Added years in the LGPS

saucer

Hi all
My wife, who has been in the LGPS for over 20 years, is paying just short of 6% in an 'Added Years' contract. She has been doing this since about 2000.
Looking at the pension forecasts, it is very difficult to see how many additional years of benefit this will lead to at the point of retirement. I know the LGPS is a bit complicated, and come retirement there will be 3 distinct bits of the pension, based on the various reforms. To complicate things she intends to retire before her SRA, and probably draw the pension at 63, or if we are lucky 61. We understand there will be a penalty for doing this, but that is probably ok because it will help tide us over until my pension becomes payable (also DB).

I have two questions please.
1. Is there a way of determining what the benefit of this contract will be at various potential retirement dates?
2. Is this likely to remain the best way of saving extra towards retirement, particulary noting that she intends to take it a few years ealier than SRA, or should she be putting the money in a SIPP?

Many thanks in advance for your advice :-)

woolly_wombat

I received a letter detailing how many additional years I would achieve at retirement if I stayed until 65 (the retirement age in the pre-2008 scheme). What did you wife's letter say?

Obviously if you wife retired early, like me, then she won't get that much.

I believe you can still buy Additional Pension in the LGPS, although I don't think you can include provision for a spouse any more since 1 April 2014. Others have reported that it's more difficult now, with medical checks being requested. I also don't know what happens if you take these benefits early. Hopefully an LGPS expert will come forward.

It's tempting to suggest bunging the extra in a SIPP, although I'll leave others to suggest what to invest it in - cash would be safer in the short term but comes with inflation risk.

OldBeanz

One of the major benefits that the LGPS offers is that AVCs can be used to buy the tax free lump sum thus allowing the money in the scheme to buy more pension. While not an expert, I am loading up my wife's pension this way.

Neasy

I apologise for the lack of links in the email, I am writing it on my phone on a dodgy Italian wifi connection.

The Government Actuary's Department issued tables stating what percentage of salary a certain number of added years cost depending on the age and gender of the LGPS member. The rules changed in 2005 I think, and I can only find the post-2005 tables. You need to look for the earlier ones, work out when your wife started & her age then & compare the %age she's paying to the appropriate row on the table.

Be aware that added years contracts entered into prior to the 2005 change may have certain advantages. For example, I think the added years bought count toward the Rule of 85 calculation, which later ones don't.

I'm sure SilverTabby can add more, as a bona fide LGPS Expert, but IMHO don't just stop the Added-years contract without finding out more.

Silvertabby

Neasy is right - but as she is under 61 and only has 20/21 years service she either has minimal R85 protections or possibly none at all. Can you post when she joined and how old she is now?

System

Hi

In my experience the amount of added years would have been stipulated in a letter at the time.

Then the added years will show on an ANNUAL BENEFIT STATEMENT, not necessarily as added years but as increasing value.

EG: In 2008 the added years for the 80ths would be shown as part of the sevice value. If there was 08/000 exactly 8 years employment and 02/200 added years bought the value shows as 10/200.

Then the next statement would have an 80ths value of 10/306. Since the scheme ended there can be no more employment added to 08/000, only the 02/200 can be increased.

When the added years contract ends it will be at the stipulated date and have bought the stipulated amount. Early termination would be Pro Rata.

So go thru the paperwork and please ask for any particular clarification.

atush

If retiring early, i am not a fan of buying added pension.

I look at it like this, you are buying at a discount a future contract for 100 tennis balls every 6 months, as you will play a lot of tennis when retired. But by retiring early, you may be getting only 50-90 balls instead. So the discount disappears?

So for me a sipp, pp or the AVC would be better.

saucer

Silvertabby wrote: »

Neasy is right - but as she is under 61 and only has 20/21 years service she either has minimal R85 protections or possibly none at all. Can you post when she joined and how old she is now?

Thanks everyone. She is currently 52 and joined the pension in 1997, but was also able to add 2 years from previous employment, so I think I underestimated her level of service. She has been part time most of this time, but I thought the 85 year rule went on calendar years. Is that wrong?


We can't find the original letter/contract as to the number of years, but I may be able to work it out using the actuary tables (thanks Neasy). In terms of actual numbers she had two projections, one where she stopped paying for the Added years in 2016 and retired in 2028 at 63, and one where she continued to pay, £174 per month until retiring at the same date. The projected annual pension difference was about £900, which to me doesn't look like a great benefit for 12 years of additional contributions at £174 pcm. I am wondering if the benefit of the added years contract is less following the various changes to the scheme.

Silvertabby

She has been part time most of this time, but I thought the 85 year rule went on calendar years. Is that wrong?

No - R85 is calculated on calendar years. However, she is too young to have full protections - by my reckoning only her pre 2008 service could have any protections under R85, with pension from her service from 2008 to 2014 being reduced if taken before 65 and pension from her service from 2014 onwards being reduced if taken before State pension age.

How long was her original added years contract for?

saucer

Thanks Silvertabby, that is very helpful. As to the length of the added years contract, that is one thing I don't know. If I went on the actuary tables for post-2005, it would suggest 11 years, but given she started the contract before that, I have no idea how accurate that is.
It does seem quite an outlay now however for 900 pa in retirement

Silvertabby

The original added years would have been for a specific number of years (with a lower payout if your wife had left the LGPS before the end date of the contract) so you could be looking at a new contract - with new Ts&Cs.

As your wife is currently part time, does she earn enough to pay tax? If she doesn't, then she's missing out on one of the tax advantages of added years - ie, her £174 per month (along her normal LGPS contributions) would be deducted before her remaining salary is assessed for tax.

If that's the case, then £174 x 12 x 12 = £25,056.00. The £900 per annum pension that would buy her is index linked, but ball park figure is that is would take her well over 20 years just to break even.

As you have stated this was an estimate as at age 63, and if this is a new contract, then it's possible that the £900 quoted is after the early payment reduction - which could be as much as 25%.

If your wife's paperwork isn't clear, then I'd check it with the pensions administrator. If it is indeed a new contract, then that may not be the way to go if she is set on early retirement.