Making a one-off pension contribution

thatoldchestnut

Hello everyone. Sometime lurker, first-time poster here, and very new to the whole pensions thing, so please be gentle. Apologies if this has been answered elsewhere.

I am 27 and have worked for local government (Trafford MBC) for two years, and I want to join the pension scheme (Greater Manchester Pension Fund). It's a final salary scheme and my employer would make a 14% contribution if I joined. My understanding (which may be totally wrong) is that I can no longer buy back lost years, but can make an Additional Voluntary Contribution in a lump sum or an Additional Regular Contribution of up to £250 per month.

I have £3,000 that I was thinking of putting in. My question is, is my employer likely to contribute more if I put more in too, or will they just stick with the 14% of my salary as their contribution? I presume the latter, but I just wanted to see if anyone could shine a light on what they'd be likely to do in this case. I'm going to ask when I'm next in, but that's on Tuesday, a whole two days away! Why do I only think about these things when there's no one in work to ask?

Many thanks for any help anyone can give.

CAE

My first question is why are you not in the pension scheme already? You need to get your option to join the scheme in as soon as possible before you even start considering how to pay additional contributions.

You are correct in saying you cannot buy back the years you have missed.

You can however buy additional amounts of pension in multiples of £250 by making Additional Regular Contributions (ARCs), by having deductions made from your monthly pay. The £250 is the multiple of pension that you can buy, not the amount you can pay. This will automatically give you tax relief on your additional contributions. Your employer will not make any additional contributions.

More information on ARCs can be found at

http://www.gmpf.org.uk/avcs/topping_up_your_benefits.htm

http://www.gmpf.org.uk/avcs/intro_to_buying_extra_pension.htm

Hope this helps

dunstonh

Can you confirm if what you have access to is the Local Government pension scheme or is it something else?

It's a final salary scheme and my employer would make a 14% contribution if I joined.

Its a final salary scheme so it doesnt matter what contribution the employer makes. The pension you get on retirement is based on years of employment. Not what the employer has paid into the main scheme.

My understanding (which may be totally wrong) is that I can no longer buy back lost years

A lot of schemes have withdrawn or are withdrawing that option.

but can make an Additional Voluntary Contribution in a lump sum or an Additional Regular Contribution of up to £250 per month.

AVCs dont normally have a limit of £250. A number of hybrid schemes have come around since April 2006. It could be one of those rather than an AVC.

My question is, is my employer likely to contribute more if I put more in too

Not on the main scheme. The terms of the hybrid scheme (assumption that there is one given the £250 limit) will have to be read to find out what the benefits are.

or will they just stick with the 14% of my salary as their contribution?

Again, they dont pay 14%

jem16

thatoldchestnut wrote: »

but can make an Additional Voluntary Contribution in a lump sum or an Additional Regular Contribution of up to £250 per month.

Just one point to add to CAE's post. From the links that CAE provided on the Greater Manchester pension fund it appears that it is part of the LGPS (Local Government pension scheme).

The £250 as CAE rightly points out is buying additional pension in amounts of £250. This replaces the buying back of years that was available earlier. The actual cost to you depends on your age and how long you want to pay it back over. Some examples are given on the link CAE provided. Buying additional pension this way means that it is not subject to investment returns.

The AVCs you can buy are subject to investment returns. However with the LGPS you are able to add your AVC pot to your main scheme and then take your 25% lump sum tax-free cash. This may mean that you actually get back all of your AVC pot as your lump sum. This is one advantage of the LGPS AVC scheme and could be worth considering.

http://www.gmpf.org.uk/avcs/more_about_avcs_example.htm

thatoldchestnut

Thank you for replying.

dunstonh: Yes, it's the LGPS that I have access to. Sorry, I should also have clarified that I was under the impression that an Additional Voluntary Contribution could be made and that there wasn't necessarily any limit to what this could be, whereas I could alternatively increase the amount I contributed on a regular basis, but that this would be limited to £250 per month. Is this correct?

I think I am confused when it comes to the final salary thing, then. The Greater Manchester Pension Fund website says that it's a final salary pension, but also has a PDF file (which I can't link to because I'm a new user, but if you put 'trafford mbc employer pension contribution' into Google, it's near the top of the results) which details the employer contribution as 14% until next April, and 14.9% for the following 12 months. Should I just ignore that?

CAE: I opted out of the pension scheme at first because I didn't understand its benefits until yesterday when a friend of mine asked why on earth I'm not in it and I couldn't think of a very good answer!

jem16

thatoldchestnut wrote: »

Sorry, I should also have clarified that I was under the impression that an Additional Voluntary Contribution could be made and that there wasn't necessarily any limit to what this could be,

The link that CAE provided explains that you can put in 50% of your earnings.

whereas I could alternatively increase the amount I contributed on a regular basis, but that this would be limited to £250 per month. Is this correct?

No it's not. As already explained the £250 is the amount of extra pension you can buy, not what it costs you. What is costs is dependant on your age, how long the payback is and whether you buy dependants' rights too.

For example a 30 yr old buying £250 extra pension would have this cost;

Pete wants to buy extra pension for himself, and also his dependants’. He is 30... here is the cost of buying £250 of pension, over various payback periods:

Cost over 1 year: £136.73 a month (less tax relief)
Cost over 5 years: £30.21 a month (less tax relief)
Cost over 10 years: £17.18 a month (less tax relief)
Cost over 20 years: £11.17 a month (less tax relief)
Cost over 24 years: £9.35 a month (less tax relief)
(maximum payment period for Pete)
So if Pete buys £1000 of pension and spreads the cost over 20 years, it will cost him £44.68 a month. If Pete was a taxpayer at the basic rate of 20%, this would bring down the cost to £35.74 a month.

