Benefits of Local Gov Pension Scheme vs Private Pensions

jamesd

LGPS is simple and reliable with a high effective employer contribution (that you don't see, it shows up in the benefit accrual rate). It's a good move to stay in it.

A disadvantage of defined benefit pensions like LGPS is the age at which you can take the pension without an actuarial reduction for taking it early. That's where personal pensions like the one you have at PensionBee come in. Those are accessible from 55 or 57 depending on the specific scheme and you can draw money out as fast as you need to. So I routinely write planning approaches like:

1. Work out your total retirement capital inside and outside pensions
2. Deduct your state pension times the number of years until you claim it from the total
4. Deduct your work pension income times the number of years until you claim it from the total
5. You can retire at the age you've been using on the state pension plus the work pension using money set aside plus 0.034 times the remaining capital balance for life (4% rule). Slightly more complex rules allow 0.049% (Guyton-Klinger).

If the capital remaining after deductions goes negative you don't have enough income to retire at that age on the full income from state and DB pensions.

sevenhills

jamesd said:

A disadvantage of defined benefit pensions like LGPS is the age at which you can take the pension without an actuarial reduction for taking it early.

An actual reduction is not a penalty for taking the pension early. You incur this reduction when your pension is paid earlier than normal and, therefore, potentially will be in payment for longer.

Silvertabby

sevenhills said:

jamesd said:

A disadvantage of defined benefit pensions like LGPS is the age at which you can take the pension without an actuarial reduction for taking it early.

An actual reduction is not a penalty for taking the pension early. You incur this reduction when your pension is paid earlier than normal and, therefore, potentially will be in payment for longer.

True, but it depends on how long you live for.

Break even point is 12 to 14 years - so, die early and you are in pocket.  Live to 100, however, and not so much.

daveyjp

Another bonus of LGPS is the possibility of contributing to a salary sacrifice AVC.  That tax and NI going to a pension rarher than the treasury is a significant benefit.

Even more so from next April when NI rates increase.

AVC cash is also a 100% tax free lump sum when withdrawn.

Silvertabby

daveyjp said:

Another bonus of LGPS is the possibility of contributing to a salary sacrifice AVC.  That tax and NI going to a pension rarher than the treasury is a significant benefit.

Even more so from next April when NI rates increase.

AVC cash is also a 100% tax free lump sum when withdrawn.

Only when the AVC is within HMRC limits.  However, going over the AVC limit isn't necessarily a bad thing - the surplus can (usually) be used to buy index linked LGPS benefits at a very favourable rate.

sevenhills

Silvertabby said:

True, but it depends on how long you live for.

It is generally mentioned as a negative, when in fact it's just a matter of maths.

If the literature stated a pension amount at the age of 55 and then it would increase by xx% if taken later.

OldBeanz

sevenhills said:

jamesd said:

A disadvantage of defined benefit pensions like LGPS is the age at which you can take the pension without an actuarial reduction for taking it early. 

An actual reduction is not a penalty for taking the pension early. You incur this reduction when your pension is paid earlier than normal and, therefore, potentially will be in payment for longer.

I apologise in advance for being pedantic but some times you have to scratch an itch. You say "potentially will be in payment for longer" - in what circumstances would it no be for longer?

GunJack

Isn't this statement & question based around actuarial assumptions, like life expectancy and the like, e.g. if you retire at 55 you're more likely to live for, say, 35 yrs drawing pension vs. retire at 65 and live for 20 yrs?? Each scheme will have their own assumptions they work to, with the aim of being cost-neutral overall..

Albermarle

GunJack said:

Isn't this statement & question based around actuarial assumptions, like life expectancy and the like, e.g. if you retire at 55 you're more likely to live for, say, 35 yrs drawing pension vs. retire at 65 and live for 20 yrs?? Each scheme will have their own assumptions they work to, with the aim of being cost-neutral overall..

That is how I understand it , although I think if the reduction is 5% rather than 4%, it favours the scheme a little .

sevenhills

OldBeanz said:

I apologise in advance for being pedantic but some times you have to scratch an itch. You say "potentially will be in payment for longer" - in what circumstances would it no be for longer?

I actually copied that from the BMA, but people that carry on working are thought to live longer, so there may be instances where retiring early will lead to an earlier death.