Local Government Pension Scheme

rush1884

Does anyone know how the local government pension scheme works? My wife currently works in the education sector in Lancashire and is enrolled in the local government pension scheme but appears to have no details of what it entails. She contributes 6.5% a month to it and her company contributes a good 10.7%.


She seems to think that the pension is a final salary scheme that will average her earnings of a certain timeframe and pay her an annuity at a % of that.


This doesn't really sound right to me, and reading the horrendously written information on their website it really isn't clear if her pension pot is just building up as a normal pension pot would and then its her decision what she does with it when she retires or whether their is some regular annuity related to pay when she retires.


Any help?

saver861

rush1884 wrote: »

She seems to think that the pension is a final salary scheme that will average her earnings of a certain timeframe and pay her an annuity at a % of that.

It was final salary until April 2014. There after it is Career Average. Add to that, unto 2008 it is compulsory lump sum.

There will be no annuity with her LGPS. If she has AVC's the that option will be available.

It sounds to me like you are getting some wires crossed.

hyubh

rush1884 wrote: »

Does anyone know how the local government pension scheme works? My wife currently works in the education sector in Lancashire and is enrolled in the local government pension scheme but appears to have no details of what it entails.

If the employer didn't provide a scheme booklet, check out the administrator's website (which you've done), or the national LGPS site (see below).

She contributes 6.5% a month to it and her company contributes a good 10.7%.

The employer rate is really irrelevant - as a DB scheme the employer will pay what it takes to pay the promised benefits. That said, I doubt it is only 10.7% even as an ongoing rate, unless the fund actuary uses assumptions at the less prudent end of the spectrum (maybe they do). More typical is a 'future service rate' of 13%-14%.

She seems to think that the pension is a final salary scheme that will average her earnings of a certain timeframe and pay her an annuity at a % of that.

While still DB (defined benefit) like a final salary scheme, the LGPS is now a CARE ('career average revalued earnings') scheme. In essence, a fraction of her earnings each year (currently 1/49) becomes her pension on retirement, with the amounts from previous years uprated for inflation (currently CPI) so that they don't lose their value in real terms.

This doesn't really sound right to me,

Your terminology isn't quite right (e.g., a DB pension in payment isn't technically an 'annuity'), but you have the right idea.

and reading the horrendously written information on their website

You mean this one?

http://www.yourpensionservice.org.uk/local_government/?siteid=5921&pageid=34020&e=e

The 'Active Members' page has the key information, though admittedly the stuff about old versions of the scheme adds a lot of 'noise' when irrelevant (as it is in this case). Check out the national LGPS site as an alternative:

http://www.lgps2014.org

it really isn't clear if her pension pot is just building up as a normal pension pot would and then its her decision what she does with it when she retires or whether their is some regular annuity related to pay when she retires.

By the sounds of it you're only familiar with defined contribution (DC) pensions (these have become the normal type of workplace pension in the private sector). As a DB scheme there are no individual 'pots'; instead, being a member earns you a set of pension benefits, to be paid for (in the LGPS case, like it would be in private sector DB scheme) out of a collective fund ('pot'). If the fund proves too small to cope, then it's down to the employer(s) to make good the difference.

If your wife wanted to, on leaving she could in principle request a 'cash equivalent transfer value' (CETV) and exchange her LGPS benefits for a pot of money to go into a private, DC pension instead. However, that's not normally a good idea because (with a few exceptions) the cost of an equivalent DC annuity will typically be more than the CETV offered (this goes for all DB schemes, not just the LGPS).

Peelerfart

Sounds good stuff to me hyubh, my oh is in lgps and that sums up my understanding as well.

rush1884

hyubh wrote: »

While still DB (defined benefit) like a final salary scheme, the LGPS is now a CARE ('career average revalued earnings') scheme. In essence, a fraction of her earnings each year (currently 1/49) becomes her pension on retirement, with the amounts from previous years uprated for inflation (currently CPI) so that they don't lose their value in real terms.