I think I am confused when it comes to the final salary thing, then. The Greater Manchester Pension Fund website says that it's a final salary pension, but also has a PDF file (which I can't link to because I'm a new user, but if you put 'trafford mbc employer pension contribution' into Google, it's near the top of the results) which details the employer contribution as 14% until next April, and 14.9% for the following 12 months. Should I just ignore that?

With a final salary pension it doesn't matter what your employer pays in. The employer could pay in 2% or 22% and you would still get the same pension in the end. What matters is the length of time you are in the pension scheme.

CAE: I opted out of the pension scheme at first because I didn't understand its benefits until yesterday when a friend of mine asked why on earth I'm not in it and I couldn't think of a very good answer!

There isn't one. It's one of the best schemes around - get in there quick!

thatoldchestnut

Oh! Right, well I appear to have fundamentally misunderstood the whole thing in that case. You must forgive me, because until last night I wasn't giving the pension a second thought, so it's all quite new to me.

Hmm. I think what's confusing me is that I'm not sure what buying, say, £250 of pension means in terms of what I actually get at retirement. What sort of difference would I notice in terms of my income? For the record, I'm 27 and male, but I suppose there will be other variables that might make that a difficult question to answer.

jem16

thatoldchestnut wrote: »

Hmm. I think what's confusing me is that I'm not sure what buying, say, £250 of pension means in terms of what I actually get at retirement.

Buying £250 of additional pension means you get just that - an additional £250 of pension per annum.

What sort of difference would I notice in terms of my income?

You would get £250 more each year - it is index-linked the same as your main pension so it would go up each year.

Basically as you are 27 you will be able to pay into the LGPS for 38 years (retirement at age 65) so you will have 38/60ths. If your final salary was £30,000 you could have a pension of £17,500 with no lump sum or a maximum lump sum of £75,000 and a pension of £11,250.

So if you chose to buy an extra £250 pension you would then have a pension of £11,500 or £17,750 depending on your lump sum option.

For the record, I'm 27 and male, but I suppose there will be other variables that might make that a difficult question to answer.

Basically you would have to decide if it's worth the extra amount for the amount of pension you are buying.

The younger you are the more attractive it is I believe. In the example I gave below it would cost Pete £8577.60 to buy £1000pa extra pension over 20 years.

Your tax position can also make a big difference too - for example if you became a higjher rate taxpayer and had 40% tax relief.

However you also have to think about whether having extra pension is a good idea or not. Pension income is taxable. You have an extra personal allowance at age 65 and above. However if you have too much taxable income you start to lose some of this extra allowance so it can cost you more in tax. If you are married has your wife got any pension provision? Retirement income should be viewed jointly so that you both use up your tax-free allowances and pay the minimum of tax.

The main thing for you at the moment is to join the LGPS asap. Anything more than that needs to be looked at more seriously as to whether AVCs, Additional pension or indeed S&S ISA would be best for you. If you don't know you need to look for advice from an IFA.

taliesin

dunstonh wrote: »

Again, they dont pay 14%

Actually, in this case, they do. This is one of those public sector schemes where the employer (itself a relatively small entity) pays hard cash to an umbrella scheme that services a number of small but independent local government organisations. The cash is invested (in "gilts") and the coupons (and potentially, if the scheme were ever wound down, the principal) are used to pay benefits to pensioners. Unlike most public sector pension schemes, it is not based on "imputed costs", "notional funds" or "future liabilities on the public purse", and a conservative oversight regime is in place that should ensure the scheme will be able to pay out the pension promised. In other words, it's just about the very best pension scheme imaginable. I wish the scheme that holds my pension worked this way - it would be far clearer to others that it has been paid for with real money that my colleagues and I have generated!

Perhaps you meant, as expressed by jem16:

With a final salary pension it doesn't matter what your employer pays in. The employer could pay in 2% or 22% and you would still get the same pension in the end. What matters is the length of time you are in the pension scheme.

in which case I would largely agree.

That said, the employer's contributions are not entirely irrelevant. On the one hand, you need to know that employers overall are paying enough into the fund to ensure that it will be able to pay the promised pensions, and on the other, it provides a clear indication of the value of the pension rights.

To the OP: I think the message is already loud and clear from all sides that you should get into that pension scheme without delay. I agree that the chances are slim that you will be permitted to join retrospectively, but I suggest you make enquiries of your Personnel office and/or local union reps without delay to see whether that is possible. As to additional contributions, it looks like a relatively secure, low-risk place to put your savings.

thatoldchestnut

Thanks for the further replies, everyone.

jem16: May I ask what formula you used to work out the pension amount based on the £30,000 salary? I thought you divided the number of years you worked by 60 and then multiplied that by the salary, but doing 38/60 x 30,000 gives me just below 19,000 without a lump sum. Does your amount take into account the tax I'd pay?

taliesin: It's a slight worry that you think I might not be permitted to join retrospectively! How common is it to not allow people back in?

jem16

thatoldchestnut wrote: »

jem16: May I ask what formula you used to work out the pension amount based on the £30,000 salary? I thought you divided the number of years you worked by 60 and then multiplied that by the salary, but doing 38/60 x 30,000 gives me just below 19,000 without a lump sum. Does your amount take into account the tax I'd pay?

It was my mistake. I had used their online calculator and input 35 years instead of 38 years. Your calculation is correct.

http://www.gmpf.org.uk/calculators/whole_time_calc.htm

taliesin: It's a slight worry that you think I might not be permitted to join retrospectively! How common is it to not allow people back in?

Perhaps he/she meant that you would not be able to backdate it to when you joined the company two years ago?