LGPS extra pension

patrickbateman

I'm considering buying extra pension in the LGPS. I'm not sure if this is a good idea and just wondered if anyone had any experience of this or thoughts?

I've found out that I can buy £5K additional annual pension (which I hope and believe increases each year with CPI). If I buy this in 1 year it will cost approx 2.5K per month before tax relief, if I buy it in 2 years it will cost approx. 1.3K per month before tax relief or if I buy it in 3 years it will cost approx. 0.9K per month before tax relief etc. I can buy it over any time frame so long as it it fully paid by my 65th birthday but I would sooner reduce the length of time and if possible reduce my tax rate to nil... I.e. Take home just under £1k a month.

I current earn approx 3k a month gross and am in my mid 30s. I don't own a property and am not likely to buy for the next few years. I do hope to retire in my mid 50s.

Does anyone have any thoughts on if this is a good idea? Is this a better deal that buying avc's. I assume I continue to pay my ordinary LGPS payment of approx 0.2k a month. The way I see it is if I buy it in 1 year I give up approx. £30K of pre tax earnings now which costs me about 70p in the £ (21K) to receive £5K increased for inflation each year when I am 65... If this is correct, seems a good deal.

I realise that if I don't make it to pension age I lose the money I buy this extra pension with.

hyubh

patrickbateman wrote: »

I've found out that I can buy £5K additional annual pension (which I hope and believe increases each year with CPI).

£6,500, scheduled to increase by CPI every year. (I'm assuming you're in England or Wales and so talking about a new-style APC rather than an old-style ARC.)

I do hope to retire in my mid 50s.

Surely that's irrelevant to the issue at hand? Or if it is relevant, only negatively, as an LGPS APC won't help you retire early...?

I assume I continue to pay my ordinary LGPS payment of approx 0.2k a month.

Yes.

to receive £5K increased for inflation each year when I am 65

State Pension Age rather than 65.

FatherAbraham

patrickbateman wrote: »

I've found out that I can buy £5K additional annual pension (which I hope and believe increases each year with CPI). If I buy this in 1 year it will cost approx 2.5K per month before tax relief, if I buy it in 2 years it will cost approx. 1.3K per month before tax relief or if I buy it in 3 years it will cost approx. 0.9K per month before tax relief etc. I can buy it over any time frame so long as it it fully paid by my 65th birthday but I would sooner reduce the length of time and if possible reduce my tax rate to nil... I.e. Take home just under £1k a month.

What's the point of reducing your tax rate to 0%? What are you trying to achieve?

Isn't LGPS deducted from salary before income tax is deducted? In that case, getting into the 0% band may be a bad thing for you, since there's no way to get tax relief on a DB scheme which is paid for in this way. You could end up paying gross contributions from 0%-tax-band income -- ouch!

In any case, it may be better to check the full cost of buying your defined benefit at various rates, and pick the cheapest (allowing for inflation, of course).

patrickbateman wrote: »

I current earn approx 3k a month gross and am in my mid 30s. I don't own a property and am not likely to buy for the next few years. I do hope to retire in my mid 50s.

Does anyone have any thoughts on if this is a good idea?

It sounds like the time-structure of this investment strategy might be in conflict with your spending profile (but we don't really know enough about your extant assets to be sure).

The point is that the extra payments into a DB scheme might be a good idea, but this strategy doesn't pay out until state pension age (68 for you? Rising potentially by 1 year per decade until you're within a decade of your SPA, due to actuarial/longevity revaluations).

If you need capital to acquire real estate within 5-10 years, then locking it away might be a bad idea.

If you want to retire at 55, then you'l need capital available to bridge the funding gap between that age and your DB pensions (LGPS + state pension) starting at SPA. So putting too much into LGPS would undermine that goal.

But, as I say, we can't see the whole picture, so if your other financial goals are already well-funded, then boosting LGPS might be a good way of reducing retirement-income-shortfall risk.

Warmest regards,
FA

atush

I agree. While having a larger DB pension is a great idea, not so much if you will then take it actuarily reduced.

So far better to instead find a way to fund a DC pension, that will pay out early so as to allow you to take your DB pension unreduced.

