good as it once was, it's still a very good scheme, and one could argue that it's fairer as no manager or head of drivers is going walk off with a pension based on 40 years of their top salary when they didn't have that many years in the role.

You will get a 'Guide for Members' sent to you when you join the scheme, and online will be able to estimate how much lump sum and pension you will get using a planning tool, where you can alter your retirement age and your BRASS contributions. This is an estimate, but will give you an idea of how to plan ahead. You also get an estimate every year.

IMPORTANT:
Make sure you fill out a Nomination form for who the pension benefits go to if you die.
There is a 'death in service' (whilst you are employed, you don't actually have to be at work at the time!) benefit, widow's pension, dependants pension, as well as the BRASS funds you could accumulate.

Welcome to the railway again, and I hope you enjoy your new career.

 

[7819Hinton]

Hello, and welcome to the railway!

Well, the first thing to point out is that despite what the job adverts for railway recruitment say, it is NOT a 'Final Salary Pension'.

Before 2016 it was, and if for example you started as Trainee Driver, became a Qualified Driver, got a bumper pay deal one year for changing Terms & Conditions to be more productive, got promoted to Driver Manager, and then later became Head of Drivers, your pension would be based on your final salary as Head of Drivers - or your final salary however far along that career path you got.

That is no longer the case.

Now, each promotion, or payrise above RPI+2.5%, triggers a 'pension restructuring premium' which applies from then until you retire - not for the whole of your service as previously.

All the years and days of 'All service pensionable pay', and the 'pension restructuring premiums' are added up and averaged out.





Also, it's never been quite as straightforward or as generous as divide your pay by 60 and times by the number of years upto 40 and that's your pension - as the state pension has always been a factor in the calculation.

It is now (with the word average included):

Final average salary minus 1.5 times basic state pension
Divided by 60

Times number of years service upto 40.


 BRASS
You can exchange some of your pension for lump sum, or exchange some of your lump sum for pension. For the latter, it is a good conversion figure compared to other pension schemes of trading £12 of lump sum to get £1 of yearly pension (other schemes are £20 for £1).
This means that if you save a lot into BRASS, you can have a large lump sum with your BRASS funds, and then convert the lump sum part of your normal railway pension benefits into yearly pension at that favourable rate.


If you are starting as a Trainee Driver and decide to make contributions to BRASS, then set it up when you start, and then when you pass out as a Qualified Driver, up the payments to maximum then - if you do it then, you'll never get paid that money (after tax) into your bank account, so it won't ever be money you'll be banking on day to day, and you'll never miss it or feel you're 'giving it up' by contributing to your BRASS fund instead.


Whilst not as good as it once was, it's still a very good scheme, and one could argue that it's fairer as no manager or head of drivers is going walk off with a pension based on 40 years of their top salary when they didn't have that many years in the role.

You will get a 'Guide for Members' sent to you when you join the scheme, and online will be able to estimate how much lump sum and pension you will get using a planning tool, where you can alter your retirement age and your BRASS contributions. This is an estimate, but will give you an idea of how to plan ahead. You also get an estimate every year.

IMPORTANT:
Make sure you fill out a Nomination form for who the pension benefits go to if you die.
There is a 'death in service' (whilst you are employed, you don't actually have to be at work at the time!) benefit, widow's pension, dependants pension, as well as the BRASS funds you could accumulate.

Welcome to the railway again, and I hope you enjoy your new

Great post. Probably the most accurate description i’ve read on the subject.

 

[Dai Corner]

I would second the advice given above. A good independent financial adviser is well worth consulting. They will look at your whole financial position including your aims and ambitions before advising how to best achieve these. It should cover everything, not just pensions.

Mine worked his magic and enabled me to retire at 56. Mortgage was paid long before. Worth every penny of his commission.

I'd third it, being in a similar position to Ken X. I didn't work for the railways but was in two very good pension schemes.

One thing to remember is that money in a pension fund cannot normally be accessed until age 55 (due to rise to 57 in April 2028, and may well rise again in the future).

 

[father_jack]

I would second the advice given above. A good independent financial adviser is well worth consulting. They will look at your whole financial position including your aims and ambitions before advising how to best achieve these. It should cover everything, not just pensions.

Mine worked his magic and enabled me to retire at 56. Mortgage was paid long before. Worth every penny of his commission.

Hi. Can you private message the name of that company who you dealt with please. Been to two advisors and neither had any kind of grasp of railway pensions.

 

[driver333]

Hello, and welcome to the railway!

Well, the first thing to point out is that despite what the job adverts for railway recruitment say, it is NOT a 'Final Salary Pension'.

Before 2016 it was, and if for example you started as Trainee Driver, became a Qualified Driver, got a bumper pay deal one year for changing Terms & Conditions to be more productive, got promoted to Driver Manager, and then later became Head of Drivers, your pension would be based on your final salary as Head of Drivers - or your final salary however far along that career path you got.

That is no longer the case.

Now, each promotion, or payrise above RPI+2.5%, triggers a 'pension restructuring premium' which applies from then until you retire - not for the whole of your service as previously.

All the years and days of 'All service pensionable pay', and the 'pension restructuring premiums' are added up and averaged out.





Also, it's never been quite as straightforward or as generous as divide your pay by 60 and times by the number of years upto 40 and that's your pension - as the state pension has always been a factor in the calculation.

It is now (with the word average included):

Final average salary minus 1.5 times basic state pension
Divided by 60

Times number of years service upto 40.


 BRASS
You can exchange some of your pension for lump sum, or exchange some of your lump sum for pension. For the latter, it is a good conversion figure compared to other pension schemes of trading £12 of lump sum to get £1 of yearly pension (other schemes are £20 for £1).
This means that if you save a lot into BRASS, you can have a large lump sum with your BRASS funds, and then convert the lump sum part of your normal railway pension benefits into yearly pension at that favourable rate.


If you are starting as a Trainee Driver and decide to make contributions to BRASS, then set it up when you start, and then when you pass out as a Qualified Driver, up the payments to maximum then - if you do it then, you'll never get paid that money (after tax) into your bank account, so it won't ever be money you'll be banking on day to day, and you'll never miss it or feel you're 'giving it up' by contributing to your BRASS fund instead.


Whilst not as good as it once was, it's still a very good scheme, and one could argue that it's fairer as no manager or head of drivers is going walk off with a pension based on 40 years of their top salary when they didn't have that many years in the role.

You will get a 'Guide for Members' sent to you when you join the scheme, and online will be able to estimate how much lump sum and pension you will get using a planning tool, where you can alter your retirement age and your BRASS contributions. This is an estimate, but will give you an idea of how to plan ahead. You also get an estimate every year.

IMPORTANT:
Make sure you fill out a Nomination form for who the pension benefits go to if you die.
There is a 'death in service' (whilst you are employed, you don't actually have to be at work at the time!) benefit, widow's pension, dependants pension, as well as the BRASS funds you could accumulate.

Welcome to the railway again, and I hope you enjoy your new career.

Wow, what an incredibly informative reply, honestly thank you so much for taking the time to give such a detailed response. I’ve taken it all in and it all sounds great to me, I like the fact there is a tool you can use to alter and see the difference it’ll make. I can’t wait to start! Just got to get this medical done and then full steam ahead! Thanks