LGPS, combine or not?

Aylesbury_Duck

Hi all

After a bit of advice on behalf of my other half. She's started a new job and is contributing to the lgps after contributing in her old job for 10 years. She's had the letter asking if she wishes to combine her deferred benefits or not and we're trying to get our heads around it. Here are some of the specifics:

Started first employment January 2008, part time role.
Built up final salary benefits until 31 March 2014 when her salary was £23k.
Deferred benefits from first employment (career average scheme) started April 2014 and ended in April 2018. Final salary in that role was £24k.
The current value of the deferred benefit, payable from 2040 is £4K p.a.
New employment has a salary of £28k. No break in contributions, she ended one job and started the new one the following week.
She has no immediate plans to leave her role so she is likely to be there for a few years at least.

On the face of it, reading through the paperwork it would seem the sensible thing to do is to combine, because her final salary is already £4k more that it was in 2014 and is unlikely to reduce. She is building a private pension pot alongside these which is currently valued at £67k and to which she is contributing £500 a month from salary sacrifice.

Am I missing something? The benefits of keeping them separate seem to be outweighed by the final salary element.

AlanP_2

I agree combining makes sense in money terms.

Lose the flexibility to take old pension at a different time to new pension if retiring before scheme age is a consideration.

Personal pension gives you that flexibility though.

Have you looked at AVCs as an alternative use for at least some of the 500 per month?

Aylesbury_Duck

Thanks Alan. The public sector employer runs a private scheme alongside with Prudential and it's that that my wife pays AVCs into to give the flexibility from age 55 on that element if she chooses to, or waits until 67 and draws it alongside her lgps pension.

Or do you mean perhaps it makes sense to buy "added years" or whatever it's called with some of that £500?

Silvertabby

Started first employment January 2008, part time role.
Built up final salary benefits until 31 March 2014 when her salary was £23k.

Was this £23K her actual part time salary or her whole time equivalent (ie, what she would have received had she been full time)? The difference is critical when deciding to combine or not.

Aylesbury_Duck

Thanks Silvertabby. It was her actual part-time salary. Her FTE was around £28,500 and she worked about 0.8 of a week.

Silvertabby

Aylesbury_Duck wrote: »

Thanks Silvertabby. It was her actual part-time salary. Her FTE was around £28,500 and she worked about 0.8 of a week.

Then £28,500 is the pay figure you are looking at for final salary purposes (it's the service that is pro-rated). Is your OH now working full time, or is her current salary of £28K also part time?

If she is full time, then you need to dust off your crystal ball before deciding to combine or not.

Combine

All pre 2014 service will be calculated on final pensionable pay as at her eventual date of leaving. This could be more than her old job if she picks up a promotion or two.

Should your OH be made redundant after (currently) 55, then all of her LGPS benefits could be paid on redundancy terms - ie, not reduced for early payment.

Don't Combine

Value of pension will increase in line with inflation (CPI). Over the past few years, this has been higher than annual pay rises (promotions apart).

If your OH is made redundant (see above), then only her current benefits would be paid under redundancy terms. She would be able to access her deferred first job pension at the same time, but it would be reduced for early payment.

AlanP_2

Aylesbury_Duck wrote: »

Thanks Alan. The public sector employer runs a private scheme alongside with Prudential and it's that that my wife pays AVCs into to give the flexibility from age 55 on that element if she chooses to, or waits until 67 and draws it alongside her lgps pension.

Or do you mean perhaps it makes sense to buy "added years" or whatever it's called with some of that £500?

Sorry, you initially referred to to it as a "private pension alongside" but it sounds like it is the LGPS AVC scheme offered by Prudential she is contributing to.

If it is, I would check about her options at Age 55 as opposed to retiring and taking the main LGPS pension.

As I understand it the ability to take the AVC pot as the tax free element of the overall LGPS benefits ONLY applies if they are taken together.

To take it separately at Age 55 I think you would need to transfer it from the Pru to a true private pension and you would then be limited to 25% of that pot value tax free.

Silvertabby

AlanP wrote: »

Sorry, you initially referred to to it as a "private pension alongside" but it sounds like it is the LGPS AVC scheme offered by Prudential she is contributing to.

If it is, I would check about her options at Age 55 as opposed to retiring and taking the main LGPS pension.

As I understand it the ability to take the AVC pot as the tax free element of the overall LGPS benefits ONLY applies if they are taken together.

To take it separately at Age 55 I think you would need to transfer it from the Pru to a true private pension and you would then be limited to 25% of that pot value tax free.

