Advice for LGPS non tax payer

Farside71

My wife has very little pension provision at the moment and is 50 years old.  She has a few years, maybe 5, in the Thomas Cook DB I believe and we're waiting for confirmation of what those will be.

She has been working part time in local government for a year and is paying 5.5% into LGPS.  She should have a full state pension at 67.

Her annual salary is less than 9k but hopefully she will get a slightly different job soon in same place with a bit of a pay rise but will still be a non tax payer.

My question is if we want to increase her overall provision are AVCs into LGPS likely to be the best option, considering she will likely remain a non tax payer.

Dazed_and_C0nfused

I think the first consideration is the method used to contribute.

If it would be net pay then I would think carefully before doing this.

If it is relief at source then it seems ok as she can get basic rate relief despite paying no tax.

NB.  By AVC's I'm assuming you mean contributions to a DC fund, not additional DB/CARE accrual.

xylophone

LGPS operates net pay and this is disadvantageous for members who do not earn enough to pay tax.


See
https://www.hants.gov.uk/hampshire-services/pensions/local-government/about-the-scheme/scheme-benefits

Scheme Benefits

About the LGPS

The LGPS is one of the largest public sector section pension schemes. It is open to most employees in local government and in some other organisations. 

• The LGPS is a statutory scheme with benefits set out in law making it very safe and secure.
• Its regulations are issued by the Ministry of Housing, Communities and Local Government (MHCLG).
• The benefits you build up in the LGPS are guaranteed. What you receive is specified by the scheme regulations rather than the value of your investment in the financial markets - it is a "defined benefit" pension scheme.

Every employer in the UK must enrol their workers into a workplace pension scheme if they are not already in one. This is known as automatic enrolment and is overseen by The Pensions Regulator. 

Your employer may enrol you in the LGPS under either the LGPS scheme rules if eligible, or under automatic enrolment rules. You can leave the LGPS at any time on or after your first day in the scheme. See: Opting out. 

For more information on automatic enrolment, see: Automatic enrolment.

What are the scheme benefits?

• an annual pension on retirement based on pension you build up,
• a choice of tax-free lump sum when you retire - subject to HM Revenue and Customs limits,
• the ability to pay 50% of your contributions for 50% of the pension benefits,
• the ability to increase your pension by paying extra contributions,
• pension payable from your normal pension age (usually linked to State Pension Age),
• voluntary retirement from age 55, normally reduced as it's being paid earlier,
• an ill health pension from any age (subject to qualifying service for a period of two years),
• a death in service lump sum of three times your pensionable pay,
• a spouse's, civil partner's or cohabiting partner's pension in the event of death,
• children's pensions for eligible children in the event of death.

Tax and your pension

Contributions to a pension scheme are eligible for tax relief. The LGPS is a "net pay" pension scheme so your employer will deduct your pension contribution from your gross pay before calculating your tax. This reduces the amount of tax that you pay.

However, if you are a low earner who does not pay tax then:

• you will not get tax relief from a "net pay" pension scheme
• you cannot claim money back from HM Revenue and Customs in respect of your pension contributions.

Low earners may wish to seek advice from The Pensions Advisory Service or an Independent Financial Adviser as there are other methods of pension saving which do provide tax relief.

The AVCs are also taken from salary before tax.

While continuing to contribute to LGPS, the OP's wife could open a personal pension (relief at source tax relief) and receive tax relief on her contributions, even though she does not actually pay tax.

Take an individual who has modest earnings of £12,000 a year.

He could open a personal pension, pay in up to £9600 a year and the pension provider would claim up to £2,400 from HMRC and add it to his pot.

Farside71

Dazed_and_C0nfused said:

I think the first consideration is the method used to contribute.

If it would be net pay then I would think carefully before doing this.

If it is relief at source then it seems ok as she can get basic rate relief despite paying no tax.

NB.  By AVC's I'm assuming you mean contributions to a DC fund, not additional DB/CARE accrual.

 By AVC I meant this option:

Pay Additional Voluntary Contributions (AVCs)

You can pay more contributions to our AVC schemes (sometimes called "in house" AVC schemes).

You choose how much to pay in AVCs and how they are invested. The money will come straight out of your pay and go to the AVC provider who will invest it for you.

What happens when I retire?

You can either use your AVCs to take a lump sum from the fund when you retire or you can buy additional pension in the scheme or an annuity from an insurance company.

If you are interested in paying AVCs please contact us for further information.

