Help! I don't understand how my pension works

Linton

leypt1 said:

Dazed_and_C0nfused said:

You are not building up a pot of money.

You are paying £4,200/year (before tax relief).

In return you will get a pension of £990.  Per year.  From normal pension age.  For the rest of your life.  And no doubt index linked.

Where else could you get that return?

Thank you for this response. Again though, I think I'm missing something really fundamental - why not pay £4200pa into a bank account for 25-35 years until I retire? Even assuming 0% interest and 0% returns if I invest (but also 0% inflation), I could then use the money at a rate of £4200 per year for 25-35 years after I retire?

This question will probably fully expose the limits of my knowledge, thanks again for any help.

Say you retire at 65 and live for 25 years.  So in year 1 you pay in £4200 and get £990/year for the whole of your retirement.  £990 X 25= £24750.  In year 2 you pay in £4200 and get another £990 per year for 25 years.  Total expense so far 2X£4200=£8400.  Total pension paid 2X25X£990=£49500. etc etc.

Actually its better than that because the pension is index linked.

molerat

leypt1 said:

Dazed_and_C0nfused said:

You are not building up a pot of money.

You are paying £4,200/year (before tax relief).

In return you will get a pension of £990.  Per year.  From normal pension age.  For the rest of your life.  And no doubt index linked.

Where else could you get that return?

Thank you for this response. Again though, I think I'm missing something really fundamental - why not pay £4200pa into a bank account for 25-35 years until I retire? Even assuming 0% interest and 0% returns if I invest (but also 0% inflation), I could then use the money at a rate of £4200 per year for 25-35 years after I retire?

This question will probably fully expose the limits of my knowledge, thanks again for any help.

Under your plan you put £4200 for 30 years and take £4200 for another 30 years once you retire.

With the pension you pay in £4200 for 30 years and take out £29700 per year once you retire.

Now which scheme looks better ?

Each one of those single £4200s gives you £990 per year for the rest of your life once retired, that is the fundamental bit you are missing.

leypt1

Thanks everyone! The bit I was missing is that the scheme adds on an extra £990 pa for every extra year in service.

AlanP_2

leypt1 said:

Thanks everyone! The bit I was missing is that the scheme adds on an extra £990 pa for every extra year in service.

That's it.

If you started in the LGPS after April 2014 the reference earlier to the 1/60ths scheme doesn't apply to you.

Does your LA have an online pensions portal? Ours does and there are various modelling tools on there that illustrate how much you will get at different retirement ages. Or try this one - https://lgpsmember.org/more/pam/index.php

You have additional options available to you as an LGPS member - APCs to buy additional annual pension, or AVCs to build up a pot that can be taken tax free at same time as main benefits (subject to HMRC rules). Once you've reflected on what you could reasonably expect when you retire you can decide whether adding either of these makes sense for you (will be particularly beneficial if you move into a role where you pay 40% tax).

LHW99

molerat said:

leypt1 said:

Dazed_and_C0nfused said:

You are not building up a pot of money.

You are paying £4,200/year (before tax relief).

In return you will get a pension of £990.  Per year.  From normal pension age.  For the rest of your life.  And no doubt index linked.

Where else could you get that return?

Thank you for this response. Again though, I think I'm missing something really fundamental - why not pay £4200pa into a bank account for 25-35 years until I retire? Even assuming 0% interest and 0% returns if I invest (but also 0% inflation), I could then use the money at a rate of £4200 per year for 25-35 years after I retire?

This question will probably fully expose the limits of my knowledge, thanks again for any help.

Under your plan you put £4200 for 30 years and take £4200 for another 30 years once you retire.

With the pension you pay in £4200 for 30 years and take out £29700 per year once you retire.

Now which scheme looks better ?

Each one of those single £4200s gives you £990 per year for the rest of your life once retired, that is the fundamental bit you are missing.

And if you happen to be someone who lives to beyond 100 (as more are) you could still be getting that £29700 (+ index linking) for more than 30 years!

leypt1

AlanP_2 said:

leypt1 said:

Thanks everyone! The bit I was missing is that the scheme adds on an extra £990 pa for every extra year in service.

That's it.

If you started in the LGPS after April 2014 the reference earlier to the 1/60ths scheme doesn't apply to you.

Does your LA have an online pensions portal? Ours does and there are various modelling tools on there that illustrate how much you will get at different retirement ages. Or try this one - https://lgpsmember.org/more/pam/index.php

You have additional options available to you as an LGPS member - APCs to buy additional annual pension, or AVCs to build up a pot that can be taken tax free at same time as main benefits (subject to HMRC rules). Once you've reflected on what you could reasonably expect when you retire you can decide whether adding either of these makes sense for you (will be particularly beneficial if you move into a role where you pay 40% tax).

Thanks very much Alan - I haven't seen anything like that but will look into it, and the add-ons which you've described. So much to learn!