LG Pension scheme - please help, I'm clueless!

[vindaloopy]

I'm mid 40s and have a support staff role in a school and am therefore part of the LGPS. This pension at the moment is pathetic as I'm low paid and haven't been there very long, but as I understand it I can pay in a lump sum of up to £7k-ish per scheme year (is that the same as tax year?) which would add £700-ish pension per annum. Is this a good investment?

Dh needs to set up a private pension as he's recently set up his own business. Are we better off paying as much as possible into mine (better returns?) while I still work at school?

I'm clueless here. All I know is that between us we currently have very poor pensions (think I have about £3k per annum and he has about £6k pa from previous pensions) and we need to do something...

Any advice would be very gratefully received!

The LGPS scheme is similar to the NHS and to the Teachers Pension Scheme. You can buy up to circa £6-7k (in total, not per year!) worth of pension. How much this costs you depends on your age and on whether you're buying it for a surviving spouse, too, or not.
For someone in their 30s it can be 7-8x and for someone in their 40s more like 9-11x.

E.g. if it's 10x it means it costs you £10,000 to buy £1,000 worth of extra pension.

In general it tends to be a very good investment. It is possible to obtain better returns investing privately elsewhere, but it is also quite possible to get much lower returns!

These costs are pre-tax; you get tax savings on them, so the net cost is actually less.

That's really helpful thank you! Seems like something I should take advantage of while I can to give my pension a little boost.

LGPS is a defined benefit scheme. Generally speaking these are very generous.

There are two main types of pension - defined benefit and defined contribution. In the former you are guaranteed a set level of income in retirement. Your employer must pay it out to you after you turn 65 (or whatever your agreed pension age is). In the latter your money is invested and you choose how much income to take, but will need to ensure your don’t deplete the investments too fast.

The rules for all DB schemes differ but as I understand it you will naturally accrue 1/49th every year in LGPS. So let’s say you earn £49k per year (I realise you probably don’t) that means for every year of work you’d get £10k of pension. A 30 year career at that salary would give you a £30k annual pension. That sum is inflation protected. It is extremely generous and you should be delighted with it. Someone in the private sector would need to contribute far more and enjoy decent investment growth to enjoy the equivalent pension.

If you can buy additional contribution you need to work out what the rate you get is - www.lgpsmember.org/more/apc/extra.php?

If indeed you get (10% on inflation protected benefit) £1,000 for £10,000 that seems pretty good to me. Possibly worth sacrificing a significant chunk of pay to get it and relying more heavily on your partner’s salary now.

Thank you - it's all starting to get a bit clearer in my mind now. Absolutely wish I was earning £49k ;) but at least knowing I am in a DB pension which I can top up a little is reassuring.

You can buy extra defined benefit pension up to c. £7000 pa either by way of additional monthly contributions or a lump sum. I recently enquired about doing this and it would have cost £90k (c £70k once tax benefits taken into account) but would be cheaper if I was younger.

You can also make monthly AVCs, up to the value of your salary to a defined contribution scheme run by a separate pension provider. My county offers two different ones to choose from

You can also make separate private pension contributions up to £40k pa via a SIPP or a Stakeholder Pension

When do you in tend to retire? You get another 1/49 of your salary for every year's service, so if you have 20 years to go you can add almost half your salary to the current figure

Ah, ok, I think this is where I was getting confused; so I can make a lump sum APC to increase my annual pension by £7026 (would cost me £70+k! so that won't be happening) But is this a one-off opportunity? So if I want to do this, I have to put in as much as possible now? Or should I wait and see if, for example, I won the lottery, I could put in a bigger chunk at a later date?

I guess the issue is, I love my job at the moment, but it's a temporary contract and poorly paid so I'm not sure how much longer I will be there. Might be years or I might not have a job come September so access to this APC benefit of the pension scheme isn't guaranteed long term :(

AVCs are brilliant if you can afford it, I started putting in 50 a month and gradually over 15 years built it up to half of my (grade 9 in the end ) salary. In effect every time I got a pay rise I banked it in the pension scheme..
When I left I had over 60k in additional savings which has made a big difference to my actual LGPS pension ( and I have taken it 4 years early)... Also by doing that I paid very little tax as the your salary is taxed after pension contributions deducted.

Your pensions team will be able to advise, but really because of the tax its the best way to save..

@vindaloopy

Ah, ok, I think this is where I was getting confused; so I can make a lump sum APC to increase my annual pension by £7026 (would cost me £70+k! so that won't be happening) But is this a one-off opportunity? So if I want to do this, I have to put in as much as possible now? Or should I wait and see if, for example, I won the lottery, I could put in a bigger chunk at a later date?

