Standard Life transfer into LGPS career av scheme

Oasis1

25 year-old here trying to get their head around pensions to make the most of starting relatively early... any advice is much appreciated.

I have £3,750 in a Standard Life Stakeholder Pension Plan from my previous employer. Whilst I know you can't predict future growth, the rate for the last year was ~15% according to the app.

I now work for the government and am paying into a Local Government Pension Scheme (LGPS), which is a career average scheme with an accrual rate of 1/49 and I pay in 6.8%. I hear this is the next best thing to final salary pensions, but my understanding is that I'd need to work there for 49 years (not likely) to get my average salary - is that correct? It doesn't seem that lucrative given I'm paying in £220 a month... maybe I'm wrong?

I enquired about transferring my £3,750 Standard Life pension into my LGPS and have been given an estimate of benefits of a guaranteed £655/year (and surviving partner pension of £200/year).

My instinct tells me this isn't worth it, and it'd be better seeing this little pot of money grow given I'm 25 with a long time left until I retire. So the question is - what considerations do I need to make in order to make a decision? Am I right in thinking not to transfer?

If I choose not to transfer, I'm tempted to add say £50 a month to my Standard Life Pension. So my second question is - what are the benefits/risks I need to consider before doing this? From what I've read it seems to be a very good idea if I can afford it, but I don't know what the risks are...

Many thanks in advance! :money:

bigadaj

You are actually asking a series of separate questions.

The lgps pension is better than most options, the amount your employer is nominally paying in is probably three times what you are currently paying in, most DC schemes would lay in less than half this level and many a tiny fraction.

Buying into your employer scheme is normally good value but you are locking that away unto your scheme retirement age so not much use if you want to retire early.

A good thing to have a separate pension that you should be able to access earlier for retirement, also good to have savings, is a, house deposit fund etc

Just check what teh charges are in your current pension as well.

Drp8713

I personally disagree.

To get an annuity at 68, with a spouses benefit and index linking and a 10 year guarantee period would mean a rate of 3%, that means to get your £655 you would need £21833.

£3750 compounded for 43 years at 4% is only £20251 at 5% (historic return rate) is £30561, so clearly the risk of beating the LGPS offer or getting a worse result is high and the margins are slim.

Let the LGPS take on the risk. Then start a Stocks & Shares ISA or Personal Pension on the side with your £50 a month to allow you to retire early.

Also again, at £220 per month contribution it is earning you £790 of index linked pension per annum so £33970 after 43 years.

If you opted out and invested that £220 per month at 5% for 43 years you would have a pot of £400k which at 3% would get you £12k per annum. So the not lucrative deal is getting you an extra £22k per annum, while giving you none of the risk, no fees, ill health and death cover.

Oasis1

Thanks for your reply, bigadaj.

bigadaj wrote: »

You are actually asking a series of separate questions.

The lgps pension is better than most options, the amount your employer is nominally paying in is probably three times what you are currently paying in, most DC schemes would lay in less than half this level and many a tiny fraction.

Buying into your employer scheme is normally good value but you are locking that away unto your scheme retirement age so not much use if you want to retire early.

Just to confirm - 'Buying into' means transferring extra money in to 'buy' more benefits?

bigadaj wrote: »

A good thing to have a separate pension that you should be able to access earlier for retirement, also good to have savings, is a, house deposit fund etc

I'm trying to save approx. £400 a month. £200 of this goes into a Halifax Help to Buy ISA with 3.5% interest and the rest into a Nationwide monthly saver with 5% interest. Trying my best to squeeze as much as I can out of savings with the historically low interest rates...!

bigadaj wrote: »

Just check what teh charges are in your current pension as well.

According to the app for my Standard Life pension, there's a 1% FMC charge and 1% total annual fund charge. I don't have the knowledge to benchmark how reasonable these charges are...

Oasis1

Thanks for your advice, Drp8713 - there was me thinking it was an easy choice... I'm glad I asked. Just to make sure my understanding is correct -

Drp8713 wrote: »

I personally disagree.

To get an annuity at 68, with a spouses benefit and index linking and a 10 year guarantee period would mean a rate of 3%, that means to get your £655 you would need £21833.

£3750 compounded for 43 years at 4% is only £20251 at 5% (historic return rate) is £30561, so clearly the risk of beating the LGPS offer or getting a worse result is high and the margins are slim.

You're saying that to get the equivalent £655/year annuity out of my £3750 Standard Life pot, it would need an average rate of 4-5% each year until I'm 68? What confuses me is that the details on the app seem to imply higher rates are likely?



