LGPS or Lifetime ISA?

assa96

Hello Money Savers,

I've recently landed a job at my local college as a Marketing Assistant, net £16,500 pa. I'm 19 years-old, living with my parents rent free, and have 20k in savings, which I earn a good amount of interest on, (£600 a year). I only spend £200 a month, so about £14,000 a year can go straight into savings.

As a public sector job, I am automatically enrolled into the Local Government Pension scheme. The dilemma being I'm not sure whether I should opt-out and save as much as possible for a low-interest mortgage (as I would have a large deposit), or remain in (costing £100 a month), and plan for my retirement, (potentially even putting more away), while I have the option of taking advantage of this scheme.

My thinking is that surely if I save entirely for my deposit, that in the long-term, I would be financially better off, saving thousands in interest, (especially considering the potential returns on a Lifetime ISA). And anyway, I wouldn't achieve a ROI paying into the LGPS until I'm 69.

My calculations are below:

Paying £1200 a year.

1 / 60 * 19500 = £325 per year at age 65 (normal retirement age).

So £325 * 4 years = £1300 to achieve a ROI when I'm 69. That's really old.

I would like to retire at the age of 60 max, and plan on moving out within the next five years.

If anyone here can give me some advice, it would be hugely appreciated. And please feel free to ask me any questions.

Thank you in advance of your assistance.

Aaron.

speakingofart

There's very rarely a circumstance for not paying into an LGPS - it's a guaranteed payout, even if small given your salary and the employer match is also excellent.

I would pay into the pension, especially given the amount you're able to save (although frankly I would be paying my parents board as an adult, but that's your business) and save for a deposit as well - you really aren't ever too young to start saving for retirement.

Another thing to consider is whether you think you might want to do further qualifications in the future, and if so what - this will also affect what you want to save for.

assa96

Thank you, yes £100 is a small amount, giving that over the course of five years I would have saved £6,200 (which I don't think would affect the interest rate on my mortgage much, see below).

My calculations then based on five-year financial strategy.

Putting away per year:

£1,200 into the LGPS - total paid is £6,000 for a £1,625 pension at age 65, ROI at age 69.

£4000 into the Lifetime ISA - = so £25,000 from lifetime ISA plus £20,000 from other savings so £55,000 deposit - mortgage interest will be minuscule on a £120,00 flat.

£8,800 in general savings earning interest - not putting anymore away in ISAs or retirement incase I want to pursue a degree, tuition fees covered after three years, living costs after four.

Sounds like a plan to me! Thanks.

Silvertabby

The LGPS is now a career average 1/49th scheme, with CPI as the revaluation rate. Overall, not as generous as a 1/60th final salary scheme, despite the higher accrual rate, but still well worth having. Also, your normal retirement age in the LGPS is now the same as your State pension age. Have you been given an old scheme information booklet?

hyubh

assa96 wrote: »

I am automatically enrolled into the Local Government Pension scheme. The dilemma being I'm not sure whether I should opt-out

Nothing will ever compare, and certainly not a private arrangement with zero employer contribution. Aside from a very generous pension, LGPS membership also comes with (for example) life cover. While this may not be of paramount importance for a 19 year old, your circumstances could quickly change. Conversely, if you stick at marketing, I doubt you'll remain in the public sector long term, in which case some 'banked' DB benefits will be a useful base when you're earning considerably more than you are now, but with pension benefits that can't hand a candle to the LGPS.

My thinking is that surely if I save entirely for my deposit, that in the long-term, I would be financially better off, saving thousands in interest,

If you already have 20K in savings, you're hardly starting from nothing deposit-wise, assuming you're not aiming for something silly as a first time purchase, or Greater London.

(especially considering the potential returns on a Lifetime ISA).

A LISA (assuming LISAs do actually happen) come with with several drawbacks compared to a pension (any sort):
- Beyond the first house purchase, LISAs cannot be drawn until 60, whereas pensions can be drawn from age 55.
- Especially given your age, the taxed input/untaxed output structure runs the risk that a future government will tax withdrawals anyhow.
- If you were to get into serious debt, a LISA wouldn't be specially protected like a pension is.

And anyway, I wouldn't achieve a ROI paying into the LGPS until I'm 69.

That's a funny way of looking at it - spending in retirement is what a pension is for.

So £325 * 4 years = £1300 to achieve a ROI when I'm 69. That's really old.

The current prime minister, not long into the job, will shortly be turning 60; the recently re-elected leader of the opposition is 67; and the next President of the United States will be either 68 or 70.

I would like to retire at the age of 60 max, and plan on moving out within the next five years.

Still living with your parents, rent free, in your mid-20s, then looking to retire 'at the age of 60 max'? Doesn't quite compute...

kidmugsy

You will be the toast of the taxpayer if you opt out. Who could resist such popularity?

assa96

Silvertabby wrote: »

The LGPS is now a career average 1/49th scheme, with CPI as the revaluation rate. Overall, not as generous as a 1/60th final salary scheme, despite the higher accrual rate, but still well worth having. Also, your normal retirement age in the LGPS is now the same as your State pension age. Have you been given an old scheme information booklet?