Apologies for the further questions as my understanding on this is poor. So if my wife gets paid £30,000 per year for 25 years (to make the figures easy) and takes her pension out at normal retirement age what should she be expecting to receive as her annual final pension? Would it be 1/49th of her total earnings £750,000? Which would equate to £15,300 per year?


Thank you for the help

hyubh

rush1884 wrote: »

So if my wife gets paid £30,000 per year for 25 years (to make the figures easy) and takes her pension out at normal retirement age what should she be expecting to receive as her annual final pension? Would it be 1/49th of her total earnings £750,000? Which would equate to £15,300 per year?

Yes, assuming CPI has been zero through those years; in payment the pension will then continue to increase by CPI every year, and were your wife to die before yourself, a spousal pension will become due. There's also life cover benefits before then - again, that's normal with a DB scheme, unlike in DC land where workplace life cover (when available) is frequently completely separate from pension scheme membership.

With respect to the core pension, in practice I can't see an accrual rate of 1/49 being tenable in the longer term (> 10 years), but that's for the future, and will not directly affect pension being earned now.

System

Hi

It is 3 sets of sums

Years and Days upto 31/03/08
Years and Days 01/04/08 - 31/03/2015
01/04/14 0nwards.


So 30 years would (Counting Back) be 1 post 2014, 6 08 to 14 and 23 prior to that.

At £30, 000 this would represent

23 years 000 days divided by 80 and multiplied by 30000 = £8625.00
(with a Tax Free Lump Sum of £25,875)
06 Y 000 D divided by 60 and times £30000 = £3000.00 (No Lump Sum)

Giving 38.25% of Salary

Total is £11,625.00 with a L/S of £25,875
Commuting gives £ 8,859.38 with a L/S of £59, 062.50


Then add on each and every year in the 2014 scheme

1Y 000 D divided by 49 and times £30000 = £612.24 (No Lump Sum)

and adjust for CPI.

saver861

rush1884 wrote: »

Would it be 1/49th of her total earnings £750,000? Which would equate to £15,300 per year?


Thank you for the help

No - you are getting things mixed up. The total career earnings of £750,000 does not come into it. johndough has done the various calculations so the pension would be £12,237 per year with a lump sump of £25,875.

There are options to convert some of your annual pension per year to the lump sum. I think it is 1 to 12. So for every £1,000 you reduce the annual pension you get £12,000 more lump sum. Example - £11,237 annual pension and lump sum £37,875. (However, this is generally not a good idea as you will be losing from year 12 onwards, a bit longer with tax etc.)

So the max annual pension is £12,237.

Your wife should be able to contact the pensions office and get a statement with estimates for her retirement date. She should get a statement every year but she can contact them and get the correct figures for her salary for any given retirement date. Thats really your best option to get the most accurate information.

hyubh

saver861 wrote: »

No - you are getting things mixed up. The total career earnings of £750,000 does not come into it. johndough has done the various calculations so the pension would be £12,237 per year with a lump sump of £25,875.

Hang on - where did the OP confirm his wife has final salary, and in particular, 1997 scheme membership? I read him as saying she was a relatively new joiner, and therefore with 2014 scheme membership only - perhaps the OP can clarify?

There are options to convert some of your annual pension per year to the lump sum. I think it is 1 to 12.

It is.

saver861

hyubh wrote: »

Hang on - where did the OP confirm his wife has final salary, and in particular, 1997 scheme membership? I read him as saying she was a relatively new joiner, and therefore with 2014 scheme membership only - perhaps the OP can clarify?

I was going by post #5. The example seem to suggest that the OP's wife was on £30,000 and had 25 years service in the LGPS scheme which would have started circa 1990.

He was thinking that the total earnings of £750,000 would calculated and the 1/49th being the annual pension. Obviously that is not correct.

However, you are correct if she is a new joiner since April 2014 then it will be career average, which it will be in any case. The final salary part will only be effective for any service pre 2014.

hyubh

saver861 wrote: »

I was going by post #5. The example seem to suggest that the OP's wife was on £30,000 and had 25 years service in the LGPS scheme which would have started circa 1990.

Hmm, I read it as 25 years prospectively rather than 25 years so far... but we're all just guessing at the moment I think!