What’s so good about a Local Government Pension Scheme?

[MellowBird85]

Can someone explain in simple terms why LGPS is better than a standard scheme? I’m 35 and have been paying into it since I was 18 but my employer did away with them a couple of years ago as it was apparently too expensive. I’m still in it as part of a legacy contract and have opted to pay in a lump sum over this year plus applied for an AVC due to recent maternity leave and going part-time...but I don’t really know what I’m doing, I just know they’re “good”.

Hi OP,

I have the same question. I have been paying into a LGPS for a few years now and like you said, at first didn't think too much of it due to the fact that everyone says it is "good" - mainly due to employer contributions.

Did some digging, and was told that the employers contributions (and mine) mean nothing - in that they are not collected in a pot, but rather we are paying to be part of the scheme. Queue my shocked face when I discovered that I had contributed more than what my pension is currently worth.

As I understand it, the LGPS is now a career average pension? So theoretically if working for the same company until retirement you'd get an average of your salary every year?

Not the most knowledgeable on the subject so am watching with interest.

My teacher pension is similar. Not sure how much I paid in, in my last pay packet I paid £350 or so. So over the 28 years I paid in, I’ve paid a maximum of £117,600. In reality, much less as I earned less in my early career. Taking into account the lump sum I received, if I only got back what I paid in, it would last me 3.4 years at the rate I receive. I’ve been receiving my pension for 2 years already. By November 2023 I’ll be quids in.

In retirement you’ll get a guaranteed payment each year for life so you won’t run out of money, Unlike those who have a pot and have to make it last.

You accumulate 1/59 of your salary each year so if your salary is 60k, each year you work adds £1200 to your yearly payment in retirement. I’m on target to have a LGPS of 38k a year which will hopefully mean a very comfortable retirement.
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These schemes are so good as they are defined benefit schemes rather than the usual defined contribution.

This means that whatever you contribute, what you get out is pre-determined (defined benefit) - it is determined by your service and your salary. Career Acerage versions accrue at oerhaos 1/57 of yearly salary. You know how much your yearly pension has grown after each working year has passed. They are also index linked so increase for inflation. There are death in service benefits too.

Unlike defined contribution pensions, they do put rely on you building a pot of contributions (a defined contribution from yourself and maybe employer each month) but with an uncertain outcome at the end. These pots are subject to the ebbs and flows of the stock market and at the end you have a pot which has to last you your retirement. You can buy an annuity which pays a lifetimes sum per year or you can draw down a percentage of the pot each year.

In order to generate a pension of £20k that someone in a career average scheme can generate by earning £57k for 20 years, or perhaps about £40k for 30 years, a defined contribution pit would need to have a value of perhaps £600-700k in it to generate the same mo they income. It will have cost more to build that pit than the contributions into the defined benefit scheme.

This is why LGPS or TPS are so good, even if you joined after the final salary schemes stopped for new entrants.

@Tee20x

Did some digging, and was told that the employers contributions (and mine) mean nothing - in that they are not collected in a pot, but rather we are paying to be part of the scheme.

Yes I discovered this too - your employers contributions don’t go into your “pot” as such but the scheme as a whole.

Thank you @FrownedUpon and @WombatChocolate - so basically they’re not reliant on the stock market, you’re getting a guaranteed sum at the end? This must be why my pension forecast is vastly better than my DH’s who earns literally quadruple what I earn!

Interesting - I suppose it will be beneficial in the end then, even though at the moment it looks rather drab. I have only been part of the LGPS for a year or so and at the moment my pension is worth about £900 - ha.

I think part of the confusion lies with the way it is marketed. I know in my sector emphasis is put on the fact that the employer makes a contribution of around 25% - which looks great until you realise their contribution is neither here nor there as the pension is solely based on my own average earning.

At my work we have a choice- LGPS with 5% contribution from someone at my level and 19% contribution from my employer. NEST with 3% contribution from me and I think 5% from employer. Basically LGPS is like a significant pay rise, albeit a pay rise that's going into savings.

Queue my shocked face when I discovered that I had contributed more than what my pension is currently worth. but you are getting that amount each and every year (plus inflationary increases) from when you retire to when you die, even if you live for 40 years! It would be incredibly expensive to get an annuity that guaranteed you that. I'd be really surprised if you've paid in more than what the pension is 'worth' in annuity terms.

