Workplace Pension schemes
Defined benefit: Career average revalued earnings (CARE) schemes
Career average revalued earnings (CARE) schemes are a type of defined benefit pension scheme that are offered by employers. The benefits at retirement are based on your earnings and length of membership of the scheme.
How CARE schemes work
CARE schemes run in a similar way to defined benefit final salary schemes, but with differences in the way that your ‘pensionable earnings’ are calculated.
A CARE scheme is typically run, on behalf of the employer by the Board of Trustees, who are responsible for all aspects of the scheme. This includes paying out benefits to retired members. Daily management of the scheme is typically done by the Scheme Administrator, who reports to the Board of Trustees.
A CARE scheme normally offers you an income in retirement based on a proportion of your average earnings, after adjusting these for inflation, during the whole period of membership of the scheme.
The pension scheme’s rules will define what is meant by ‘earnings’. For example, some schemes don’t count additional earnings, such as overtime, commission, bonuses or the value of benefits in kind (other benefits that are not paid as cash).
The scheme may also only count a proportion of your weekly or monthly wage or salary. The amount of your earnings that are used towards calculating your retirement benefits is often called ‘pensionable earnings’.
As a member, you build up a fraction (the accrual rate) of your career average revalued earnings for each year of membership of the scheme. Typically, this fraction may be 1/60th or 1/80th of your career average revalued earnings (for each year of scheme membership), although other fractions may be used, as specified in the scheme rules, so you should check these.
Taking your benefits
When you decide to retire and take your pension benefits from the scheme, your ‘career average revalued earnings’ are calculated. This is done by increasing each year’s pensionable earnings in line with inflation, over the period from the year that earnings were paid, to the date of retirement.
Each year’s revalued (increased by inflation) earnings are added together to give the total revalued earnings during the whole period of membership of the scheme. The total revalued earnings are then divided by the number of years of membership in the scheme, to give the career average revalued earnings figure.
See the example below for further detail.
Amanda is about to retire. She has been a member of her employer’s CARE scheme for 20 years. The scheme’s accrual rate for building up pension is 1/80th for each year of membership. Amanda’s total revalued earnings are £420,000 over her period of membership of the scheme. After dividing her total revalued earnings by the 20 years that she was a scheme member, Amanda’s career average revalued earnings are £21,000 per year.
This means that Amanda can receive a pension of £5,250 per year (20/80 x £21,000) from the scheme.
Tax- free cash lump sum and CARE schemes
As well as providing you with a pension income at retirement, some schemes also provide a tax-free cash lump sum.
For example, some schemes with an accrual rate for pension of 1/80th of career average revalued earnings for each year of scheme membership, may also provide a tax-free cash sum of, say, 3/80ths of career average revalued earnings for each year of scheme membership.
Other schemes may offer you the option of taking a tax-free cash lump sum on retirement, in return for receiving a reduced pension. The scheme should specify:
- the maximum amount of tax-free cash lump sum that can be taken; and
- the amount of tax-free cash lump sum that will be paid for each £1 per year of pension that is given up. (This is often called the cash commutation factor.)
See the example below for further detail.
Amanda, in Example 1, has been told by her Scheme Administrator that she is also entitled to receive a tax-free cash lump sum of 3/80ths of her career average revalued earnings for each year of her membership of the scheme.
Based on Amanda’s career average revalued earnings of £21,000 per year and her period of membership of the scheme of 20 years, Amanda is also entitled to receive a tax-free cash lump sum of £15,750 (60/80 x £21,000) from the scheme.
How can I find out what benefits my CARE scheme offers?
You would normally have been given a booklet when you joined the scheme. This booklet would give you details of the benefits. If you no longer have the booklet, contact the Scheme Administrator and ask for details.
I have lost the contact details for the Scheme Administrator, what can I do?
If you have lost track of your pension details, the Pensions Tracing Service can help you to find the current contact details. This is a free service and more details are available here.
Where can I find out more?
If you need more information, please contact us. A pension specialist from our team will be happy to help with whatever pensions-related question you have. Our help is always free.