Building up benefits
DC Core and DC Start are Defined Contribution (DC) pension arrangements.
Here’s how they work:
- You have an individual account in DC Core or DC Start.
- You and Nestlé both make contributions into your individual account.
- Your account is invested.
- At retirement you will have a choice about how to take your benefits.
The amount of benefits you receive depends on how much you contribute (including Nestlé contributions), how your investments perform and your choices at retirement. You take the risk that your investments might not perform well. Equally, if they perform well, you will directly benefit. To help you understand how much pension you could receive, you can use the modeller.
In DC Core you can choose how much you contribute and how to invest your account. For more information see DC Investments.
DC Start has a lower contribution rate and you don’t have a choice about how you invest. In DC Start, your account is invested in a default investment fund, the Lifetime Pathway option, which means that your investment choices are made for you. For more information, see DC Investments.
You cannot increase your contributions to DC Start or pay Additional Voluntary Contributions (AVCs) but you will have the opportunity to change section (ie. move to DC Core) on a quarterly basis if you want to pay more, choose your investments or benefit from higher contributions from Nestlé.
What will I receive?
You can choose how you would like to provide benefits from your DC account. The main options are as follows, and you could take one or a combination of all three.
You can take all or part of your account as cash. 25% of the total value of all your pension benefits can be taken tax free. You’ll have to pay tax on the balance, and you may pay a higher rate of tax if you take it all at once.
You can transfer all of your balance to an external arrangement where you can withdraw variable amounts of income (subject to tax) while your account remains invested (income drawdown).
You can buy an annuity with your account balance, which guarantees an income for a set period of time or for the whole of your retirement. Payments are treated as income so are subject to tax.
Buying a pension
If you are in DC Start or DC Core (or you are in DB Core or DB CorePlus and have a large DC Core AVC account), you may choose to buy a pension (‘annuity’) from an external provider, normally an insurance company. There are different types of annuity. For example, you can choose an annuity that provides: a dependant’s pension on your death; annual increases; a guaranteed payout if you die within the first five years of receiving your pension. If you die in retirement, the benefits your dependants will receive will depend on the choices you make when buying your pension. When choosing your annuity, you should think very carefully about the level of benefits you need to provide after your death as these will affect the amount of your own pension.
Brian chooses to build up pension in DC Core. When he retires at age 65 the value of his account is £100,000. He takes tax-free cash of £25,000 and uses the remaining £75,000 to buy a pension that increases each year with RPI inflation and includes a pension for his wife. This would be paid if Brian died before her. The cost of buying an annuity can vary depending on:
- your age at retirement (i.e. how long the pension has to be paid for);
- your health at retirement; and
- the type of annuity you choose.
Buying an annuity is one of the most important decisions you will make, so it is important that you allow sufficient time to shop around to find the best one for you. This can be quite a lengthy process, which you should begin several months before your retirement date.
To help you choose the annuity, Nestlé provides an annuity selection service. Alternatively, you can find your own annuity on the open market.
In DC Core, you can make changes to your:
- DC Core contributions (including AVCs) on a monthly basis; and
- DC investment choices on a quarterly basis.
Building up a pension is generally a very tax efficient form of saving. Various tax reliefs are provided up-front (on contributions and on the roll-up of investment returns) and the payment of income tax is currently deferred until the point at which benefits are finally taken as pension income.
The law does not restrict the number of pension arrangements you can be a member of at any one time. For example, if you wish, you can contribute to a personal pension at the same time as building up benefits in the Fund. You may generally obtain tax relief on pension contributions (to all schemes) up to the greater of 100% of your earnings or £3,600 a year if you are a non-taxpayer.
However, her Majesty’s Revenue and Customs (HMRC) place two important restrictions on the reliefs provided:
If your benefits exceed either of these allowances, they will be subject to a tax charge. It is your responsibility to inform HMRC that you have exceeded the allowance and to pay any charge arising.
The Annual Allowance (AA) is the maximum amount by which the value of your pension benefits from all sources (excluding State pension) can increase in any one tax year without incurring a tax charge. The AA for most people is £40,000 for 2018/19 (the ‘standard AA’). Please note though:
A lower limit of £4,000 (Money Purchase Annual Allowance or MPAA) may also apply in certain circumstances.
From 6 April 2016 the AA reduced for most people with ‘Adjusted Income’ above £150,000 a year through the introduction of a Tapered Annual Allowance.
If you exceed the AA in a given tax year, you are required to declare the excess and pay the charge as part of your annual income tax return. If we are aware that you have exceeded or are going to exceed the standard AA in a specific tax year, we will send you an AA Pensions Savings Statement with details of your total 'Pension Input Amount' in the Fund once the tax year has ended.
The amount of money you can pay to a defined contribution arrangement like DC Core or DC Start is restricted to £4,000 a year, including any employer contributions where payable, if you:
- Started to take benefits from a defined contribution pension arrangement on or after 6 April 2015; and
- Accessed your monies from that arrangement 'flexibly' under the 'Freedom and choice' options available from 6 April 2015.
By ‘flexibly’, we mean if you:
- took all of your retirement savings from that arrangement in the form of a cash lump sum, or
- are withdrawing monies directly from your retirement savings within that arrangement to provide a regular income (‘flexi-access drawdown’).
The MPAA will not apply to you if you used some or all of your monies to buy an annuity to provide regular income.