I wasn't given any booklet, just inadvertently reading about the old scheme on the web.

72 years old to get a ROI...

Let's hope I've got good genes then!

Triumph13

Generally it is a complete no brainer to join the LGPS - particularly as you have underestimated your benefits (as Silvertabby pointed out it's a 49ths scheme now so it will be £398 per year not £325) and overestimated your costs (it's just under £100 a month GROSS so after tax relief only actually costs you £75.40).


The extra factor to be considered though, is that the older you are, the better value DB schemes are as the equivalent DC contribution has less time to compound. You, if you don't mind me saying, are exceedingly young and the DB scheme is therefore much less valuable to you (and costly to the employer) than it would be for someone in their fifties or sixties. If you put the same amount of employee contribution into a private pension for the next fifty years it would need to yield about 4.5% pa over CPI to get you the same benefit (assuming a 4% withdrawal rate) which is broadly in line with historical stock market performance, so you are one of those rare people for whom the LGPS is only 'quite valuable' rather than 'incredibly valuable'.
This all adds up to mean that there isn't one answer which is clearly head and shoulders above the others in your case, particularly if you expect to be much higher paid in the future.
Having said that, I personally would definitely take the pension. As has been said above, defined benefit pensions are becoming more and more rare and even a small one can be very valuable as it helps to guarantee your core spending. For only £75 a month I think that would be a very nice little gift to give to your future self.

assa96

hyubh wrote: »

A LISA (assuming LISAs do actually happen) come with with several drawbacks compared to a pension (any sort):
- Beyond the first house purchase, LISAs cannot be drawn until 60, whereas pensions can be drawn from age 55.
- Especially given your age, the taxed input/untaxed output structure runs the risk that a future government will tax withdrawals anyhow.
- If you were to get into serious debt, a LISA wouldn't be specially protected like a pension is.

First point - However, the LGPS I can't retire until I'm 69?
Second point - unlikely to happen, the current government is planning to charge 5% for withdraws along with other penalties. Can't see there being anymore.
Third point - It would be miracle for me to get into debt; my finances are run like a business, and will continue to be.

hyubh wrote: »

That's a funny way of looking at it - spending in retirement is what a pension is for.

It's all about the ROI. No point in investing if you are not returning (and with that, within reasonable amount of time).

hyubh wrote: »

The current prime minister, not long into the job, will shortly be turning 60; the recently re-elected leader of the opposition is 67; and the next President of the United States will be either 68 or 70.

I'm sure the current Prime-minister, along with many others, will not entirely be in the same position as many of us, with her £2m net worth.

hyubh wrote: »

Still living with your parents, rent free, in your mid-20s, then looking to retire 'at the age of 60 max'? Doesn't quite compute...

Got to enjoy life while you still have your health

Scrimps

assa96 wrote: »

I'm sure the current Prime-minister, along with many others, will not entirely be in the same position as many of us, with her £2m net worth.

You missed the point being made. Being that, although 69 is 'really old', there is plenty of life left (hopefully), and lots of people doing plenty with it. Dont write off maxmising your planning for that age.

As for the rest, you seem to have answered your own questions.

Well done for thinking about the future at such a young age.

Good grief that was patronising :eek: sorry wasnt intended in that way

jamesd

assa96 wrote: »

72 years old to get a ROI... Let's hope I've good genes then!

You'd need pretty bad genes not to. Life expectancy at age 65 is currently:

Male, to age 86, 21 years, 1 in 4 chance of 95, 1 in 10 chance of 99
Female, to age 89, 24 years, 1 in 4 chance of 96, 1 in 10 chance of 100

The LGPS helps a lot with retiring before state pension age because it reduces the amount you need to keep back to provide income from then to end of life. You're harming your early retirement plan if you don't pay into it every year.

Given your savings inclination it's entirely possible that you'll be able to retire before you reach 50 if you continue as you are.

The Lifetime ISA has some advantages but for you it has some serious disadvantages as well:

1. No income until age 60 at the earliest.

2. Vulnerable to benefits means tests, unlike a pension that hasn't been taken. As a young person you've many more years of exposure to this risk than someone older and young people also tend to be among the first to be made redundant in times of economic trouble.

Those things mean that you definitely do need the protected money in a pension and also that you should after buying a home keep on putting some money into a non-Lifetime ISA so you can have it available to draw in the first part of your retirement. The Lifetime ISA is a good move for buying a home, though.

The LGPS rules don't mean that you can't retire until 69, just that it'll only help with your early retirement planning from then. So you don't need to provide for the LGPS amount of income nor the 8k from the state pension from that point, just the earlier years. That greatly reduces the amount you need and makes much earlier retirement possible. You should have a play with cfiresim to see what you need to accumulate in today's money to meet your target. Planning for the 1 in 4 or 1 in 10 chance age is likely to be sensible. So if planning to retire at say 50 you'd need to have a planned lifetime of say 49 years from retirement.