Local government pension scheme

Veteran

Hi all.

I'm a complete newbie when it comes to pensions and I've been auto-enrolled into the LGPS. I'm not sure I know how it works.

From their website:

Your pension will build up in a new way from April 2014.

The LGPS 2014 will remain a defined benefit scheme from April 2014. A defined benefit scheme means that your pension will continue to be worked out using a set formula.

However, from 1 April 2014 that formula will be different because the Scheme changes from a final salary scheme to a career average scheme:

For each year in the new scheme, you will build up a pension based on your pensionable pay in that year.
For each scheme year that you are a member, a pension equal to a 49th of your pensionable pay will be added to your pension account.
Inflation increases will be added to ensure that your pension account keeps up with the cost of living.

Let's say I earn £12,000 a year and this doesn't change for the next 25 years. £55 is taken from my wage each month and my employer also puts in £55. Then at the end of the year, 1/49th of my annual salary is also added to the pot.

My pot after one year should be (£110 x 12) + (£12,000 / 49) = £1565.
And after 25 years it should be no less than £39122.

These are all rough numbers, obviously, I just wanted to check I had the maths right.



As an aside, I'm not sure whether this type of pension is affected by the recent budget announcement. Will I be able to take a defined benefit scheme as one big lump sum at the end?

dunstonh

Let's say I earn £12,000 a year and this doesn't change for the next 25 years. £55 is taken from my wage each month and my employer also puts in £55. Then at the end of the year, 1/49th of my annual salary is also added to the pot.

although your £55 hasnt actually cost you £55 as you get tax relief on it and you pay a lower rate of NI (at the moment).

My pot after one year should be (£110 x 12) + (£12,000 / 49) = £1565.
And after 25 years it should be no less than £39122.

There is no pot. Its not that type of pension. You get 1/49th for every year of service. After 25 years you will have 25/49ths. And on £12k that would equate to a pension income of £6122. There is inflation protection built into the pension. However, I have ignored it to keep the figures in line with your todays terms example

Will I be able to take a defined benefit scheme as one big lump sum at the end?

no. This type of pension does not offer that and the Govt is proposing preventing people from making the silly mistake of transferring to schemes that do.

CAE

Under the new LGPS 2014 you will build up a pension of 1/49th of your actual pay each year. Year 1 will have a pension of £244.90.

This pension is revalued each year, and the 1/49th pension for year 2 is added to the revalued pension, and so on until the end of the 25 years, as in your original example.

So assuming salary of £12000 for year 2, a further £244.90 would be added to the Year 1 £244.90, (which has been revalued). The total at the end of Year 2 would therefore be £489.80 plus the revaluation amount on the Year 1 £244.90.

At the end of 25 years the pension would be £6122, plus the revaluation each year.

The contributions made by yourself and your employer do not show in the calculations as the LGPS is a defined benefit scheme, and the pension benefits are based on the 1/49th of actual pay formula.

You won't be able to take it all as a lump sum at retirement, but you could reduce your pension and choose to have a lump sum, subject to HMRC limits.

Veteran

Woah. Okay then this now looks like the worst decision I could make by staying in.

I'm paying £55 a month (which on its own after 25 years is £16500) to get £6122 back?

I figured the perk of a pension like this is the employer paying in the same if not more than my own contribution. But if that doesn't factor into how much money I get at retirement, what's the point? It may as well go in an ISA.

Thanks for the replies.

dunstonh

Woah. Okay then this now looks like the worst decision I could make by staying in.

You mean by not staying in.

I'm paying £55 a month (which on its own after 25 years is £16500) to get £6122 back?

You mean you are paying £44pm (as £11 is tax relief) and after 25 years you will get £6122 in todays terms. However, that £6122 will be increased for career average earnings/inflation. So, it wont actually be £6122. It will be a lot more than that.

I figured the perk of a pension like this is the employer paying in the same if not more than my own contribution. But if that doesn't factor into how much money I get at retirement, what's the point? It may as well go in an ISA.

How do you work out that an ISA could be better?

If you have inflation at 2.5% and pay increases of 2.5% and start at £12,000 earnings, the amount you get on retirement is £11,350.68 p.a. (which is increased each year).

To get that in an ISA, you would need around £400,000. To build up that in 25 years, you would need to pay £783.53pm (assuming 4% p.a. net growth average)

An ISA getting £44pm for 25 years would give you a fund of £22,463

Veteran

Well if I'm paying £44 a month (£44 x 12 = £528) and for this year my pension is £244.90 then I will have lost £283.10.

My salary is not likely to go up next year and who knows after that, so it seems a pension like this one is only suited for those with vastly better salaries than mine.

jem16

Veteran wrote: »

Well if I'm paying £44 a month (£44 x 12 = £528) and for this year my pension is £244.90 then I will have lost £283.10.

You are not understanding what a pension like this is based on. You don't just have £6122 (or more as it actually will be) - you will have a pension of £6122 (increasing each year with inflation) for every year that you live, followed by a half pension for your spouse/partner for every year he/she lives after you die.

For your £16,500 to do exactly the same, it would last less than 3 years.

My salary is not likely to go up next year and who knows after that, so it seems a pension like this one is only suited for those with vastly better salaries than mine.

Only for those who are not understanding how good this type of pension actually is. Anyone, no matter how low a salary, will be far better off joining the LGPS than opting out.

Drp8713

Veteran wrote: »

Well if I'm paying £44 a month (£44 x 12 = £528) and for this year my pension is £244.90 then I will have lost £283.10.

My salary is not likely to go up next year and who knows after that, so it seems a pension like this one is only suited for those with vastly better salaries than mine.

Are you serious?

The £244.90 is for life, which on average is around 20 years. So for £528 pounds you get around £4900.

Plus it is linked to your final salary in the current scheme and index linked to CPI in the new scheme.

Plus you get life cover, Ill Heath cover, tax relief, reduced national insurance, spouses and children's benefits.

Veteran

Yep - I am *just* that stupid. I seriously forgot the fact the amount would be for each year after I retire!

God, better to make a fool of myself anonymously here rather than talk to the pensions guy at work.

I won't be opting out. Thanks for putting up with me!

jem16

Veteran wrote: »

Yep - I am *just* that stupid. I seriously forgot the fact the amount would be for each year after I retire!

God, better to make a fool of myself anonymously here rather than talk to the pensions guy at work.

The only stupid questions are the ones which you don't ask. Far better to make a supposed fool out of yourself asking questions than to make a total fool out of yourself by opting out.

Read all about your pension here, although it will be changing from April 1st.

http://www.lgps.org.uk/lge/core/page.do?pageId=157961

I won't be opting out. Thanks for putting up with me!

So glad you are not opting out!

Drp8713

Better to look silly now and be rich in retirement, than make a big mistake by opting out now and be eating out of a skip in retirement.