Difference between the old and new pension scheme
The old pension scheme, also known as the Final Salary Pension Scheme, and the new pension scheme, also known as the Career Average Revalued Earnings (CARE) scheme, are two different types of pension schemes offered by employers in the UK. Here are the main differences between the two:
Old Pension Scheme (Final Salary Scheme):
- Benefits: The pension benefit is based on the employee's final salary at retirement, multiplied by a factor (usually 1/60th or 1/80th) to calculate the annual pension.
- Accrual rate: The pension benefit accrues at a fixed rate, usually 1/60th or 1/80th of final salary per year of service.
- Retirement age: The normal retirement age is usually 65, but can vary depending on the scheme rules.
- Indexation: The pension benefit is usually increased annually by a percentage (e.g., 3-5%) to keep pace with inflation.
- Death-in-service benefit: A lump sum or pension is paid to the beneficiary in the event of the member's death while still employed or in retirement.
New Pension Scheme (CARE Scheme):
- Benefits: The pension benefit is based on the average salary earned throughout the member's career, multiplied by a factor (usually 1/60th or 1/80th) to calculate the annual pension.
- Accrual rate: The pension benefit accrues at a rate based on the member's average salary, usually 1/60th or 1/80th of average salary per year of service.
- Retirement age: The normal retirement age is usually 65, but can vary depending on the scheme rules.
- Indexation: The pension benefit is usually increased annually by a percentage (e.g., 3-5%) to keep pace with inflation.
- Death-in-service benefit: A lump sum or pension is paid to the beneficiary in the event of the member's death while still employed or in retirement.
Key differences:
- Accrual rate: The old scheme has a fixed accrual rate, while the new scheme has a variable accrual rate based on average salary.
- Benefits: The old scheme provides a higher pension benefit for longer-serving employees, while the new scheme provides a more consistent pension benefit for all employees.
- Indexation: Both schemes have indexation provisions, but the new scheme may have a more complex indexation formula.
- Retirement age: Both schemes have a normal retirement age of 65, but some employers may offer earlier retirement options.
It's essential to note that the old pension scheme is generally considered more generous than the new scheme, as it provides a higher pension benefit for longer-serving employees. However, the new scheme is designed to be more sustainable and equitable for all employees, regardless of their length of service.