Members can purchase a reduction in pension age of up to three years. This is limited by a requirement that the reduced pension age is at least 65 years (and so non-integer year reductions are possible). For example, where a member has a Normal Pension Age (NPA) of 66 years and 6 months they will be able to buy a reduction of 1 year or 1 year and 6 months.
The following factors are relevant:
- Table P2EPA1 (Table 717 in the consolidated factors workbook) - Contribution rate in respect of the 1 year early EPA option, payable in addition to standard member and employer contribution rates.
- Table P2EPA2 (Table 718 in the consolidated factors workbook) - Contribution rate in respect of the 2 year early EPA option, payable in addition to standard member and employer contribution rates.
- Table P2EPA3 (Table 719 in the consolidated factors workbook) - Contribution rate in respect of the 3 year early EPA option, payable in addition to standard member and employer contribution rates.
The EPA option contribution rates in the factor tables are expressed as a percentage of the member's pensionable earnings.
EPA contributions are payable by members only, in addition to their standard member contributions. Their employer's contribution rate is unaffected by the EPA option. This section sets out how this additional contribution rate is determined. The contribution rate should be applied to the member's pensionable earnings over the scheme year. Therefore any pensionable pay fluctuations will impact on the amount of the contributions paid for the EPA option.
At the start of each scheme year in which the EPA option is in force (or operation), the member's age (complete years, ignoring part years) is determined and the contribution rate(s) corresponding to their NPA (in years and complete months, ignoring part months) is taken from the relevant EPA option table(s) (1 year, 2 years or 3 years earlier).
Where the minimum age of 65 years applies the reduction being purchased may not be an integer year reduction and it is necessary to interpolate between the rates from two EPA option tables to derive the correct contribution rate.
Note that contribution rates will increase annually with age, all else equal.
This means EPA option contribution rates are effectively determined at each 1 April, but are applied to pensionable earnings over the scheme year, in the same manner as standard member and employer contributions.
The additional member contribution in respect of the EPA option is determined as follows:
Additional member contribution in respect of the EPA option = Pensionable earnings x P2EPA(n) contribution rate (age at 1 April)
Where:
Pensionable earnings is the pensionable earnings as defined in the relevant regulations.
Age at 1 April is the member's age in the complete years (ignoring part years) on 1 April.
P2EPA(n) contribution rate is taken from table P2EPA(n) appropriate for the member's Age at 1 April and NPA (in years and complete months, ignoring part months) and the number of years (n) earlier that the member wishes to retire before NPA.
In order to derive the appropriate contribution rate where a non-integer year reduction is being purchased, it is necessary to interpolate between two contribution rates taken from separate P2EPA(n) tables.
The EPA contribution rate for a non-integer reduction of y years and m months (part months rounded up where required) is derived as:
P2EPA(y,m) = P2EPA(y) + [(m/12) x (P2EPA(y+1) - P2EPA(y))]
Where:
P2EPA(y) is the y years reduction factor taken from table P2EPA(y) appropriate for the member's age and NPA
P2EPA(y+1) is the (y+1) years reduction factor taken from table P2EPA(y+1) appropriate for the member's age and NPA
We have simplified the presentation of the interpolation formula, but the effect of the formula is the same as the old formulation i.e. it gives the same answer, so there is no need to update administration systems.
Where an EPA reduction of between 0 and 1 years is being purchased, it will be necessary to interpolate between the P2EPA1 (contribution rates for a 1 year reduction) table and a notional P2EPA0 (contribution rates for no reduction) table where all entries are set to zero.
The additional member contribution in respect of the EPA option are determined as follows:
Additional member contribution in respect of the EPA option = Pensionable earnings x P2EPA(d) contribution rate (age at 1 April)
Where:
Pensionable earnings is the pensionable earnings as defined in the relavant regulations.
Age at 1 April is the member's age in the complete years (ignoring part years) on 1 April.
P2EPA(d) contribution rate is derived as shown in the previous paragraphs.
