Is it worth buying extra LGPS contributions?

midge406

I'm 34 and periods of low paying jobs, living overseas and university study mean that I only have 2 1/2 years pension in total (albeit with a very good scheme when I worked for a university a few years back).

I've recently qualified as a social worker and have started working for a council with a final salary pension in the LGPS.

I want to save extra towards my retirement but am confused about my options. I was planning on buying extra years but the expense doesn't seem worth it. To get an extra £250 pa I would need to pay £31.21 a month for five years (in total £1872.60). Does that mean that I would need to live at least 7 1/2 years after retirement to get any benefit (£1872.60/£250). Or am I misunderstanding how it works?

kidmugsy

Is the £250 index-linked?

bigfreddiel

midge406 wrote: »

To get an extra £250 pa I would need to pay £31.21 a month for five years (in total £1872.60). Does that mean that I would need to live at least 7 1/2 years after retirement to get any benefit (£1872.60/£250). Or am I misunderstanding how it works?

Well lets see then £100,000 buys say £5000 pa annuity

Your scheme £2000 buys £250 pa(roughly)

So £200,000 would buy £25,000 - just factor each one up by 100

So I reckon its a bloody good deal, pile in as much as you can afford - for go holidays, new car etc for five years - you won't regret it.

Just be sure your initial figures are correct.

jk

midge406

Thanks for the replies guys.

The main pension scheme is index linked. Does that mean the extra contributions will be too?

I still don't understand how it is such a good deal (I've never been great with figures alas). Why is it good to pay nearly £2000 for just an extra £250pa on retirement?

Here are some of the figures based on 5 years:

Buy a yearly pension of: For you alone monthly cost is: For you and dependants monthly cost is:
£250 £31.21 £34.56
£500 £62.42 £69.12
£750 £93.63 £103.68
£1000 £124.84 £138.24
£1250 £156.05 £172.80
£1500 £187.26 £207.36
£1750 £218.47 £241.92
£2000 £249.68 £276.48

Thanks again!

bilbo51

midge406 wrote: »

Why is it good to pay nearly £2000 for just an extra £250pa on retirement?

Because in the private sector I would have to pay in nearly £4,200 to get the same benefit. And that wouldn't be index linked like yours will be. For the index linked option, I'd have to pay about £8,000.

midge406

Thanks. Ok, the theory is that £250 pa is good because if I live 20 years I would get £5000 but would have paid in less than £2000? It just seems like £250 per annum is so small. I'm worried I misunderstanding some fundamental aspect of this!

hugheskevi

To get an extra £250 pa I would need to pay £31.21 a month for five years (in total £1872.60). Does that mean that I would need to live at least 7 1/2 years after retirement to get any benefit (£1872.60/£250). Or am I misunderstanding how it works?

You would have to live a lot longer than 7.5 years to get benefit. You need to factor in inflation and investment returns that would be available if you put the money elsewhere.

Well lets see then £100,000 buys say £5000 pa annuity

Your scheme £2000 buys £250 pa(roughly)

So £200,000 would buy £25,000 - just factor each one up by 100

So I reckon its a bloody good deal, pile in as much as you can afford - for go holidays, new car etc for five years - you won't regret it.

You have to take account that the OP is making contributions at age 34, not at retirement age.

Hence it is necessary to adjust (discount) for the return that money would have made had the money been invested.

The main pension scheme is index linked. Does that mean the extra contributions will be too?

All of the examples I've seen of this sort of thing are CPI linked.

Because in the private sector I would have to pay in nearly £4,200 to get the same benefit. And that wouldn't be index linked like yours will be. For the index linked option, I'd have to pay about £8,000.

You would have to pay that at age 60/65, not age 34.

I still don't understand how it is such a good deal (I've never been great with figures alas). Why is it good to pay nearly £2000 for just an extra £250pa on retirement?

I don't make it such a good deal. Assuming:

• the payment is indexed at CPI both from age 34 to retirement and once in payment
• future CPI is 2%
• the payment commences at age 65
• The OP dies at 88
• There are no spouse benefits

Then the nominal discount rate required for the net present value of benefits to match the net present value of costs is 5.128%. That is in line with reasonable assumptions about expected rates of return you would expect from pension investments, perhaps a bit low even.

However, given that you are not bearing investment or inflation risk and there is no cost of annuitisation, that is enough to swing it in favour of being an okay deal.

Thanks. Ok, the theory is that £250 pa is good because if I live 20 years I would get £5000 but would have paid in less than £2000? It just seems like £250 per annum is so small. I'm worried I misunderstanding some fundamental aspect of this!

No. You are misunderstanding the way you need to deal with future investment returns. Working in cash terms is okay when you are thinking of investments over a short period, 1 or 2 years, but when talking over decades you need to take into account inflation and expected investment returns.

£$&*"($£&(

The real adavatage of additional voluntary contributions is that you get tax relief. From what I remember this means that additional money, depending on your tax rate, gets paid in as well. The money is managed in a pension fund separate from the LPGS scheme usually manged by the organisation that manges the local LPGS scheme, such as Prudential, and you can choose how it is invested. What you get in the end will depend on how the fund performs rather than being linked to salary. When you retire you can take 100% of the AVCs as a lump sum, although this might be changing.

amibovvered

grahawk wrote: »

The real adavatage of additional voluntary contributions is that you get tax relief. From what I remember this means that additional money, depending on your tax rate, gets paid in as well. The money is managed in a pension fund separate from the LPGS scheme usually manged by the organisation that manges the local LPGS scheme, such as Prudential, and you can choose how it is invested. What you get in the end will depend on how the fund performs rather than being linked to salary. When you retire you can take 100% of the AVCs as a lump sum, although this might be changing.

AVCs are a completely different thing from buying additional years. However, I went the AVC route and am quite happy with the final outcome. I'm not sure how the 2 systems compare but I'm sure someone else will know!