@Tee20x that 25% contribution is also linked to your salary and is a direct reflection of the cost of providing the £900 per year pension. Like others have said the cost of purchasing that annuity from a defined contribution PPF would be something like £25k - it’s a great benefit! People are generally bad at valuing future income though.

It's fantastic value, if the rules remain the same as currently you'll be able to take any AVC's tax free if taken at the same time as your main pension up to 25% of the total pension value*. Also, you get spousal benefits and a form of life insurance.

However, I've stopped contributing to AVC's and instead I'm putting money in a SIPP which will cover a couple of years and allow me to take my LGPS with lower reductions. The aim is to stop work @ 57/58 use SIPP and take my LGPS @ 60.

*Annual pension x 20 + any lump sum from 2008 scheme + AVC value divided by 4.

I'm in one of these too, and have no clue what it actually means

If I'm on 32k a year, can anyone tell me roughly what my annual pension will be in 30 years time?

@excelledyourself

I'm in one of these too, and have no clue what it actually means

If I'm on 32k a year, can anyone tell me roughly what my annual pension will be in 30 years time?

On £32k, you would accrue £653 per year, so multiply that by 30 and you would get £19,590. That's the amount that you would receive each year from the pension.

It also increases each year with inflation.

Thank you @ElizabethG81!

Can I ask how you got the £653?

@excelledyourself

Thank you *@ElizabethG81*!

Can I ask how you got the £653?

The accrual rate for LGPS is 1/49th, so you do 32,000/49 to get £653.

You accrue pension at a rate of 1/49th a year. £32k divided by 49 is £653. That's how much you'd get with one year service.

With 30 years service (at the same salary) you'd get 30 x £653 = £20k nearly pension per year.

This thread is wonderful

And final two questions...

Will my pension be based on what my salary is when I retire? And are you both saying 30 years as that's what I said? By the time I retire I'll have been in this job 40 years, but started on 16k.

Thank you so much.

It's career average, so it'll be based on your average salary throughout your employment.

Disclaimer - many defined benefit schemes were final salary then changed to career average. If you were a member when it was final salary, the salary calculation may be different. For example if it was final salary during the first 10 years, then whatever you earned in year 10 may be taken as your salary for each year up to then.

Yes saying 30 years as that's what you said. If you will have 40 years service then it'll be £653 x 40

Thank you @titchy. Much appreciated.

Terrible that I'm so clueless about handing over a chunk of my salary each month. I just did what my trusted boss told me to do at the time

Have a look at this site for more information: lgpsmember.org/

Your fund will also have its own website - just google council name pension fund and you should find it. There’s likely to be the option to log in to your records so you can do different estimates of what you might get at particular ages.

Placemarking. Trying to understand all this as new to LGPS. Thanks to all the knowledgeable posters, much appreciated.

@excelledyourself

Thank you *@titchy*. Much appreciated.

Terrible that I'm so clueless about handing over a chunk of my salary each month. I just did what my trusted boss told me to do at the time

Ha same. I'm on the young side and this job is my first "proper" job so just stayed enrolled in the pension scheme as it is drilled into you that it is beneficial etc etc.

Have tried to convince many of my colleagues to stay enrolled but a lot of them haven't understood the benefits (much like myself) and have opted out for a bit extra in their take home pay.

My DH worked in a job for 6 months during which time he was a member of the LA's pension scheme. On reviewing his pension arrangements recently his pensions advisor said "it's a shame you weren't a member of that scheme for longer ". And that is with DH being a member of another pretty good defined benefits scheme for 20 years. So clearly Local Government had good pension schemes in the past.

It's an extremely good scheme. The size of the employers' contribution just demonstrates how much it actually costs to run the scheme, and remember that contributions are tax free (so come out of salaries before tax).

Here is a useful LGPS modeller to estimate what you may get in the future:
www.lgpsmember.org/more/pam/index.php

Just to clarify: there are two parts to the pension scheme:

Defined benefits: where you'll receive an annual payment equal to a set % of your salary, multiplied by the number of years you contributed.

AVCs (additional voluntary contributions): these are one off extra contributions that you make but, unlike the defined benefit contributions, are in your personal 'pot' of invested money. So that part is like investing in a private (non-DB) pension scheme, ie the stock market etc.