How much would I contribute in a Local Government Pension Scheme per annum? Confused

bobgreggary

I earn between £22,500 and £36,500. Let's say £30,000 for the sake of argument.

1) Do I pay in 1/49th of my salary, or 6.5% of my salary per annum? Their information page seems to suggest both.
2) How much does the employer contribute?
3) Secondary question: if I contribute nothing, will the employer contribute nothing?

Many thanks for your help!

snowqueen555

Each year you accrue 1/49 of your salary into your pension. So if you contributed for 49 years , you will have a years salary as your pension (career average).

So you will contribute 6.5% of your salary. The LGPS blurb is that the effective contribution of your employer is 2/3 of what you put in, but LGPS is not like an normal pension scheme so doesn't really have a pot you build up.

If you contribute nothing you will not be an active member.

LGPS is fairly good. The downsides are inheritance if you die early there is no pot to give to your family (3 years salary as life insurance and other benefits if you have kids etc), and that the scheme benefits married/partners with children. If you are single with no dependents the benefits are less.

bobgreggary

Hey thanks so much for the quick response! Though I'm not sure I'm totally understanding still.

Are you saying that if I pay in for 49 years, when I retire I will receive a years salary as my annual pension payout? I.e. When I get to 65, assuming my salary was always £30k and never changed in those 49 years, I'd get £30k per year as my pension? Is 1/49th deduced from my salary each year, should I choose to opt for LGPS?

Is the 6.5% in addition to that career average pension? I.e. I put 6.5% into the pot (the employer contributes say 13%), and then by the time I pay out on retirement, I'll get £30k per year PLUS anything accrued by that 6.5%?

Sorry I'm having such a hard time with all of this!

molerat

You pay 6.5 % of your salary into the scheme (but you will not pay tax on that so you only lose 5.2% of your take home pay).


For that 6.5% contribution the scheme will pay on retirement 1/49th of your salary for each year you were working so yes in simple terms work for 49 years at 30K you will get £30K as a pension.


The employer also pays 13% into that scheme but there is no individual pot for you, there is instead a promise to pay that 1/49th per year.


Your family also get the protection of a lump sum payout and a pension if you die whilst in employment.


To get that sort of guaranteed benefit from a personal pension would cost a lot more than 6.5% of your pay. If you have or intend to have a family it would be foolish not to join.

p00hsticks

bobgreggary wrote: »

Are you saying that if I pay in for 49 years, when I retire I will receive a years salary as my annual pension payout? I.e. When I get to 65, assuming my salary was always £30k and never changed in those 49 years, I'd get £30k per year as my pension?

Yes

bobgreggary wrote: »

Is 1/49th deduced from my salary each year, should I choose to opt for LGPS?

No, you pay in 6.5% of your salary.

bobgreggary wrote: »

Is the 6.5% in addition to that career average pension? I.e. I put 6.5% into the pot (the employer contributes say 13%), and then by the time I pay out on retirement, I'll get £30k per year PLUS anything accrued by that 6.5%?

No, you put in 6.5% into the pension fund and your employer puts in however much they need to to meet the fund liabilities.This fund is then used to pay you a pension (of e.g £30k if you work for 49 years earning £30k) when you reach the pension scheme retirement age.

snowqueen555

Yes that is right. But that is just 1 example, no-one really works for that long.

LGPS is inflation protected too. LGPS is the only self funded public sector pension. As in they get their income from contributions from the council/employees and invest that money. Other public sector pensions are funded by the tax payer :S

6.5% is deducted from your salary each year to pay for 1/49 (2.04%). You can take a pension early with penalties.

Using my calculations, the LGPS has similar returns as a normal private sector pension invested on the stock market, but the LGPS is guaranteed income, whereas the stock market is variable. As said, the LGPS has some downsides, but if you are working for local government, it makes sense to contribute.

hyubh

bobgreggary wrote: »

Are you saying that if I pay in for 49 years, when I retire I will receive a years salary as my annual pension payout? I.e. When I get to 65, assuming my salary was always £30k and never changed in those 49 years, I'd get £30k per year as my pension?

Yes.