You should let Nestlé Pensions know immediately if you think you might be affected by the MPAA.
From 6 April 2016 the Annual Allowance reduced for most people with ‘Adjusted Income’ above £150,000 a year. However, they will not be affected if their ‘Threshold Income’ is £110,000 or less. If they are affected, their Annual Allowance will be reduced by £1 for every £2 of Adjusted Income. Once Adjusted Income is over £210,000, the Annual Allowance is reduced to £10,000. You can find out more about tax on private pension contributions at www.gov.uk/tax-on-your-private-pension/annual-allowance.
This is the period over which the pension benefits you earn in the Fund are measured for the purposes of estimating whether you are likely to exceed or have exceeded your Annual Allowance. The Pension Input Period for the Fund is aligned with the tax year and ends on 5 April every year.
If you decide to make AVCs for the first time or to increase your existing AVC contributions, Nestlé Pensions will check your benefits against the Annual Allowance. Please note that this check will only be based on the benefits you hold in the Fund. If you are currently contributing to another pension arrangement outside of the Fund, you should make Nestlé Pensions aware. If we find that your AVC request is likely to make you exceed your standard Annual Allowance for the year, we will notify you and ask you to confirm if you would like to proceed.
If you exceed your Annual Allowance in a given tax year, you may be able to use ‘Carry Forward’ to receive tax relief and offset or reduce the AA charge that would normally be payable. Carry Forward allows you to make use of any AA that you may not have used during the three previous tax years, providing you were a member of a registered pension scheme. To use Carry Forward, you must make the maximum allowance contribution in the tax year (£40,000 if you have a standard AA) and can then use any unused allowances from the three previous tax years, starting with the tax year three years ago. However, you can’t receive tax relief on contributions in excess of your earnings in a tax year and you only receive higher rate tax relief to the extent that you have paid it.
When you retire, the value of your Fund benefits plus any previous benefits you may have built up elsewhere (excluding State Pension) will be tested against the LTA at that time. If the total value of all your benefits exceeds the LTA at retirement, you will have to pay a tax charge, payable to HM Revenue & Customs. The LTA charge only becomes payable at the point when you put benefits into payment that exceed the LTA. The LTA is £1.03 million (2018/19).
If you think you may be affected by one or more of the issues outlined above and would like to know more, follow this link (password: pensionstax2016) to view 12 bite-sized videos from professional advisers, Lane Clark Peacock (LCP). Each video deals with a different topic and lasts no more than 4 to 10 minutes. Please note that the videos are solely for the use of Nestlé employees and should not be shared with anyone else or posted on social media.
If you have benefits in a previous pension scheme, you may be able to transfer them into the Fund. If you are in DB Core, DB CorePlus or DC Core, any pension transferred into the Fund will go into DC Core and you will be able to choose how it is invested. If you are in DC Start, any pension transferred in will go into DC Start and must be invested in the Lifetime Pathway. Transferring pension benefits can be very complex. You should think carefully and consider taking financial advice before making a transfer into or out of the Fund. If you would like to transfer benefits into the Fund, please contact Nestlé Pensions.
Working part time
If you work part time, your account in DC Core or DC Start builds up in exactly the same way as if you work full time. Your contributions and Nestlé’s contributions are based on a percentage of your Pensionable Earnings and the amount of pension you receive depends on how much you contribute (including Nestlé contributions), how your investments perform and the cost of providing benefits at retirement.
What if i'm absent?
During any period of maternity leave you’ll continue to pay contributions based on the Pensionable Earnings you actually receive. You’ll still be covered for the full range of benefits, including the usual life cover that will be based on your Pay in the 12 months before maternity leave begins. If you make contributions through salary sacrifice, see Salary sacrifice and statutory maternity pay.
In DC Start and DC Core, your account will continue to build up from the contributions you and Nestlé make. It will remain invested and its value will continue to go up and down depending on the performance of your chosen investments.
Long-term sickness and disability scheme
If illness or injury prevents you from working for a prolonged period, you may be entitled to receive a benefit from a long-term sickness scheme operated by Nestlé. The scheme is not part of the Fund. Details are available in the HR policy section of the Nest or on request from HR. Whilst you are receiving benefits from the scheme, your membership of the Fund will normally remain unchanged. This means that you will continue to pay contributions based on the pay you receive and to build up pension. You will be covered for the usual life cover of six times Pensionable Earnings in DC Core or two times in DC Start while you are absent from work. If you are too ill to return to work, the Fund also offers ill-health retirement options.
Other temporary absences
Most absences from work are for a relatively short period and your membership of the Fund would, under normal circumstances, be unaffected. However, if you are away from work for a longer period but continue to be employed by Nestlé you’ll be advised at the time what effect, if any, your absence has on your Fund membership. Please contact Nestlé Pensions for more information at the time. You’ll continue to pay contributions to the Fund on any Pensionable Earnings you receive during your period of absence. Your DC Core or DC Start account will remain invested and its value will continue to go up and down depending on the performance of your chosen investments.
If you get divorced, the court can allocate a proportion of your Fund benefits to your ex-spouse. If you are making financial arrangements in connection with a marital separation or divorce, you should get advice about your pension rights. A lawyer may ask for an up-to-date calculation of the transfer value of your benefits. If you are going through a divorce and require information about your pension, you should contact Nestlé Pensions.