If you can afford to both fund a DC pension and buy some added pension, all the better.

patrickbateman

Thank you for your replies.

I'm now considering defined contribution. This is something I'd never really considered as I always thought being in the LGPS was better.

I am interested in vanguard having read tim hales book last summer, but I'm sort of getting a bit lost with all the jargon etc. can I purchase this in a sipp, if so which companies should I consider using.

I don't know if my employer offers full salary sacrifice (it's a county council) but if they do, then would I get 20%tax, 12% NI and then my employers 12% as additional contribution to whatever I contribute.

Are there are other better strategies out there for early retirement ?

kidmugsy

patrickbateman wrote: »

Are there are other better strategies out there for early retirement ?

Yes; save in shelters that are not pensions - most obviously NISAs, and owner-occupied housing. Remember that your eventual pension might well be taxed at greater than the current 20% tax rate. (A Labour MP was flying a kite last week about raising the standard rate back to 22%. That won't be in the Labour manifesto, presumably, but someone, of one party or another, might well raise tax rates long before you retire.)

Teaandscones

If you want to retire early, you could save in a separate DC pension not linked with the LGPS. With a free personal allowance of £10,500 then using funds saved in a DC scheme and with the 25% lump sum, you could withdraw £14,000 p.a. tax free. This could bridge the gap until your LGPS and state pension kicks in.

hugheskevi

I've found out that I can buy £5K additional annual pension (which I hope and believe increases each year with CPI). If I buy this in 1 year it will cost approx 2.5K per month before tax relief,

Be aware that if you did this, the cost may be £30,000 but HMRC will deem it to be worth £80,000 which is far above the Annual Allowance of £40,000.

As you are so young, the method HMRC uses to value DB pensions is significantly incorrect for you, so you need to factor this into your decision making.

The same method is used to calculate the value of your main LGPS pension, and similarly badly over-values it so you do need to be careful you understand the system before you consider large purchases of additional pension. It looks like you are already using at least £11,755 of the £40,000 allowance from your LGPS pension.

kidmugsy

If I were you, OP, I'd wait a while, at least until it's higher rate tax I'd be saving, and the inflexibility period - from your contribution being made until you reach retirement age - is smaller. That would also minimise political risk, in the sense that you'll be exposed to it for a shorter time.

You might also look at the recent thread on USS (the university scheme) to see how browned off people can become about pension reforms that are (presumably) legit in terms of the trust deeds, but are not at all what they expected based on scheme leaflets.

atush

kidmugsy wrote: »

Yes; save in shelters that are not pensions - most obviously NISAs, and owner-occupied housing. Remember that your eventual pension might well be taxed at greater than the current 20% tax rate. (A Labour MP was flying a kite last week about raising the standard rate back to 22%. That won't be in the Labour manifesto, presumably, but someone, of one party or another, might well raise tax rates long before you retire.)

Personally not sure these are better so close to retirement, and wanting to retire early Before a DB pension pays out.

This is where pensions beat Isas hands down, as you can take 10.5K w/o paying any tax- even after the TFLS. Too many people forget the new rules about DD and forget about fully using your personal allowance. using this method to keep from taking a DB pension early/reduced is an excellent way of minimising tax and maximizing income.

Saving in shelters outside of pension like S&S isas are great- if you have a good pension paid already, or need the money before age 55.

hyubh

patrickbateman wrote: »

I'm now considering defined contribution. This is something I'd never really considered as I always thought being in the LGPS was better.

Nobody here is saying opt out of the LGPS. Rather, from different angles we're saying that a large additional LGPS contribution in the form of an APC to buy additional pension may not be wise, or at least not the best way achieve your early retirement aim.

I don't know if my employer offers full salary sacrifice (it's a county council) but if they do, then would I get 20%tax, 12% NI and then my employers 12% as additional contribution to whatever I contribute.

That's not how it works - you're referring to a situation whereby the work pension is a DC one. For a local authority, in contrast, the LGPS will be offered and that's it, however even if that weren't the case, LGPS membership would be more valuable than 12% employer conts to a DC scheme.