LGPS/Low Earner/Tax Question

wannaretireearly

Hi folks,

Trying to get to grips with pension 'stuff' and where better to begin than with my work pension.

I joined LGPS in October 2012 and as I only have a contract for 11 hours, I earn very little and thus pay in very little. My question is this.

As a 'non-tax payer', do my contributions to the LGPS scheme attract an additional 20% and if so how do I know it is being added or do i have to claim it myself? My understanding is that non tax payers can pay into a private pension up £2880 to receive a value of £3660 with this 20% added or low earners can pay in up to their gross wage.

Have I got this totally wrong? Can't move forward with sorting out my next step until i get this worked out. Any help would be greatly appreciated x

jem16

wannaretireearly wrote: »

Hi folks,
As a 'non-tax payer', do my contributions to the LGPS scheme attract an additional 20% and if so how do I know it is being added or do i have to claim it myself?

Contributions to a Defined Benefit scheme like the LGPS are paid from gross salary. Tax relief is gained through paying less tax as the contribution is paid before you are taxed.

Unfortunately if you earn below the personal allowance and therefore pay no tax, there is no benefit to you with tax relief.

My understanding is that non tax payers can pay into a private pension up £2880 to receive a value of £3660 with this 20% added or low earners can pay in up to their gross wage.

Correct, although it's £3600 that is the gross. However this only applies to Relief at Source pensions which are always Defined Contributions type schemes.

Can't move forward with sorting out my next step until i get this worked out. Any help would be greatly appreciated x

What next step?

For you there is no benefit, tax-wise, through being a member of the LGPS. However despite this it is still much better than any Defined Contribution scheme using Relief at Source. You could, however pay into both the LGPS and a private pension, thus gaining some tax relief that way.

wannaretireearly

Thanks for your reply. Are you saying that basically, a defined contibution scheme is not a good choice for a low earner/non tax payer such as myself? Although I have a small contract I do a reasonable amount of extra hours covering other members of staff. Pension contributions are taken from these earnings too. Is is the best choice for me or should i be looking at opting out (if i can) and taking out a private pension instead? To date, I have never really thought that much about it as hubby has a decent (frozen) final salary pension and is currently paying into another pension via a salary sacrifice scheme. As he is a higher rate tax payer, we've felt it more valuable to pay extra into his pension to get 'value for money'. I am 46 and In an ideal world, we are only looking to be in paid employment for another 10 years so would it be worth taking out a private pension for this time? Any recommendations where to start looking for one? It's a bit like a ball of string. I need to unravel what there is to know about pensions to find a beginning!
Thanks

jem16

wannaretireearly wrote: »

Thanks for your reply. Are you saying that basically, a defined contibution scheme is not a good choice for a low earner/non tax payer such as myself?

If you are referring to the LGPS, it's a Defined Benefit scheme and not a defined Contribution scheme.

I am also saying that it is the best scheme you could possibly have even in the absence of tax relief.

Is is the best choice for me or should i be looking at opting out (if i can) and taking out a private pension instead?

Absolutely the best choice for you and no private pension would come anywhere close to providing you with the same benefits. To get anywhere near you would need to pay around 25%/30% of your salary. I suspect you pay around 5%.

You would also be giving up guaranteed benefits with spouse pension and death-in-service benefits for a non-guaranteed return on the stockmarket.

Stay in the LGPS and don't even think about opting out and going with a private pension.

wannaretireearly

So, you're saying I should stay in the LGPS, defined benefit scheme which takes 5.5% of my wage as it is the most beneficial way to use that 5.5% of my wage.

I was looking at paying around £200 pcm extra into my pension. Would i be best to do this through LGPS or should i look at doing that through a private provider instead?

Alternatively, I have a civil service pension which they have told me is worth approx £3k p.a at retirement (earned from 1985-2008). Would it be worth seeing if i could pay extra into this instead....if it is possible?

jem16

wannaretireearly wrote: »

So, you're saying I should stay in the LGPS, defined benefit scheme which takes 5.5% of my wage as it is the most beneficial way to use that 5.5% of my wage.

Yes.

I was looking at paying around £200 pcm extra into my pension. Would i be best to do this through LGPS or should i look at doing that through a private provider instead?

That depends on whether you want the guaranteed benefits that Additional Pension (ie in the same way as your current benefits work but you pay the full cost) can buy or whether you want the flexibility to perhaps retire earlier that a private pension would allow.

Alternatively, I have a civil service pension which they have told me is worth approx £3k p.a at retirement (earned from 1985-2008). Would it be worth seeing if i could pay extra into this instead....if it is possible?

If you're not currently a member of that scheme then it wouldn't be possible. I'm assuming you are a Deferred Member as you have left.

hyubh

wannaretireearly wrote: »

So, you're saying I should stay in the LGPS, defined benefit scheme which takes 5.5% of my wage as it is the most beneficial way to use that 5.5% of my wage.

