Local Government Pensions - Additional Contributions or Lifetime ISA

Katgoddess

I'm 39, work very part time in a school so pay no tax, and am contributing a small amount (£25/month) to a local government pension scheme. I also do self employed work. I am able to make additional pension contributions (it's unlikely my employer will contribute extra but I will check) so I was considering doubling the amount I put in. The other option I was considering was to put this extra money in a lifetime ISA to get a 25% top up and then when I'm 60 I can use the cash as a lump sum to add to the government pension or something else.



I have no idea what's best so any suggestions appreciated.

AlanP_2

The LGPS is a Defined Benefit scheme so there is no practical option for your employer to contribute more.

The employee contribution rates are set nationally and vary by salary (higher earners pay a higher percentage).

Employer rates are irrelevant to your personal situation, they have to pay whatever is required to fund their employees, and ex-employees, projected or actual pension payments.

You should get a statement each year that sets out what pension you have banked to date and what it could be at Normal / Scheme retirement Age which will be your State Pension Age (so 67'ish I would think).

If you retire early then the amount paid will be reduced to offset the anticipated longer payment period.

For each year you work you get 1/49th of your salary as pension when you retire, adjusted for part time working. So if you work half a week you will get 50% of what a full time worker on the same pro-rata annual salary would get.

Are you earning enough to pay National Insuarance and thus build up your State Pension entitlement? Easy enough to check SP situation online at https://www.gov.uk/check-state-pension

As a NON TAXPAYER making additional contributions to the LGPS won't gain you the tax benefits associated with a pension. LGPS pension contributions are taken off salary to arrive at a Taxable Salary amount. As your Annual Salary and Taxable Salary are both below tax allowance level of £12.5k then you can't save any tax.

LISA is an option, for up to £4k a year, but must be opened before Age 40 (so do it anyway whether you intend to use it now or not would be my advice).

Can't be accessed without penalty until Age 60 as you know so when do you hope to retire?

Any plans to increase hours worked / change jobs to earn more in the future?

What about overall "family unit" pension situation & mortgage etc?

The other option is to open a separate pension and pay money in to that. These work differently to LGPS in that they assume you have paid tax at 20% on the money paid in and reclaim it for you from HMRC so you get the tax boost whether you have paid tax or not.

You can contribute up to your earned income level into all pensions so you could theoretically pay in 80% of your (School Salary + Self Employed Income) - LGPS contribution and HMRC would add 25% taking you back to your overall salary level in the pension.

NOTE - Different aspects to consider if salary approaches £40k but doesn't apply to you at the moment.

LISA and Personal Pension / SIPP have same 25% benefit so not much between them, although pension can be accessed at 55 (likely going to 57+ in next couple of years).

Katgoddess

AlanP wrote: »

Are you earning enough to pay National Insurance and thus build up your State Pension entitlement? Easy enough to check SP situation online at https://www.gov.uk/check-state-pension
My children are under 12 so I'm protected for the moment, and I have the full amount from when I was 16. My self employment may take me over the threshold to pay this tax year. I've been saving for it just in case but I will make voluntary contributions if I need to in the future.


LISA is an option, for up to £4k a year, but must be opened before Age 40 (so do it anyway whether you intend to use it now or not would be my advice).
I opened one last year and stuck 20 quid in it. Currently doing nothing else!

Can't be accessed without penalty until Age 60 as you know so when do you hope to retire?

Most likely the state retirement age.

Any plans to increase hours worked / change jobs to earn more in the future?

Hopefully more self employed work but don't plan to increase the day job hours until my youngest is at secondary school.

What about overall "family unit" pension situation & mortgage etc?
There is a very small mortgage and my partner has a private and company pension.

Thank you very much for your help, that's made things a lot clearer for me.:T I have a very small pension somewhere from a previous employment so once I've tracked that down I will decide whether to add to that or use the LISA, I think.

hyubh

Katgoddess wrote: »

I'm 39, work very part time in a school so pay no tax, and am contributing a small amount (£25/month) to a local government pension scheme. I also do self employed work. I am able to make additional pension contributions (it's unlikely my employer will contribute extra but I will check) so I was considering doubling the amount I put in.

For that, there are two options in the LGPS:

APC

This is where you purchase additional DB pension for yourself. If put something like your numbers into here and specify a monthly payment of £25 until NRA (68), it come out with a total extra pension of £536.48 pa:

https://www.lgpsmember.org/more/apc/extra.php?

This is nowhere near what your regular contributions are accruing, mainly because there is no (*) employer contribution, but partly also because APC rates are determined by age (and sex) not salary band, and main scheme contribution rates are deliberately biased in favour of the low paid.

There are also a few caveats:

- An APC like this does not earn survivor benefits.

- The contract is with respect to the extra amount of indexed-linked pension to purchase by the end of it, not the extra contributions to pay. From time to time contribution rates are reviewed by the Government's Actuary Department (GAD); when altered, the new rates come into affect for existing contracts from 1 April.

AVC

This is where you pay into a DC scheme that is however linked to your LGPS pension in some ways:
- Contributions come from payroll.
- On retirement, you can put the AVC pot together with the notional value of your LGPS pension and use it to take tax free cash without eating into the latter.
- Alternatively, an AVC pot on retirement can be used to purchase additional LGPS benefits (basically, an APC, but where survivor benefits are attached as well as additional pension for yourself).

(*) Strictly speaking both an APC and an AVC can have an employer contribution, becoming a 'shared cost' APC or AVC in the process. In practice this will be very unlikely beyond certain technical scenarios (a shared cost APC for buying back lost pension due to [e.g.] maternity, a shared cost AVC through a salary sacrifice arrangement where the employer is formally paying your contributions on your behalf for tax reasons).