Alan is right. Transferring/taking the AVC before the LGPS main benefits means that our OH won't be able to use the options of taking all of the AVC (up to the 25% total notional 'pot' limit) or using it to buy extra LGPS pension. Which rather negates the value of an in-house AVC (other than the convenience of having contributions taken straight from salary).

Aylesbury_Duck

Thanks both. It seems there are two issues at play here. My wife and I think that combining is probably the better option because she's new in her post and at the bottom of the pay grade so it's possible that she'll get rises even before she might get future promotions. That would have a positive impact on her final salary element, even taking into account the point that her FTE salary was broadly similar to her current full-time salary.

The other issue is the AVCs. Yes, apologies for the terminology mix-up. Her "private pension" as I called it is actually made up of two pots. One is a true private pension pot of £55k she built up over 10 years with Clerical Medical and which is completely unconnected to employment. The other £12k and ongoing £500pm. contributions are indeed going into the LGPS-linked Prudential scheme. Thanks for pointing out the drawbacks of that. As I understand it, the CM private scheme means she is free to withdraw 25% tax free from 55 if she wished to. When it comes to Prudential AVC, she can take all of it tax free at 67 (up to that notional limit) or if she wishes to access it before the, must transfer into another plan to do so and can only withdraw 25% of it tax free. Am I correct?

If I'm correct, she has a reasonably good short, medium and long term plan. She's investing £2k pm into an S&S ISA (currently valued at £14k) and has £60k in a cash ISA, so there are savings in place to take her up to 67 should she need them. She has a frozen CM pension fund of £55k she could tap into between 55 and 67 if needs be, meaning she should be able to hold out and get the full 100% benefit from the AVC pot at 67. The only thing I'm thinking of now is how big her LGPS pot might be and if there's a chance her AVC pot might be more than 25% of it. Does that seem likely with a pot of £12k now that it growing at £6k p.a.?

AlanP_2

Aylesbury_Duck wrote: »

The other issue is the AVCs. Yes, apologies for the terminology mix-up. Her "private pension" as I called it is actually made up of two pots. One is a true private pension pot of £55k she built up over 10 years with Clerical Medical and which is completely unconnected to employment. The other £12k and ongoing £500pm. contributions are indeed going into the LGPS-linked Prudential scheme. Thanks for pointing out the drawbacks of that. As I understand it, the CM private scheme means she is free to withdraw 25% tax free from 55 if she wished to. When it comes to Prudential AVC, she can take all of it tax free at 67 (up to that notional limit) or if she wishes to access it before the, must transfer into another plan to do so and can only withdraw 25% of it tax free. Am I correct?

If I'm correct, she has a reasonably good short, medium and long term plan. She's investing £2k pm into an S&S ISA (currently valued at £14k) and has £60k in a cash ISA, so there are savings in place to take her up to 67 should she need them. She has a frozen CM pension fund of £55k she could tap into between 55 and 67 if needs be, meaning she should be able to hold out and get the full 100% benefit from the AVC pot at 67. The only thing I'm thinking of now is how big her LGPS pot might be and if there's a chance her AVC pot might be more than 25% of it. Does that seem likely with a pot of £12k now that it growing at £6k p.a.?

Broadly correct in paragraph 1 but it doesn't have to be at 67 as the benefits can be taken earlier albeit with an actuarial reduction.

She may well have too much in her AVC fund and that rate of contribution as it is about 10 times the rate of Care pension increase.

You need to try and keep it within 25% of (20 * annual pension) + AVC pot value. Running it all through a spreadsheet out to planned retirement age would give you a way of tracking it each year.

I plan on 1% annual pay rises, although 2% this year and next, 2% for banked Care uprating and 3% for investment growth.

Adjust each year when you get pension statement and adjust contribution if required (much closer to retirement than your wife).

Aylesbury_Duck

Thanks Alan, so just to ensure I have it completely understood, we need to keep track of her total pot value (lgps plus Prudential AVCs) and adjust the AVCs each year upon reviewing the statement so that the AVC element of the total pot is kept close to but within 25%. Doing a spreadsheet now would help with forecasting that, thanks.

e.g. if her lgps statement shows an annual pension of £10k and she is projected to be heading for a £100k AVC pot, her total pot would be worth £300k and the AVC element would be 33% of that. In those circumstances we should reduce her AVCs to bring that projected ratio down to 25%. Repeat each year as the statement comes in and check against the spreadsheet.

I assume that if she overdoes it such as in the worked example above and doesn't reduce her contributions, she'd be able to take £75k tax free and the remaining £25k could be taken as a pension?