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URN No: 06/540/A1
For the first part of this guidance please go to:
Offsetting pensions against redundancy payments
Please note that pensions may not be offset against statutory redundancy payments made to employees dismissed on or after 1 October 2006.
Time off for job hunting or to arrange training when facing redundancy
Offsetting pensions against redundancy payments
Under the Redundancy Payments Pensions Regulations 1965, employers may offset pensions or lump sums which are paid immediately on redundancy or within a short time after and which satisfy the conditions described in this document. According to the amount of the pension or lump sum payable, the statutory redundancy payment due may be either reduced or extinguished completely. Employers are not compelled to offset pensions or lump sums in this way, or to apply the maximum offset.
Please note that pensions may not be offset against statutory redundancy payments made to employees dismissed on or after 1 October 2006.
General rules for offsetting
Are there any particular benefits which may not be offset?
Yes. A payment may not be offset if:
Apart from the benefits mentioned above any lump sum or pension payable under a scheme or arrangement of which the object, or one of the objects, is to provide retirement benefits may be offset up to the specified limits - see How much offset is allowed?
In the case of a continuing pension the Secretary of State must be satisfied that it is payable for life and may not be terminated or suspended except in certain prescribed circumstances (see below) and that adequate provision has been made to secure payment of the benefits in full. Both contributory and non-contributory schemes are included.
The scheme or arrangement under which continuing pension is paid must also satisfy one of the following conditions:
The circumstances in which a pension may be terminated or suspended (but may still be offset against a redundancy payment) are where the scheme or arrangement provides for termination or suspension on assignment, charge, commutation or other alienation; in case of mental disorder or inability to act, imprisonment or detention in legal custody; upon resumption of employment with the same employment; or under certain provisions relating to statutory superannuation.
How long after redundancy may a pension begin to be paid and still qualify for offset?
This depends on the number of week's pay due by way of redundancy payment (see Pension or lump sum payable after an interval) but the longest possible period is 90 weeks.
What must an employer do who wishes to offset?
The employer must give the employee notice in writing of the intention to offset. This must contain a written statement showing the amount of any reduction in respect of pension and how the reduction has been calculated. Where pension offset is sufficient to eliminate the redundancy payment completely, the employer must still state the amount to which the employee would have been entitled and the way in which the right to it has been eliminated through pension offset.
The scheme under which the benefit is paid should satisfy the conditions outlined above -see What benefits may be offset? unless:
The redundancy payment may not be reduced by more than the amount obtained by multiplying the payment calculated before pension offset by the fraction 'annual value' of the pension and lump sum divided by one-third of the employee's 'annual pay'. This amount can be expressed as:
R x P = R x P x 3
A x ? A
Where R is the redundancy payment (adjusted on account of age, if appropriate) calculated before offset; A is the "annual pay" of the employee calculated by multiplying by 52 the week's pay (calculated as described in What a week's pay means), P is the 'annual value' of the pension (that is, the amount due in the first year of payment ignoring any changes in the level of pension in that time or the possibility that the pensioner may not survive so long) plus, where payable, the 'annual value' of the lump sum (that is, the lump sum divided by 10).
A and P should be rounded down to the nearest whole pound. Where both pension and lump sum are payable, rounding down should be done after adding together their annual values.
Thus the redundancy payment may be entirely eliminated if the 'annual value' of the pension and/or lump sum is equal to one third or more of the employee's 'annual pay'. Where the annual value of the pension or lump sum is less than one-third of annual pay, the redundancy payment may be reduced proportionately, that is, if the pension is one-sixth of pay, the redundancy payment may be reduced by one half; if it is one-twelfth, the redundancy payment may be reduced by one quarter and so on.
Pension and/or lump sum payable within a week of redundancy
The following formula will give the reduced amount of redundancy pay due (that is, the full redundancy pay less the appropriate amount as defined above) in all cases where the pension and/or lump sum is payable within a week of termination:
R - (R x P x 3)
A
Where R, A and P are as defined above. A specimen calculation is given in Appendix 1, Example 1.
Pension or lump sum payable after an interval
The amount of redundancy payment in these cases is obtained as follows:
R - (R x P x 3)
A
The amount of redundancy payment due, calculated as above, is to be subject to the overall limit of the employee's original entitlement to a redundancy payment as calculated before taking any pension and lump sum into account.
The effect of this formula is that no offset may be made if the number of weeks by which the start of the pension or payment of the lump sum is deferred equals or exceeds three times the number of 'week's pay' due by way of redundancy payment. Since the maximum statutory redundancy payment is 30 week's pay, this means that the maximum period of time between the date of redundancy and the time the pension begins or the lump sum is paid (if any offset is to be allowed) will be 90 weeks (3 x 30).
A specimen calculation of the kind described above is given in Appendix 1 Example 2
Are superannuation benefits to be offset before or after tax?
