Lgps avc/ apc

Plu88

I'm 28 and a member of the LGPS, but work in the private sector now though after being outsourced. I have 6 years of membership on the previous final salary scheme.

I am looking at paying additional pension contributions to take advantage of the 40% tax relief. The scheme document gives the option of AVC or AVP, the latter potentially looks like the better option. £100 of additional pension would cost approx. £9.30 gross per month over 5 years.

I would welcome any opinions on whether this could be a good route or whether a separate pension pot might be a better idea. Or indeed whether to just put the money in a S&S ISA. I am slightly concerned that my employer will at some stage replace the pension with a DC scheme, so if the AVP route is a good idea I want to take advantage of it whilst I can.

Any thoughts?

Thanks.

atush

The latter can be the better option, but mainly if you work til scheme age (or retire and draw on private funds of going early). If you w ant to retire early, AVCs could be a better choice. AS could a PP or SIPP.

hugheskevi

You may need to take account of the Annual Allowance.

Taking into account your accrual in the main scheme, you can only contribute about £8,000 per year to buy extra pension before you exceed the Annual Allowance. Whereas you could put more than £23,000 into an AVC or personal pension before reaching the limit.

Plu88

Thanks for the replies. I certainly don't want to be working for another 40 years. My thought was to secure as much defined pension as possible whilst I'm still in the LGPS. Once this is topped out start saving so that I can retire earlier than 68.

Looks like I haven't considered enough the implications of the annual allowance. Due to the way my pay is packaged not all my salary is pensionable but I may have to restrict any AVP to keep under the limit. To work out my annual allowance usage my understanding is I need to add 20 * current year CARE amount + 20 * additional pension in final salary element following any payrise + 20 * any AVP. Do I need to add anything in for previous years CARE amounts because of CPI?

hugheskevi

Annual Allowance is a multiplication factor of 16, it is the Lifetime Allowance which uses 20.

Past CARE service should not lead to any pension input, as the HMRC calculation allows for CPI increase.

Remember there is the 3 year carry-forward available.

You will need to check the dates your scheme's pension input period starts and ends (and understand why that matters).

In short, if you do intend to contribute more than about £8,000 p/a you are going to have to make sure you understand the Annual Allowance calculation process very well, as you are in significant danger of breaching the limit (even though the amount of pension you are building up is worth nowhere near £40,000).

You may find it easier to pay via lump sum each year rather than monthly, as that gives more flexibility to change amounts (eg to ensure you use up an appropriate amount of carry-forward). That does mean some involvement with HMRC to claim tax relief back though.

hyubh

Plu88 wrote: »

I may have to restrict...

How much are you actually looking to pay into an APC a month? You've quoted a likely rate but not the amount.

To work out my annual allowance usage my understanding is I need to add 20 * current year CARE amount + 20 * additional pension in final salary element following any payrise + 20 * any AVP. Do I need to add anything in for previous years CARE amounts because of CPI?

Like hugheskevi says, the fact CPI is both the LGPS's revaluation rate and what you use to adjust upwards the pension value at the start of the input period for AA calc purposes neutralises past CARE accruals. However, for completeness' purposes, do you have any final salary membership?

Plu88

Thanks hugheskevi, I will have unused annual allowance so the 3 year carry forward should help. Useful suggestion about an annual payment over monthly, timed well I assume it would also protect against an unexpected pay rise once I know the input period start/ end.

hyubh I was planning on around £500 a month. My aim would be to get the maximum £6k pa additional pension as quickly as possible, due to risk of losing membership. But balanced with efficiently using 40% tax relief. The published guide figures say I need to contribute around £32k to achieve this. I have 6 years membership of the previous 1/60 final salary scheme.

hyubh

Plu88 wrote: »

once I know the input period start/ end.

1 April to 31 March - all LGPS funds have the same scheme year.

I was planning on around £500 a month.

Using the figures you've quoted:
- 9.30 x 12 x 5 = £558 conts for £100 extra pen
- 100 / 558 = £0.18 extra pen for £1 conts
- 500 x 12 x 0.18 = £4,800 extra pen earned for the year with £500/month extra cont
- 4800 x 16 = £76,800 increase in pen 'value' for AA

Annual allowance for 2015/16 is £40,000; last tax year it was the same, however in 2013/14 it was £50,000, so it's not outside the realms of possibility that you could be OK even maxing things out. While only indicative, check your recent annual benefit statements from the pension fund to see what they say about used annual allowance for the year.

I have 6 years membership of the previous 1/60 final salary scheme.

Ah sorry, just noticed you actually said this in your first post! It won't make a large difference, but since the value of those six years is still dependent on your final salary, they won't be neutral for AA purposes - in a nutshell, if your rate of pay over the scheme year is more than CPI then it will make a small dent into your allowance, if less then it will offset somewhat your CARE and any APC accrual for the year.

(As an aside, if everybody's doing things correctly, the pensionable pay relevant here will be under the 2008 scheme definition rather than the broader 2014 scheme one, though by the sounds of it your employer is possibly trying to 'game' the definition of pensionable pay anyhow.)

Plu88

Thank you for the very detailed reply, really useful.

The timings look to work in my favour, annual bonus and any pay rise should be agreed around Christmas giving me a couple of months to sort out a lump sum AVP. Can always hold back if the annual limit with previous years allowance becomes an issue.

Have you any info on what the 2008 scheme rules cover? I don't think my employer is trying to play anything, they certainly have little understanding of the LGPS though. Aside from the thought that it costs too much money and they'd rather we weren't still entitled to it! I'm in two minds as to even push whether any bonus is pensionable, it could push me into to the next contribution band for relatively little increase in pension. Possible better to use some of the money for AVPs.