I guess the issue is, I love my job at the moment, but it's a temporary contract and poorly paid so I'm not sure how much longer I will be there. Might be years or I might not have a job come September so access to this APC benefit of the pension scheme isn't guaranteed long term :(

You can make monthly contributions or a smaller lump sum towards the £7026 and you're younger than me so it won't cost you as much.

I pay very little tax anyway (sometimes none) because of how low my salary is :( so tax relief doesn't seem like much of an incentive. But I have a some cash in the bank from a small inheritance which I could put in as an APC. But will I regret that if I have more disposable cash in a few years and I've already done my 'one-off lump sum APC? Nobody has a crystal ball do they?!

I will look into AVCs as well. The APC just seemed appealing given the insecure nature of my contract/role.

A few points to clarify: the first £ 12,570 you earn are tax-free (other than for very high earners who see their personal allowance go to zero, which also causes the marginal tax rate to jump to 60ish %, but that's not the case here).

So if you earn, say, £20,570 and have already contributed £3,000 to your pension, the maximum you can contribute while still getting tax relief is £ 5,000 (=£20,570 - £3,000 - £12,570).

You can contribute more, but then you wouldn't get tax relief, because you wouldn't have paid any tax on it, and HMRC cannot refund you tax you never paid in the first place!

So let's say you earn £20ish k and already contribute £3k to your pension. You want to contribute £20k because, for whatever reason, you have £20k lying around somewhere :) Best to do it over 4 years so as to maximise the tax benefits. Oh, and do bear in mind that thresholds can change from year to year.

For defined-contribution, how much you put in is how much you put in.
But, for defined-benefit, there are certain rules to calculate how much your contributions have used up of your allowance. I don't remember them now.

@QuestionsorComments @Laska2Meryls
Aren't AVC simply contributions into a defined-contribution scheme?

I would think it is best to max out your contributions into the defined-benefit part first, ie buying all the extra £7ish one can get, before considering AVCs.

Also, you need to look into the details of the costs and charging structure, to ensure that these schemes do not overcharge you compared to what you could set up privately.

[quote ParentOfOne]**@QuestionsorComments* @Laska2Meryls*
Aren't AVC simply contributions into a defined-contribution scheme?

I would think it is best to max out your contributions into the defined-benefit part first, ie buying all the extra £7ish one can get, before considering AVCs.

Also, you need to look into the details of the costs and charging structure, to ensure that these schemes do not overcharge you compared to what you could set up privately.[/quote]
No, or at least not for the LGPS. It's paid tona separate money purchase scheme managed by a separate pension provider. It doesn't get you extra defined benefit pension .

The additional payments to buy more defined benefit pension are called APCs - Additional Pension Contributions

@ParentOfOne

A few points to clarify: the first £ 12,570 you earn are tax-free (other than for very high earners who see their personal allowance go to zero, which also causes the marginal tax rate to jump to 60ish %, but that's not the case here).

So if you earn, say, £20,570 and have already contributed £3,000 to your pension, the maximum you can contribute while still getting tax relief is £ 5,000 (=£20,570 - £3,000 - £12,570).

You can contribute more, but then you wouldn't get tax relief, because you wouldn't have paid any tax on it, and HMRC cannot refund you tax you never paid in the first place!

So let's say you earn £20ish k and already contribute £3k to your pension. You want to contribute £20k because, for whatever reason, you have £20k lying around somewhere :) Best to do it over 4 years so as to maximise the tax benefits. Oh, and do bear in mind that thresholds can change from year to year.

For defined-contribution, how much you put in is how much you put in.
But, for defined-benefit, there are certain rules to calculate how much your contributions have used up of your allowance. I don't remember them now.

This is not quite right! HMRC does give tax relief on payments into a pension that were not subject to income tax. Anyone can have a personal pension, even a baby. For people who are not paying any income tax, the annual limit that they can pay into a pension fund (and claim tax relief on) is £2,880 - and the government then adds £720 in tax relief, to make it £3,660 gross.

[quote ParentOfOne]**@QuestionsorComments* @Laska2Meryls*
Aren't AVC simply contributions into a defined-contribution scheme?

I would think it is best to max out your contributions into the defined-benefit part first, ie buying all the extra £7ish one can get, before considering AVCs.

Also, you need to look into the details of the costs and charging structure, to ensure that these schemes do not overcharge you compared to what you could set up privately.[/quote]
TBH I am not sure , But because of the changes to the LGPS ( around 2008 , I think) you stopped accruing lump sum..(I was in the previous scheme so had some) but was advised at the time that by putting additional money into AVCs I would be able to able to access up to 25% or the additional pension as a lump sum. However it was allied to the LGPS .

I cant honestly say that I did the best thing and I am no expert on pensions .. , but by doing the AVCs it did mean that i could take £10k on top of what my LGPS would have given me at the time when i retired and put the rest back into LGPS pension. the fund I was in I do know made me more at the time than it would have if I had bought extra contributions .