Before tax; that is, it is the gross amount of the benefits which should be taken into account for purposes of calculating offset.
By reference to the employment tribunals which deal with all disputes about redundancy pay or, through an Acas conciliator.
What if the employee has pensionable service with more than one employer?
The pension which may be offset is limited to that which accrues from the employee's last period of continuous employment. See Continuous employment and a week's pay: rules for calculation.
When employment with more than one employer is reckoned as continuous, the pension or pensions relating to the whole period of the continuous employment may be taken into account for calculating offset.
When any part of the pension or pensions accrues from previous employment with another employer or from employment by a group of employers operating a pension scheme common to a particular industry and any earlier employment is not reckoned as continuous with the last, the pension(s) should be apportioned between employers; and only that portion which relates to the employment qualifying for the redundancy payment may be taken into account for offset. The employer's accountant or administrator of the pension scheme will usually be able to advise on the method of apportioning. Examples of how this might be done in different types of schemes are given in Appendix 2.
Yes. The test is that the pension should be payable by reference to employment with that employer and the method of payment does not affect this.
Can a pension for widows or dependants be offset?
Only pension for the employee can be offset. If part of the pension is payable to anyone other than the employee (except where it is so payable because of a voluntary allocation by the employee), that part cannot be offset. But if the employee makes or has made a voluntary allocation of part of the pension for the benefit, for example, of a widow, the amount which can be offset is the total amount of the pension before the allocation.
If the employee has a right to take a pension immediately (if desired), that amount of pension may be taken into account for calculating offset, even though the employee may in fact choose to take an equivalent "frozen" pension instead.
Time off for job hunting or to arrange training when facing redundancy
An employee who is given notice of dismissal because of redundancy is entitled to reasonable time off with pay during working hours to look for another job or make arrangements for training for future employment. The time off must be allowed during the period of notice.
Employees are entitled to time off in this way only if they have had two years' continuous employment with their employer on the date their notice expires or the date when the statutory minimum period of notice due under the legislation expires, whichever is the later.
For an explanation of the meaning of "continuous employment", or in case of difficulty in deciding on the length of continuous employment, see Continuous employment and a week's pay: rules for calculation.
If the business or part of the business has been transferred from one employer to another, see A guide to the 2006 TUPE Regulations.
People not covered by the provisions
Certain workers are not covered, either because they are not employees, or because they are already covered by other arrangements, or because their terms and conditions of employment make the application of the provisions inappropriate. These are:
An employer should allow the employee reasonable time off. The legislation does not specify what is reasonable since this will vary with the differing circumstances of employers and employees. Some employees may need only to attend one interview or make one visit. Others may have to make a number of visits, some of which may involve travelling some distance.
Employees should be paid the appropriate hourly rate for the period of absence from work but an employer does not have to pay more than two-fifths of a week's pay, regardless of the length of time off allowed. This is arrived at by dividing the amount of a week's pay by the number of normal working hours in the week. The method of calculation is similar to that used for computing redundancy payments. The week's pay is calculated by reference to a date known as 'the calculation date'. In computing pay for time off to look for work or arrange training, this date is the one on which notice was given by the employer.
An employer does not have to pay more than once for the same period. Any payment already made under an employee's contract of employment for a period of time off to look for work will be offset against the employer's liability under the provisions. If payment has been made by an employer for time off to look for work under the provisions, this will reduce any liability under the contract of employment.
Employees who are unreasonably refused time off by their employers have a right to be paid the amount they would have been entitled to receive had they been allowed time off, subject to a limit of two-fifths of a week's pay. An employee can complain to an employment tribunal in cases where the employer refuses either to allow time off or to make the appropriate payment. A complaint should be made within three months of the date on which time off should have been allowed, but employment tribunals have discretion to accept complaints made after the three-month period if they consider that it was not reasonably practicable for the employee to make the complaint earlier.
An employee who wishes to complain to a tribunal should obtain a form IT1 or IT1 (Scot) in Scotland which is included in the explanatory leaflet How to apply to an Employment Tribunal, available from any Jobcentre Plus office and Citizens Advice Bureau.
The tribunal will send a copy of the completed form to the Advisory, Conciliation and Arbitration Service (Acas) who may attempt to get both sides to settle the complaint without the need for a tribunal hearing.
The services of an Acas conciliator will also be available in the absence of a formal complaint on form IT1, at the request of the employee or employer. In such a case the employee or employer can get in touch with a conciliator through an office of Acas. Information given to conciliators in the course of their duties will be treated as confidential. It may not be divulged to the tribunal without the consent of the person who gave it.
If no settlement is reached the tribunal will hear the case. Tribunal hearings are conducted informally. Both parties should attend and may claim travelling and other expenses, including loss of earnings. The parties can be represented by anyone they wish, including a representative of a trade union or employer's association. It is not necessary to engage a solicitor, but there is no objection to either party doing so if legal representation is preferred. Tribunal proceedings are conducted in such a way as to make it easy for individuals to conduct their own case if they wish.
