LGPS - to withdraw or not

sarahdh

I worked for my most recent employer for almost two years (my employment ended 6 days short of the two years). During this time I was a member of the LGPS (Local Government Pension Scheme). 

This pension has a vesting period of two years, and as I was just short of two years, at present I will not be entitled to the pension on retirement. However, if I ever take another job that uses the LGPS scheme, this would push me over the two years, and I would then meet the vesting period. I don’t know for definite if I will ever take another job that offers this scheme, but it is unlikely.

As an alternative, I have the option of having a refund of all contributions I have paid into the scheme, which is just under £1,000, and this money would come in very useful at the moment. If I did manage to get the LGPS past the vesting period in the future, this would pay out approx. £39 per month on retirement, adjusted for inflation. 

I am 35, so retirement is a long way off, but I am finding it very hard to decide what to do. It’s a choice between £1k now when it is needed, or £39 per month when I reach retirement age, but only if I happen to work for another employer who offers the LGPS, so no guarantees.

If anyone has any advice it would be much appreciated!

JoeCrystal

Does LGPS pension scheme offer you a transfer value to a DC pension scheme as well? This would be much higher than a refund of contribution, and besides, you need to pay taxes on the refund. So a transfer value may be a better option rather than a refund in the long term.

Silvertabby

Yes - with less than 2 years service, and thus not meeting the vesting period, a transfer to another pension scheme  - either occupational or personal - would be a far better option than a refund.

A refund would only be in respect of OP's own contributions, less tax.  A transfer out valuation, however, is based on the pension that would have been accrued had it not been for the vesting period.

sarahdh

I do have the option to transfer out to another scheme, but I have no idea how that would be worked out if moving from defined benefits to defined contribution, so I don’t know what it would be worth to me upon retirement. Is there any way to get a rough idea of this?

I have only earned circa £6k in this tax year and I am not currently working, and won’t likely be working before the end of the tax year. In these circumstances would I still owe tax on the £1k if I took it out? Again, is there any way of working out roughly how much tax would be taken?

Silvertabby

sarahdh said:

I do have the option to transfer out to another scheme, but I have no idea how that would be worked out if moving from defined benefits to defined contribution, so I don’t know what it would be worth to me upon retirement. Is there any way to get a rough idea of this?

I have only earned circa £6k in this tax year and I am not currently working, and won’t likely be working before the end of the tax year. In these circumstances would I still owe tax on the £1k if I took it out? Again, is there any way of working out roughly how much tax would be taken?

Forget anything you have read about the problems and costs involved in transferring from a DB scheme to a DC.  As you haven't met the vesting period, you haven't accrued any actual pension rights.  Your only options are  the choice of either a refund of your own contributions, less tax, or a transfer to another scheme.

The only way to find out the actual transfer value would be to ask your LGPS for a CETV (cash equivalent transfer value).  However, based on experience, I can say that the CETV could well be as much as up to 3 x the refund.

The tax is nothing to do with income tax.  It's purely a tax on pension refunds, which just happens, co-incidentally, to be the same as the current 20% basic rate.  So, your £1K refund would actually be only £800.