Pensions are So complicated!! .One thing I am pretty sure if is that its always best to keep any LGPS contributions you have and carry on paying into it as much as you can and not move them out to a private provider.. I was also paying the maximum I could into my LGPS at the same time as paying the AVCs so I used them as a top up scheme .. ..

OP i would definitely talk to your LA pensions team for advice .. Mine were really helpful and I am happy with what I did ,, however it may not be the right thing for you

I buy APC’s each month and this adds to the amount of defined benefit pension I get when I retire. I could also have done it as a one off payment as you’re suggesting. I worked out that it was well worth the money.

Like you, I will probably be leaving local government soon, so wanted to maximise the amount in the pension while working there.

I'm really grateful for all your comments. You're right they're so complicated and it somehow feels like gambling - you don't know how long you're going to live after all! But I do know that it's better to think about it now than in 20 years!

@80sMum
You're right, HMRC does give you tax relief up to £2,880 even if you have no income, to make it £3,660.

However, what does it mean for someone who earns, say, 14,570? Can they contribute only £2,000 (=14570 - 12570), or 2000 + 3660 because you get an extra 3660 regardless, even if you already have an income? I thought it was the former but TBH I am not sure!

This is not quite right! HMRC does give tax relief on payments into a pension that were not subject to income tax.
Anyone can have a personal pension, even a baby. For people who are not paying any income tax, the annual limit that they can pay into a pension fund (and claim tax relief on) is £2,880 - and the government then adds £720 in tax relief, to make it £3,660 gross.

@QuestionsorComments
"No, or at least not for the LGPS. It's paid tona separate money purchase scheme managed by a separate pension provider. It doesn't get you extra defined benefit pension ."

I think we said the same thing! AVCs are defined-contribution and they do not add to the defined-benefit pot.

APCs, additional pension contributions, are contributions into the defined-benefit pot.

www.lgpsmember.org/arm/already-member-extra.php

I wish they had chosen better names!

Sorry, where is said you’d get £10k per year for on £49k salary that should obviously have said £1k.

It is really worth taking the time to get your head around the details of all this.

To think about it another way, if you work 49 years (18-67) for example you’d get a pension equal to salary thanks to the 1/49th accrual rate. You probably do not need this much money - Most people will end up with a pension of something like 50% of the working income. This is manageable when you consider you’ll probably have no mortgage, lower transport costs etc in retirement. Plus you’ll have the state pension.

However, if you think you’re behind then I’d suggest the additional contributions sound generous. Somebody mentioned £90k (basically £70k of post tax money) for £9k per annum pension above. If that were me I’d take it all day long.

@ParentOfOne If your salary is £14570 then the maximum you can contribute is £11656. The government adds £2914 (a lot more than you would have paid in tax) taking the total pension contribution to £14570. It’s a really good deal - well worth doing if you can afford it.

There’s a handy calculator here: www.hl.co.uk/pensions/tax-relief/calculator

@parentOfOne Hazelnut is correct. A person earning up to £40k can pay in any amount up to 100% of their gross salary into their pension. It can be paid in gross by their employer or net by the employee (and then grossed up by the pension provider claiming tax relief on the employee's behalf).
So, if you're paying it in yourself, out of your taxed income, you need to pay in £32k and the taxman pays the other 8k.
People who earn more than £40k can pay in up to the £40k limit and get tax relief. Anything paid in above the limit must be net of tax.

The H&L calculator covers a different case, ie one where you contribute some post-tax money into a defined-contribution scheme, like a SIPP, and the manager of the scheme automatically adds basic rate tax relief. If you pay tax at 40% or 45%, you must claim additional tax relief separately (eg through your self-assessment).

What we are talking about here is different, it's making additional contributions to a defined-benefit scheme. The scheme has already calculated that to buy £1,000 of extra pension will cost you, say, £10,000.

If you pay in instalments through your salary, I'd like to think it should be done as salary sacrifice so there's nothing else to do.

If you pay a lump sum, out of your post-tax money, it's trickier.
If you earn £50k, no problem: contact HMRC and they'll refund the tax you paid on those £10k (probably after a self-assessment).

If you earn, say, £16,570, you will have paid tax on £4,000 (= £16,570 less the £12,570 after which you start to get taxed), and those taxes HMRC will refund. But you haven't paid taxes on £10,000, so how does HMRC refund you taxes you never paid in the first place?
Remember, this is not relief at source.

I'll admit I do not know the answer with absolute certainty, but I'd be interested in hearing from anyone who think they do - and who can elaborate.

One thing to note, APCs do not provide spouse’s or child’s pensions so if you die so does the APC