Where the tribunal is satisfied that a complaint is justified, it will order the employer to pay the employee the money, or the balance of the money, due.
Appendix 1: Examples of calculating offset
Example 1
An employee aged 62 has 20 years' employment over the age of 41; his/her weekly salary is £200 (annual pay A = £10,400).
His/her normal entitlement to redundancy pay R is £200 x 20 x 1 ½ = £6,000.
He/she is entitled to a pension payable immediately of £2,000 and a lump sum of £3,000.
Convert the lump sum to an annual value:
R - £3,000 = £300
10
Annual value of pension and lump sum together P is £2,000 + £300 = £2,300.
Redundancy pay after pension offset
= R - (R x P x 3) = £6,000
A
- (£6,000 x £2,300 x 3)
£10,400
= £2,019.23 (to the nearest penny).
Example 2
The same employee's pension and lump sum are not payable until 30 weeks after the date of redundancy. First calculate result of offset as if pension and so on were payable immediately - as above = £2,019.23.
Add 30 times weekly amount of pension and lump sum together
= 32,019.23 + £2,300 x 30
52
= £2,019.23 + £1,326.92 (to the nearest penny).
Redundancy pay to which employee is entitled
= £3,346.15
(which is within his entitlement before offset, that is £6,000).
Appendix 2: Examples of apportionment of pension
These examples are only illustrative and do not apply where employment with more than one employer counts for the calculation of the redundancy payment before reduction. They do not include every type of case that could arise and they do not necessarily indicate the only method of arriving at the correct apportionment. Nor do the notional pension rates to be offset necessarily represent the actual benefits paid out.
Example 1: Pension dependent on the final salary and length of service
The pension scheme of the employer who is liable for a redundancy payment provides pensions on the scale of one-eightieth of final salary for each year of service. The redundant employee was employed continuously with the employer in question for 12 years, and was a member of the scheme for all this period. The employee's final salary is £12,000 a year and the employee is entitled to a total pension based on 15 years' employment, because three extra years were credited in respect of a transfer value received when joining the service of the employer.
Pension rate to be offset against redundancy payment
= 12 x £12,000 = £1,800
80 per annum
(that is, the previous employment is not reckonable towards the redundancy payment, and the pension in respect of the three extra years is not to be taken into account for offsetting).
Example 2: Pension dependent on length of service and average salary throughout service
The pensions scheme of the liable employer provides pensions on the scale of one-sixtieth of average salary throughout employment for every year of employment. The redundant employee was employed with the employer continuously for 15 years. The average salary in this employment is £13,000 a year, with an additional £2,000 a year for five years treated as transferable earnings from previous employment which can count towards the assessment of average annual salary. Thus total pensionable employment is 20 years and average reckonable salary is £10,250 a year. Pension rate to be offset against redundancy payment
= 15 x £13,000 = £3,250
60 per annum
(that is, pension in respect of the five years' non-reckonable employment with the previous employer is not to be taken into account for offsetting).
Example 3: Pension dependent on salary range and length of employment
The pension scheme of the liable employer provides benefits which depend on the salary range of the employee and the number of years he/she spent in different ranges. The employee's employment and the corresponding benefits have been as follows:
Salary Pension Number
Range accrual rate of years
--------------------------------------------------------------------------------
£8,400 - £9,594 £120 3 years
£9,600 - £11,994 £144 6 years
£12,000 - £14,994 £180 1 year
The employee's total pension entitlement is £1,404 per annum including £800 per annum in respect of other employment with a transfer value.
Pension rate to be offset against redundancy payment
= (3 x £120) + (6 x £144) + (1 x £180) = £1,404 per annum.
Example 4: Pension secured by an insurance policy by annual premiums
The pension scheme of the employer who is liable for a redundancy payment provides pensions by means of non-profit deferred annuity policies on which level premiums are payable each year. As salary rises, supplementary policies on which further level premiums are payable may be taken out to provide additional pension.
By a former employment there is already a policy in force in respect of the employee securing an annuity as from age 60 of £4,000 per annum. This policy was first effected when the employee was aged 20. Transfer to the present employer was at age 45, and the employee is now declared redundant at age 60. During employment with the current employer a supplementary policy has been taken out which secures an additional £1,000 per annum pension.
Pension rate to be offset against redundancy payment
= (£4,000 x 15 ) + £1,000
40
= £2,500 per annum
Appendix 3: Redundancy Payments Offices
See link on right for a list of Redundancy Payments Offices.
HELPLINE
A helpline is available to answer any of your queries, no matter where in England, Scotland or Wales your firm is based. The number to ring is 0845 145 0004.
Once your claim has been sent to the appropriate Redundancy Payments Office above you can phone the officer dealing with your case at that office.
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