Yes - aside from anything else, the structure of the CARE LGPS makes the highest paid members effectively subsidise the membership of the lowest paid. Put another way: 5.5% isn't anywhere near paying for the benefits being earned.

I was looking at paying around £200 pcm extra into my pension. Would i be best to do this through LGPS or should i look at doing that through a private provider instead?

With the LGPS that would mean either an APC or an AVC. An APC earns a fixed amount of additional DB pension, whereas an AVC is DC and more akin to a personal pension. See here for an APC calculator:

http://www.lgps2014.org/content/how-do-i-buy-extra-or-lost-pension

Alternatively, I have a civil service pension which they have told me is worth approx £3k p.a at retirement (earned from 1985-2008). Would it be worth seeing if i could pay extra into this instead....if it is possible?

It will not be possible.

xylophone

You will be able to take your deferred CS Pension at 60 without actuarial deduction?

http://www.civilservicepensionscheme.org.uk/members/deferred/information-for-deferred-members/

As well as paying into your LGPS pension, you could consider a private pension for your extra £200 a month - under current rules you could start to draw this at 55 though the age will rise in due course.

http://www.cavendishonline.co.uk/pensions/stakeholder-and-personal-pensions/

http://www.thisismoney.co.uk/money/pensions/article-1712426/How-cheapest-low-cost-Sipp.html

This would provide relief at source so you would get tax relief.


https://www.gov.uk/tax-on-your-private-pension/pension-tax-relief

wannaretireearly

Would £200 pcm in a private pension be a better choice than opting for APCs on LGPS? Or better than opting for AVCs with LGPS?
How can i compare them?
Whatever I pay into LGPS I can't access until 67 whereas i could access a private pension at 55.
If I understand what i have read about private pensions then:
1)what i pay in will cost me 80% of the contribution rate as HMRC will put 20% towards it as tax relief up to a maximum of my gross earnings (which are less than tax allowance)
2)I can draw 25% of this money from the age of 55 as a tax free lump sum
3)the remaining money can either buy an annuity to pay me a small income in my retirement or i can leave it 'in the pot' so to speak and draw off it each year. This would only attract tax if my combined income in those years added up to more than my personal allowance?

Thank you so much for taking the time to read this and a very big thank you to those who've replied. I'm trying to get my head around it all so i have some sort of understanding to make informed choices. It may well be that after getting to grips I decide to put in all my wages or alternatively do none of these and up hubby's contributions again.

jem16

wannaretireearly wrote: »

Would £200 pcm in a private pension be a better choice than opting for APCs on LGPS?

APCs give a guaranteed benefit just like your LGPS benefits. If you want that security as opposed to unknown returns on the stockmarket then go with that.

Or better than opting for AVCs with LGPS?

AVCs with the LGPS were great in that you could use that AVC pot to fund any tax-free lump sum, thus avoiding the need to commute valuable pension to provide a lump sum.

From April 2014 that ability was removed with new contracts but I have read recently that it's being disputed so not sure what's happening there.

If it has been removed you would be better with a private pension rather than AVCs as it should give more flexibility.

How can i compare them?

You need to decide which type of extra pension you want first. Only you can decide that.

Whatever I pay into LGPS I can't access until 67 whereas i could access a private pension at 55.

You can access the LGPS earlier but it may require an actuarial reduction on some/all of it.

At the moment you can access a private pension from age 55 but that may rise to 57 shortly.

If I understand what i have read about private pensions then:
1)what i pay in will cost me 80% of the contribution rate as HMRC will put 20% towards it as tax relief up to a maximum of my gross earnings (which are less than tax allowance)
2)I can draw 25% of this money from the age of 55 as a tax free lump sum
3)the remaining money can either buy an annuity to pay me a small income in my retirement or i can leave it 'in the pot' so to speak and draw off it each year. This would only attract tax if my combined income in those years added up to more than my personal allowance?

Basically, yes.

AVCs can give a similar option but may require a transfer out when you come to take it depending on how you want to access the money.

wannaretireearly

Thank you so much jem16 for all your time and effort x

For me I think the 'safest' option is to go for APC with LGPS. Since my last post I have been reading up on their website and my understanding is that i can pay in an annual amount of up to £6675 as a lump sum. The way it reads is that i can claim tax relief on this via self assesssment (so long as i earn this much in the current tax year) as it is a 'tax relief at source arrangement'. This amount will 'buy' me extra pension of £678.55
As I am about to lose my current post due to government cuts and start a new contract in a site that has survived, I do not know how long i will manage to stay working in the LA (we all believe the axe will fall again in the new few years).
If what you say about AVCs and new contracts from April 2014 is going to be introducted/maintained then this isn't really an option as though I have worked there since October 2012, I will be getting a new contract sometime between July and October 2015.
I will keep my ears open about the AVC situation as if it may be something to consider at a future date.