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!

There's a recent thread here on the same topic: forums.moneysavingexpert.com/discussion/6328668/buying-extra-pension-lgps

Someone was saying that, as LGPS is a net pay scheme, HMRC won't refund in tax any more than you pay in tax.

Obviously, some random person on the web is not an authoritative source; it would be good to understand if there is some official reference somewhere.

@Polkadotties

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

Good point. An an odd one, too, considering that the Teachers Pension Scheme and the NHS Pension Scheme, which are in many respect similar, do give you the option of buying additional pension with or without spouse benefits.

Another important point is that all these schemes (TPS, LGPS, NHS) are unfunded schemes. What this means is that the money you and your employer pay in go to the Treasury, which uses them as if they were tax revenue, and the money that must be paid out comes from the Treasury, too, out of the government budget and general taxation.

This is different from defined-contribution schemes, where you put in some money, you invest it, then your pension is whatever that pot of money has grown into.

Also note that not all defined-benefit schemes are unfunded - e.g. the University SuperAnnuation Scheme is funded, meaning the contributions are invested and pensions must be paid out from that pot.

Whether you think an unfunded scheme is good or bad depends in great part on your views on the country and its stability: in an unstable country it's not a good thing because the currency may plummet (whereas with a defined-contribution scheme you can decide to hold investments in EUR or USD), the country may go bankrupt, the government may have to cut pensions, etc.

In a stable, Western democracy, most people (but not all!) would argue that these risks are low and that are far outweighed by the advantage of having the certainty of a fixed, inflation-linked pension.

@ParentOfOne the LGPS is not unfunded.

[quote Polkadotties]@ParentOfOne the LGPS is not unfunded.[/quote]
Thank you! OP, I hope I didn't confuse you too much!

ParentOfOne - Ha, no, thanks, this thread has been really educational :)

If you don’t earn enough to pay tax, then you basically don’t benefit from any tax relief if you’re in the LGPS.

The LGPS is a net pay scheme. This means that your pension contributions are deducted from your gross pay before it is assessed for tax, so you pay less tax than you would if no pension contributions were deducted. For most people, who earn well over the £12500 tax free annual limit, this is fine and means they are benefitting from the tax relief.

However, for someone whose gross pay is less than £12500 they won’t benefit from tax relief. The pension contributions still get deducted from gross pay, but as you don’t pay tax anyway there’s no tax relief benefit.

For relief at source schemes (where pension contributions are paid from net pay after tax has been deducted) this doesn’t matter because HMRC then makes a payment equivalent to the tax relief into the pension arrangement and this happens even if you didn’t earn enough to pay tax in the first place.

However this HMRC payment doesn’t happen in net pay arrangements like the LGPS.

This has been noted, and from (I think) the 2024/25 tax year those affected by this will be able to make a direct claim to HMRC for a payment equivalent to the tax relief, but in the meantime those who don’t earn enough to pay tax and are in the LGPS are losing out (not on the pension benefits themselves but because it basically costs you more to pay for them). www.actuarialpost.co.uk/article/hmrcs-solution-to-address-the-net-pay-anomaly--20199.htm

@ChessieFL , it is good that the disparity between net pay and other scheme may be addressed. However, taking a step back, I still wonder how fair it is to receive tax relief if you are not paying any tax in the first place!

It’s to encourage low earners to save into pensions. Without the tax relief there’s no benefit to pensions over other savings plans, so it’s an extra incentive.

Sorry, should clarify - I’m talking specifically about the non-taxpayers there and only in relation to their own contributions - they do of course get the benefit of employer contributions which they wouldn’t get in a normal savings plan (and in the LGPS employer contributions can be hefty).

Those paying into personal pension schemes using the relief at source arrangement don’t get employer contributions, but still get the tax relief. The new proposal just brings those in net pay arrangements in line with those in relief at source arrangements.