Local Government Pension Scheme - Increase in ARC's from April 2013

Jack_Griffin

You originally expected £5,000 pension for an £39,000 outlay, they are now telling you it costs £69,700 (but you've already got a few years paid up, so less for you, around £58,000).

If that £5,000 is indexed linked it is a super marvellous deal as it would cost about £140,000 at current commercial rates, even if it isn't index linked it would still cost around £90,000 at current commercial rates.

I am amazed it has not gone up before.

darren72

From the replies it sounds as though the new deal is good, but just not as good as the original one.

Is there a benefit of sticking with the current contract which increases in line with RPI rather than taking out a new one which increases with CPI ? - If the amount I pay is the same.

It looks as though they will charge less each month if I change to a new contract (CPI) rather than continue on my existing one.

Stochasticity

darren72 wrote: »

Is there a benefit of sticking with the current contract which increases in line with RPI rather than taking out a new one which increases with CPI ? - If the amount I pay is the same.

Yes, if the cost is the same. Due to the way that it's calculated, RPI tends to be about 0.8-1.0% higher than CPI.

Compounded over several years, that'll make a decent difference to the size of the additional pension.

Hypothetical example: you buy £5,000 of additional pension, begin taking benefits after 15 years and then pension's in payment for 20 years. Inflation is 2% per annum as measured by CPI and 3% per annum as measured by RPI. The CPI pension pays total income of £166,775. The RPI pension pays total income of £215,595, or £48,819 more.

If the new one is cheaper, that'll be a big part of the reason why. Obviously there's a breakeven point somewhere, but this is very difficult to calculate given all the variables.

mark55man

darren72 wrote: »

From the replies it sounds as though the new deal is good, but just not as good as the original one.

Is there a benefit of sticking with the current contract which increases in line with RPI rather than taking out a new one which increases with CPI ? - If the amount I pay is the same.

It looks as though they will charge less each month if I change to a new contract (CPI) rather than continue on my existing one.

I think that is right, and although you must be disappointed the price has gone up, I agree with previous posters in that it is still a good deal. Although the comparison with an annuity cost is a bit off beam as there you have to pay all the money up front not over a 10 year "investment" period .

woolly_wombat

darren72 wrote: »

The letter does say:

"I am writing to you now, to make you aware that we have just received notification that GAD have reviewed the contributions payable to purchase additional pension and a significant increase has been made to these contributions (the increases are in the main as a result of projected future investment returns). The new rates apply automatically from 1 April 2013 to all existing continuing contracts that were entered into before 1 April 2012. Consequently, the amount you pay each month will increase from this date."

How very interesting!

Thanks so much for posting this information. I am one of those who started making (RPI-linked) additional regular contributions (ARCs) before 1 April 2012.

I have heard nothing at all from my LGPS administrator. They seem very badly informed (in fact they have c@cked up my last three pension statements and have never included any ARC-related pension that I have purchased).

I was aware that I was purchasing RPI-linked additional pension as I have been keeping a close eye due to the aforementioned incompetence.

I am going to have to phone once again and send more emails!

Grrrr!

darren72

woolly_wombat wrote: »

How very interesting!

Thanks so much for posting this information. I am one of those who started making (RPI-linked) additional regular contributions (ARCs) before 1 April 2012.

No problem at all. - Hope it proves useful to you.

I called them today but unfortunately the person I spoke to wasn't able to answer my questions, so they are going to call me back tomorrow or Wednesday - They are not exactly in a rush, despite the short notice they have given.

woolly_wombat

Pixieboy wrote: »

Based on the amount of pension being purchased and the period over which you are paying for it, yes the contribution increase is correct based on what is in the revised GAD guidance.
These pre 1/4/2012 additional pensions are indexed relative to RPI from commencement of the contract and thereafter; so even whilst deferred if you leave and don't take payment of your benefits, and once in payment. This is different to the main scheme benefits, for which increases are applied as a result of Pension Increase Review Orders, effectively linking them to CPI at present.
ARCs taken out since 1st April 2012 have their additional pensions indexed from commencement of the contract by Pension Increase Review Orders, effectively linking them to CPI at present.
The contributions for both are reviewable from time to time, and it is only the pre 1st April 2012 ones that are changing from 1st April 2013.

Could you please post a link Pixieboy.

I have been trawling the Local Government Employers website but can't find any details.

As I stated above, my LGPS administrator has not informed me of these increases.

Many thanks.
WW

Perelandra

Out of interest (and apologies if I've missed it); how soon after the 10-year savings period will you be drawing on the pension?

darren72

A long time off - Around 25 years...

Perelandra

darren72 wrote: »

A long time off - Around 25 years...

Ooo... that makes it a tighter choice then, I think. However, the certainty factor would make that valuable.

I've crunched a few numbers, and worked out the sort of return I'd need to get if I would need to get in a SIPP to give the same value at the end.

In order to get the same benefit, I would need to be able to invest in assets that would deliver a return of 2% above RPI for the duration (35 years from commencement). This would... I think... deliver enough of a pension pot to give 5% returns (RPI adjusted).

In my own planning, I'm using an assumption of 3% real growth, so I *think* (and no doubt if my maths are wrong someone will correct me!) that I could expect (in a statistical sense) a higher return than the one you're getting here. HOWEVER, the returns on the SIPP wouldn't be guaranteed, stockmarket timing might be bad when I retire etc, so you'd expect that risk to be factored in to the equation.*

So overall, yes it looks right- and if I were able to take a deal with a certain pension value at the end, rather than a riskier one, I'd be very tempted to make that a part of my retirement planning.


* incidentally, at 3% growth, it would be a £7k pension, not £5k.