How your benefits build up
The Cash Balance scheme guarantees a minimum cash sum payable at your normal retirement age (which is age 65). It also targets, but does not guarantee, discretionary increases each year that your funds remain in the Cash Balance scheme (whether as an employee member or deferred member).
Your contribution towards your benefits is 6% of your pensionable pay.
You will build up a cash lump sum at a rate set by Royal Mail. Currently, the rate is 19.6% of each year’s pensionable pay with further discretionary increases to the lump sum being targeted each year.
Royal Mail (not the Trustee) sets the policy regarding discretionary increases and may revise it from time. The policy is currently to target annual increases in excess of inflation as measured by the Consumer Prices Index.
We’ll show you how your Cash Balance fund is building up, in your annual Benefit Illustration.
How your benefits get paid
Under current legislation, up to 25% (a quarter) of your Cash Balance benefits can be taken as a tax-free cash sum. The balance can be paid to you as taxable cash or can be transferred to an annuity (in your name) or transferred to a drawdown arrangement. Those funds would then be used to pay you a regular income.
The Government wants to encourage people to save for the future. So it gives you tax relief on the money you save in a pension as long as you don’t exceed
- the Annual Allowance which allows tax relief on a certain amount of money each year (currently £40,000)
- the Lifetime Allowance which relates to amount of money across your whole lifetime (currently just over £1 million).
What’s the Annual Allowance?
The Government looks at a period of time called the Pension Input Period, to see how much the value of your Cash Balance benefit has increased (in excess of inflation as measured by the Consumer Prices Index).
If you paid Additional Voluntary Contributions during the Pension Input Period, these also count towards your Annual Allowance.
If you are thinking about the Annual Allowance, it’s helpful to know about:
- Managing peaks: If you exceed the Annual Allowance in any tax year, you don’t necessarily have to miss out on tax relief. You can carry forward any unused Annual Allowance from the previous three years
- The Pension Input Period: This is the period of time the Government used to measure your Annual Allowance. Different members may have different Pension Input Periods. Please get in touch if you want to know more.
- Exemptions: Benefits you build up are normally subject to the Annual Allowance – except if you die or you retire in serious ill health.
What’s the Lifetime Allowance?
The Lifetime Allowance is what your pension benefits – from all of your different pension schemes – can be worth before you have to pay any tax charges. The Lifetime Allowance is currently just over £1 million and therefore does not affect the majority of members.