LGPS or private pension

[Nugget15]

Can someone explain to me in layman’s terms the benefits of joining the LGPS. Both me and my partner are working for central gov but different departments. Plan to remain here long term.

Bit of background, we opted out initially as we needed as much cash as possible to buy our house. Now it’s out the way we are thinking about opting back in. We’re not sure whether to go for LGPS or a private pension scheme.

We are 34 and 35.

Yes absolutely! And im
public sector.

For such an important decision it’s amazing how the advice isn’t readily available. I guess most people don’t think about it till near retirement then it’s such a steep learning curve.

The trouble is, people usually have been given a lot of information but it's at a point where they don't want to read it/take it all in (usually they get the prnsions info when they have started a new job so have other things on their mind and/or think retirement is ages away and not something they need to think about!). Then when they have to make decisions about their pension, it becomes overwhelming. It's a big problem and not one with any easy answers.

You need to opt into the LGPS. The pension you het at retirement is based on an average on you annual earnings whilst working there and your length if service. Due to this tje pension you will get is not based on a pot of money but more a retirement calculation taking in different factors. Personally I would keep your private ones seperate as these will pay a lump and have an earlier retirement age

Your either in the lgps (local government pension scheme - this is different to public sector/ civil service) or not, it's one big scheme with the same terms, conditions and regulations. 5% sounds more like a DC pension. Employer contributions in the lgps are irrelevant as your pension amount is based on your earnings, length of service, accrual rate and retirement factors

Yes mine is listed in the drop
sown menu for contacts on the LGPS site. It also says employer contributions vary between 5.5pc and 12 pc depending on earnings.

In the LGPS employee contributions vary between 5.5% and 12.5% depending on earnings.

Every employer participating in the LGPS has their own contribution rate set by the Fund’s actuary. The level of contributions depends on the membership profile of that employer and how well funded the fund is. It is possible (although very rare) to have an employer paying zero contributions into the LGPS if they are sufficiently well funded. However this doesn’t affect the benefits the member receives at all. Two LGPS members earning the same and in the scheme for the same length of time will accrue the same benefits whether their employer pays nothing or 30%.

That sounds more like the employee contribution not the employers
The employee contributes between 5.5 and 12.5 % in the LGPS depending in salary. To be honest the employer contribution is irrelevant in LGPS as the scheme is 1/49th of salary added each year plus usual increases.

Yes my mistake.
But I’m pretty sure my employer pays in about the same.

It won't be the same unless you are in a section of the LGPS that happens to be very well funded atm. It will probably be several multiples if what employees pay - probably about 25-30%. But it's irrelevant from a member perspective because you get your defined benefits however much they cost the employer.

It won't make any difference whether they pay in 0% or 100% you will still accrue 1/49th of your salary every year.
What you are paying in and what your employer is paying is what pays current retirees pension.

I’m not dense honest but this is hurting my head!

I always thought that the more your employer put in the better.

Sorry op im not surprised you didn’t know what was best.

It is in a defined contribution pension - the more money put in, the bigger the ‘pot’ so the more money you can take out (taking into account share prices etc)

Government pensions are defined benefit. You are promised (and legally guaranteed) that if you make your regular contributions, you will get a particular, legally guaranteed amount back for each year you contribute. That amount is not dependant on the amount you pay in.

It is why people refer to a ‘pensions time-bomb’ with the state pension. As with the state pension, most if not all defined benefit pensions use current contributions to pay current pensions rather than saving your money for you alone. If in 30 years you come to draw your pension and the people contributing at that point are only putting in enough to cover half the amount due to pensioners, those sums are guaranteed and the government has to cover the other half.

However, if contributors in 30 years are paying more than is due to pensioners, you don’t get any extra.

That makes sense thanks @CandidHedgehog

It's a defined benefit pension. So what you get at retirement is 1/49 of your average salary for each year of membership. You pay member contributions towards it deducted from your salary, but those contributions are nowhere near the actual amount needed to pay for the pension. The shortfall is all met by the employer (plus returns on the invested pool of assets - £billions in the case of the LGPS!). It doesn't matter if the employer needs to pay 5% or 500% - it has to pay whatever it takes to fund everyone's promised benefits. And what you get at the end is the same irrespective of how much it cost the employer. Hope that makes sense!

^ THIS!
@nugget15 I'm glad you are opting back in as you have been missing out on a valuable Life Assurance Policy. If you or DH had died in the past 4 years, you would have missed out on a benefit of x 3 (usually) your salary. Whilst you are re-joining the pension scheme makes sure you both complete a "Death in Service Nomination Form" so the money is allocated according to your wishes.

This. It’s why all the people using ‘but I paid in’ as a reason for objecting to the state pension age being moved back are failing to realise that the amount they have paid in probably covers very little of the amount they expect to receive.

The link is to a fairly technical paper but the tables on pages 4, 6 and 8 show how much of a person’s pension is covered by their National Insurance contributions (not much).

https://www.pensionspolicyinstitute.org.uk/media/1crf4ox5/20230110-nics-and-statepen-post-proof.pdf

The defined benefit government pensions try and make up the difference between contributions and pension paid with the employer’s contribution which is why in (for example) the civil service pension, it is close to 30% on top of salary.

@CandidHedgehog do you work in pensions or is it a hobby? Respect for your knowledge.

Somewhat embarrassingly just a hobby.

In fact, I had the awful realisation that my pension provision was dreadful while working in private industry at much the age the OP is now. Back then, employers didn’t have to contribute a penny and mine didn’t.

A massive part of the reason I took my current government job was and is the pension. If I stay in full time employment until 68, instead of a private pension of around £10,000 on top of my state pension, I will have a pension of £30,000 plus state pension. A huge difference to quality of life.

It also means I wasn’t (as a PP says) trying to get to grips with the pension along with everything else that comes with a job change - I did all the research first. It definitely helped.

I have a mix of private and public sector pensions and they are so different. Definitely pays to be clued up.

Well done you decided to opt in! Btw, do you know you can buy extra pension (up to £8,903 of extra yearly pension)?

If you have spare cash that might be a good idea, to catch up on your lost accruals.

Out of curiosity, I ran an example for someone born 1 Jan 1992, F, and if they contribute £250per month for 4 years, they could buy an extra pension of £1040.80 per year (as per attached image). You can of course run your own calculation on https://ukpensionbot.com/lgps (I just asked it "How much will it cost to buy extra pension").

If you want to look at buying additional pension I would suggest using the calculator on the official member site rather than something from an AI site:

www.lgpsmember.org/help-and-support/tools-and-calculators/buy-extra-pension-calculator/

I was getting exactly the same results with the AI https://ukpensionbot.com/lgps. The upside with the AI is it's very conversational and I can simply ask a question and get a direct answer without having to go through pages of information.

You’re still safer going through official websites. Things may get updated and this won’t necessarily feed through straight away to any AI sites. I can understand that AI is easy to ask questions but I would never rely on it for making financial decisions. Your choice though!