Dazed_and_C0nfused

I think you are likely to be better off going the personal pension/SIPP route then where relief at source is the contribution method.

The investments in the AVC would have to do amazingly well to beat the relief at source option.

AVC personal contribution of £1,000 = £1,000 in the pension fund (and no personal tax saving).

Personal pension/SIPP personal contribution of £1,000 = £1,250 in the pension fund (and no personal tax saving).

So you are already 25% up by going the relief at source route.  Investment returns and scheme fees could be better within the AVC but that is a big headstart for a personal pension/SIPP.

Farside71

Thank you both, I think my question is really are the in house AVC benefits worth forgoing for the tax benefits from an external pension.  I do have a decent enough knowledge of pensions in general but I know the LGPS can be a bit different and I was unclear what the AVC would buy in terms of benefits.

Dazed_and_C0nfused

I'm not sure it does buy you anything, you would be building up a pot of money.

LGPS may offer additional pension options which are purchase of additional guaranteed benefits.

And I believe you may be able to take more than the normal 25% TFLS with an LGPS AVC but not my area of expertise.

https://www.lgpsmember.org/more/AVCoptions.php

Farside71

Yes it's the additional top up which is an option that I don't really have an idea of how valuable it is.  All the other available options are pretty standard avc options

2) Buy a top-up LGPS pension

If you paid into the LGPS on or after 

1 April 2014, you can use some or all 

of your AVC plan to buy extra pension

from the LGPS. The extra pension you 

buy will increase in line with the cost of 

living.

If you take this option, your 

dependants will automatically be 

provided with extra pension in the 

event of your death.

OldBeanz

Your wife is in the net pay LGPS Defined Benefit scheme. As she is not a tax payer she gets no relief on any contributions but as a DB scheme it is worth staying in as there are other benefits. This might contrast with a couple of her bosses who are married and each on £80k+ who could Salary Sacrifice down to £50k saving 40% tax on £60k+, NI contributions and qualifying for full child allowance.
While not giving advice and not knowing all your circumstances, in the meantime she should only pay into a low cost SIPP (tax uplift on the way in, good opportunity on the way out for no tax); give her married allowance to you; and only take out an LGPS AVC when she becomes a tax payer and then contributing only her taxable income (tax relief on the way in and tax free lump sum on the way out). The LGPS AVC needs to be taken with he main LGPS pension to really benefit. Without a calculator to hand, taxable income would only be money above (personal allowance less married allowance plus 5.5% LGPS contribution) meaning anything over £12k -ish.
My wife is in a similar position being now just over that tax threshold. The most tortuous part being having to use the Prudential who have trashed their computer system over the past year.

OldBeanz

Farside71 said:

Yes it's the additional top up which is an option that I don't really have an idea of how valuable it is.  All the other available options are pretty standard avc options

2) Buy a top-up LGPS pension

If you paid into the LGPS on or after 

1 April 2014, you can use some or all 

of your AVC plan to buy extra pension

from the LGPS. The extra pension you 

buy will increase in line with the cost of 

living.

If you take this option, your 

dependants will automatically be 

provided with extra pension in the 

event of your death.

The LGPS AVC is not a standard HMG AVC as it can be taken within limits as a tax free pension lump sum if taken at the same time as commencing the main pension. With relatives in the military, NHS and Civil Service they do not have as lucrative a deal. It is the cherry on top of the golden egg.

Farside71

OldBeanz said:

Your wife is in the net pay LGPS Defined Benefit scheme. As she is not a tax payer she gets no relief on any contributions but as a DB scheme it is worth staying in as there are other benefits. This might contrast with a couple of her bosses who are married and each on £80k+ who could Salary Sacrifice down to £50k saving 40% tax on £60k+, NI contributions and qualifying for full child allowance.
While not giving advice and not knowing all your circumstances, in the meantime she should only pay into a low cost SIPP (tax uplift on the way in, good opportunity on the way out for no tax); give her married allowance to you; and only take out an LGPS AVC when she becomes a tax payer and then contributing only her taxable income (tax relief on the way in and tax free lump sum on the way out). The LGPS AVC needs to be taken with he main LGPS pension to really benefit. Without a calculator to hand, taxable income would only be money above (personal allowance less married allowance plus 5.5% LGPS contribution) meaning anything over £12k -ish.
My wife is in a similar position being now just over that tax threshold. The most tortuous part being having to use the Prudential who have trashed their computer system over the past year.

Understood, I'm comfortable with a Sipp as the solution.  I don't envisage her becoming a tax payer in the next few years at least.