Is 1/49th deduced from my salary each year

No, that's the 'accrual rate'; the 'contribution rate' is completely separate, and has no necessary relation.

should I choose to opt for LGPS?

You would be nutty to opt out.

Is the 6.5% in addition to that career average pension? I.e. I put 6.5% into the pot (the employer contributes say 13%), and then by the time I pay out on retirement, I'll get £30k per year PLUS anything accrued by that 6.5%?

No. Clearly, a 1/49th career average pension at 67 (or whatever your state pension age is), for life, clearly doesn't come from nowhere. Contributions (employee + employer) get spent on current pension payments in the first instance, with the remainder invested (in aggregate, the LGPS holds assets of £263bn, with liabilities in the same ballpark). Were those investments to fail, your employer (and ultimately local taxpayers, assuming it's a council) would be responsible for making up the difference.

Sorry I'm having such a hard time with all of this!

See here, if you haven't already:

https://www.lgpsmember.org/thinking-joining.php

AlanP_2

snowqueen555 wrote: »

Using my calculations, the LGPS has similar returns as a normal private sector pension invested on the stock market, but the LGPS is guaranteed income, whereas the stock market is variable. As said, the LGPS has some downsides, but if you are working for local government, it makes sense to contribute.

I'd like to see those calculations because I would expect the LGPS, like other DB schemes, to provide a better return (ignoring early death for example) than a DC scheme.

Are you saying that investing 6.5% of salary per year would build a pot large enough to take the equivalent of an LGPS pension from it for say 20 years, even if we ignore any residual spouse's pension?

JoeCrystal

AlanP wrote: »

I'd like to see those calculations because I would expect the LGPS, like other DB schemes, to provide a better return (ignoring early death for example) than a DC scheme.

Are you saying that investing 6.5% of salary per year would build a pot large enough to take the equivalent of an LGPS pension from it for say 20 years, even if we ignore any residual spouse's pension?

No, it doesn't. Not even remotely close. That is why the employer's aka the Council's contribution is much higher.

Let say I am on £28,200 and at 48 and I want to build up 20/49 pension or £11,248 per year and opting for an index-linked annuity at 68. I would need to contribute 54% of my salary or £1269 per month to reach the projected outcome. If I were opting for a 4% drawdown on it by 68, I would need to contribute £940 or 40% of my salary per month instead to reach £281,000 pension pot assuming a good stock market returns.

snowqueen555

AlanP wrote: »

I'd like to see those calculations because I would expect the LGPS, like other DB schemes, to provide a better return (ignoring early death for example) than a DC scheme.

Are you saying that investing 6.5% of salary per year would build a pot large enough to take the equivalent of an LGPS pension from it for say 20 years, even if we ignore any residual spouse's pension?

Two things I have looked at.

1) I did a lump sum transfer in, and the pension I'd get from that is very similar to if I'd invest that same money on the stock market for the same amount of time, assuming a conservative 4-5% growth.

2) LGPS say their contribution averages 2/3 and your contribution 1/3. My previous scheme also has this generous rate. Again investing on the stock market returns a similar pot to if it was in the LGPS.

As I said, scheme is career average and guaranteed, but the inheritance aspect is important for a lot of people, so there are up and downsides.

The real question I have is if you were a non active member the benefits get reduced due to the insurance shrinking.

People who take comfort in being able to give an inheritance may not he able to with a LGPS, and dying right before pension would mean your family would not be able to realise the full value of any inheritance as there is no pot.

Don't get me wrong, the LGPS is good, but I am hoping to have another pension pot so I can have a bit more flexibility, I hope to start one soon.

daveyjp

AlanP wrote: »

I'd like to see those calculations because I would expect the LGPS, like other DB schemes, to provide a better return (ignoring early death for example) than a DC scheme.

Are you saying that investing 6.5% of salary per year would build a pot large enough to take the equivalent of an LGPS pension from it for say 20 years, even if we ignore any residual spouse's pension?

Depends which "return" you are talking about.

Annual returns to the LGPS investment organisations (in effect public sector pension companies) are very similar to the private pension funds, which you would expect as they are investing in the same range of gilts, bonds, shares etc.

Returns to the individual are of course higher in DB schemes when compared to the contribution level.