Am I completely misinterpreting this?

Drp8713 wrote: »

Also again, at £220 per month contribution it is earning you £790 of index linked pension per annum so £33970 after 43 years.

Sorry - how is this worked out? My understanding is along the lines of:

Say my salary first year is £40k and rises by £1k each year, and I leave after 5 years at £44k. My average salary would be £42k. 5/49 of £42k is an annuity of £4286/year? And I would have paid in £14,280 in contributions - because (42*0.068)*5. Is that correct?

Drp8713 wrote: »

If you opted out and invested that £220 per month at 5% for 43 years you would have a pot of £400k which at 3% would get you £12k per annum. So the not lucrative deal is getting you an extra £22k per annum, while giving you none of the risk, no fees, ill health and death cover.

Again, am I wrong in thinking the rate with standard life could be a lot higher than 5%?

Sorry for being such an amateur - this stuff should be taught in school!

Oasis1

Also I'm not clear what's meant by index linking and a 10 year guarantee period?

JoeCrystal

Index-linked is your income getting linked to the inflation. For example, if CPI went up by 2% over the year, then your income will go up by 2%. It is to ensure that your income retains its real term value.

Oasis1

JoeCrystal wrote: »

Index-linked is your income getting linked to the inflation. For example, if CPI went up by 2% over the year, then your income will go up by 2%. It is to ensure that your income retains its real term value.

Thanks, Joe. Does this mean that with a career average salary pension scheme, you'll actually receive more than the average amount because it'll be index-linked? So if your average salary was £40k but inflation was 20% by the time you take your pension (and you'd worked there long enough to meet 1/1 on the accrual rate), your annuity would be £48k per annum to retain its original real-term value?

bigadaj

Drp8713 wrote: »

I personally disagree.

To get an annuity at 68, with a spouses benefit and index linking and a 10 year guarantee period would mean a rate of 3%, that means to get your £655 you would need £21833.

£3750 compounded for 43 years at 4% is only £20251 at 5% (historic return rate) is £30561, so clearly the risk of beating the LGPS offer or getting a worse result is high and the margins are slim.

Let the LGPS take on the risk. Then start a Stocks & Shares ISA or Personal Pension on the side with your £50 a month to allow you to retire early.

Also again, at £220 per month contribution it is earning you £790 of index linked pension per annum so £33970 after 43 years.

If you opted out and invested that £220 per month at 5% for 43 years you would have a pot of £400k which at 3% would get you £12k per annum. So the not lucrative deal is getting you an extra £22k per annum, while giving you none of the risk, no fees, ill health and death cover.

reasonable assumptions, but assumptions we can't forget.

What were annuity rates in 1974?

bigadaj

Oasis1 wrote: »

Thanks, Joe. Does this mean that with a career average salary pension scheme, you'll actually receive more than the average amount because it'll be index-linked? So if your average salary was £40k but inflation was 20% by the time you take your pension (and you'd worked there long enough to meet 1/1 on the accrual rate), your annuity would be £48k per annum to retain its original real-term value?

Yes, its normally in real terms, though they can use different measures for inflation, rpi, Cpi etc and there may be a cap on the increase absolutely, 5% is common.

bigadaj

Oasis1 wrote: »

Thanks for your advice, Drp8713 - there was me thinking it was an easy choice... I'm glad I asked. Just to make sure my understanding is correct -



You're saying that to get the equivalent £655/year annuity out of my £3750 Standard Life pot, it would need an average rate of 4-5% each year until I'm 68? What confuses me is that the details on the app seem to imply higher rates are likely?



Am I completely misinterpreting this?




Sorry - how is this worked out? My understanding is along the lines of:

Say my salary first year is £40k and rises by £1k each year, and I leave after 5 years at £44k. My average salary would be £42k. 5/49 of £42k is an annuity of £4286/year? And I would have paid in £14,280 in contributions - because (42*0.068)*5. Is that correct?



Again, am I wrong in thinking the rate with standard life could be a lot higher than 5%?

Sorry for being such an amateur - this stuff should be taught in school!

Have a read on monevator website and that might give you a bit more idea about investments and returns.

Near zero base rates and quantitative easing have caused asset prices to balloon, so returns have been much higher than was historically the case. This has been exacerbated by stealing weakness which makes investments in foreign assets appear to have gone up much higher than has been the case in dollars or euros.

You won't be getting 15% every year going forward, some years there will be losses but no one can predict when these will be.