5.3.1 Understanding career average pension schemes

This animation illustrates how a C-A-R-E pension scheme works. C-A-R-E, or simply Care, stands for career average revalued earnings.

With a CARE scheme you earn a proportion of your pensionable pay as pension each year you work. In this case it is 1/54th of pensionable pay per year. For example if Jane earns £18,000 a year her pension pot in year 1 is worked out as one-fifty fourth of £18,000, or £333. This pot is then 'revalued' each year, using an agreed formula, to take account of price inflation. For this example let's say the pot is increased by 3.5% per year. So at the beginning of year 2 the £333 that Jane earned in year 1 is revalued by 3.5%. This means that this part of Jane's pension is increased by £12 (or £333 x 3.5%), and this gives a revalued total of £345 (or £333 + £12). The pot continues to be revalued each year until Jane retires after 20 years of service. After 20 years of being revalued by 3.5% each year Jane's year 1 retirement pot is worth £640. Jane receives a new pension pot for each year she is a member of the CARE pension scheme. So after 20 years she will have 20 separate pension pots. If Jane's pensionable pay rises by 4% then in year 2 she will be earning £18,720 and her year 2 pension pot for that year will be worth £347. Every year's pot then gets revalued in the same way that the year 1 pot is revalued. On retirement Jane adds up the pension pots earned from each year of service after each year's pot has been revalued. The total is her pension on retirement. So if Jane's pensionable pay rises by 4% every year, after 20 years' service, she can expect a pension of £13,422 per annum.