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High/Low Pension Option
The high/low pension option aims to help even out retirement income by taking account of the expectation that a member will be in receipt of the full single person’s basic state pension by the Scheme’s Normal Pension Age of 65. It is intended for those who would like more Scheme pension before their state pension starts, in return for a reduction in their Scheme pension from age 65.
A retiring employee Member (other than on Incapacity grounds) can usually choose to receive an extra amount of Scheme pension under the high/low pension option. The amount depends on the Member’s age and is added to the Scheme pension at early retirement. Normal annual increases are applied to the high/low pension, until the Member reaches age 65. When the Member reaches age 65, the amount of the Scheme’s Lower Earnings Limit at that time (currently £4,940 for Scheme Year 2012/13) is deducted from the pension in payment.
In the example below, it is assumed that the Member retires from active service at age 55, and opts for the high/low pension option, has a state pension age of 65, and is entitled to a full basic state pension:
|
|
From retirement (say, age 55) to age 64 |
From age 65 onwards |
|
Without the high/low pension option: |
|
|
|
BSPS pension |
£10,000 |
£10,000 |
|
Basic state pension |
£0 |
£5,587 |
|
Total pension |
£10,000 |
£15,587 |
|
|
|
|
|
With the high/low pension option: |
|
|
|
BSPS pension |
£10,000 |
£10,000 |
|
Add high/low |
£2,813 |
£2,813 |
|
Less Scheme’s Lower Earnings Limit |
|
(£4,940) |
|
Adjusted BSPS pension |
£12,813 |
£7,873 |
|
Basic state pension |
£0 |
£5,587 |
|
Total pension |
£12,813 |
£13,460 |
No pension increases have been included in this example. In practice, both the Scheme pension and basic state pension would be expected to increase each year in line with inflation.
Elections for this option must be made in writing before retirement. Elections are irrevocable and whether a member should take the option is for them to judge. Each individual’s circumstances and priorities are different and there are advantages and disadvantages in taking the option. In particular, Members should bear in mind:
- Payment of the high/low pension counts towards the Annual Allowance (AA) being used-up at retirement; and
- If your State Pension Age is over age 65 you could be left with a pension shortfall between age 65, when your Scheme pension is reduced under the high/low pension option, and when your state pension comes into payment.
The amounts of the additional pension and the deduction are calculated by the Scheme Actuary with the intention of operating across all members on a “cost neutral” basis. This means the Scheme should make neither a gain nor a loss by making the option available. You may wish to take Independent Financial Advice before deciding whether to elect for this option.