LGPS vs aviva pension mym mercer growth / balanced risk

Phiil

Fun hypothetical problem:

Someone receives £63k p.a., and currently pays into the LGPS scheme.

The LGPS pays 1/49th of your annual salary under its annuity for every year worked.

Therefore, if this person were to work for 34 years they would receive 34/49ths of £63k, which is £43,714 per annum

The pension is CPI linked, so assuming a (generous?) increase of 3% p.a. would receive £119422.50 p.a.

The cost of this is 8.5% of their salary, so £446.25 per month although they are in the 40% tax bracket so will only receive £267.75 per month

This person is offered a defined contribution pension where the employer will pay in 10% and the employee does not have to pay in anything, therefore keeping the £267.75 per month.

By my understanding, this fund has doubled in value in just over 7 years which is roughly a 10% return if I have understood correctly that these models use compound interest, i.e. what your money would be worth if you left it.

By my calculations being input into the government annuity calculator, the fund and the employees additional savings of £267.75 per month would only need to achieve a 5% return in order for them to be better off:

I am missing an adjustment that needs to be made for having more in the pension pot in the LGPS and therefore being able to get more tax free but I am not sure where this fits in

Making the assumption that there is no variation in CPI or returns on the defined contribution scheme, what interest rate would the employee need to obtain from the scheme and the extra £267.75 per month to be better off? Are my workings correct? Am I missing anything important? Are there calculators for this kind of question?

Thanks
Phil

JoeCrystal

Well, generally speaking, it is worth a quarter to a third of your salary. If I were strictly comparing apples to apples and opt for an index-linked annuity of £43,714 in today's term at 68 privately from 34, you would need to contribute £2,362.50 per month or 45% of your salary for next thirty-four years and if you had an okay market return as well.

Plus all the bells and whistles on LGPS pension as well. This makes it extremely valuable. You can't compare these two options, in my opinion.

Phiil wrote: »

This person is offered a defined contribution pension where the employer will pay in 10% and the employee does not have to pay in anything, therefore keeping the £267.75 per month.

Why would I want to take a big cut in my overall remuneration? Although if they match above 10% with the employee's contribution up to 30% overall, then yes, that does make sense in my opinion.

Phiil wrote: »

I am missing an adjustment that needs to be made for having more in the pension pot in the LGPS and therefore being able to get more tax free but I am not sure where this fits in

I am confused, there is no pension pot in the LGPS, just that you get an ironclad promise to pay an index-linked income for life plus other benefits on top backed by the taxpayers and unusually in LGPS' term, with an actual funds

Linton

Phiil wrote: »

.......

I am missing an adjustment that needs to be made for having more in the pension pot in the LGPS and therefore being able to get more tax free but I am not sure where this fits in

Is this where you also pay money into an AVC? With LGPS I believe you can use the money in the AVC to pay some or all of the tax free lump sum generated by the core DB pension, thus entitling you to a higher DB pension than a simple calculation would suggest.

Phiil

Joe, I am really trying to compare the LGPS annuity which is fairly easy to calculate and as certain as a pension can be vs what you would need the return to be on 34 years of the defined contribution pot and the extra 8.5% if it was invested sensibly in order to purchase a similar annuity. Hope that makes more sense!

I am not suggesting purchasing an annuity throughout 34 years therefore not getting any return on the money.

You say you can't compare these options, but there is a choice between the 2. Received wisdom suggests that the LGPS is a great deal, but I wanted to look into the numbers.

Thanks
Phil

AnotherJoe

The factor you are missing is risk. One has none the other potentially a lot. Very difficult to put a number on that.
p.s. Theres a second factor, timing. With a private pension you have a lot more scope to take early. There is big financial hit to taking LGPS early