LGPS Question

karlos007

I have a private pension (aged 50) worth approx 120k and work in the private sector. I've just been offered a new role with a University and they are offering a LGPS Career average scheme whereby I pay in 6.8% and they contribute 16% (support staff rate). Is this scheme much that better than a private pension? its just that I'm struggling to understand how much I'll get on retirement at 67 and whether it should be a huge factor in deciding to take the role or not?

AlanP_2

You are basically comparing Apples with Oranges so be careful.

Your current pension is Defined Contribution which means you / your employer define / set how much is paid in and invested in equities / bonds etc. How much that will be worth come retirement is in the lap of the gods as none of us know how markets will perform over the next few weeks let alone a couple of decades.

The LGPS is a Defined Benefit scheme where your employer is guaranteeing how much annual pension they will give you for each year of service irrespective of how much they need to pay in to deliver on that promise.

BTW - Ignore the 16% they are contributing, it is irrelevant to you and the pension you will get. If the scheme actuaries work out that they need to pay 5% or 25% of your salary in going forwards it makes no difference to the pension you get.

As to working out what each will be worth at retirement it is quite easy with the LGPS CARE scheme. Each year you will accrue a pension worth 1/49th of your salary in that year, fully CPI linked until you retire at 67/68 (normal scheme age) and fully CPI linked once in payment.

For your DC pension a reasonably safe withdrawal rate to cover ~30 years of retirement would be 3-4% a year so say £3,600 to £4,800 based on current pot size.

Based on your contribution rate of 6.8% your salary is in the £38-48K range so each year you will accrue £775 to £980 of annual pension. Will take about 3-5 years to be the same as your "safe" withdrawal amount from your current DC pot.

I did the same as you are considering. I took a cut of about 25% on my salary when I went in to the LGPS from the private sector but reckon the pension was worth around 40% of salary overall.

If you do make the move ask for a quote on what your £120k DC pot will "buy" you in LGPS pension as that could be a sensible option. I did that and it worked out well.

Also look at the AVC and APC options if you want enhanced LGPS benefits.

Final thought - you need to try and estimate how much you will need / want in retirement to see if you are on course to have enough from all sources (State Pension / LGPS / DC / ISAs etc) including partners numbers if applicable.

MX5huggy

LGPS is a brilliant pension scheme worth hugely more than it costs you. 

You and your employer pays the contributions. In exchange the pension fund promises to pay 1/49th of that’s years total earnings as a pension every year from retirement to death. 

So if you earn £30000 per year 1/49th is £612 per year. Work for 30 years your pension would be £18360 per year. It’s all index linked to CPI, so you can ignore it for all practical purposes.

there are a number of other benefits, death in service, dependent pension.

If you take the job, get a quote for transferring the existing pension to LGPS, do it quickly, you have to complete the transfer within the first year. 

AlanP_2

MX5huggy said:

LGPS is a brilliant pension scheme worth hugely more than it costs you. 

You and your employer pays the contributions. In exchange the pension fund promises to pay 1/49th of that’s years total earnings as a pension every year from retirement to death. 

So if you earn £30000 per year 1/49th is £612 per year. Work for 30 years your pension would be £18360 per year. It’s all index linked to CPI, so you can ignore it for all practical purposes.

there are a number of other benefits, death in service, dependent pension.

If you take the job, get a quote for transferring the existing pension to LGPS, do it quickly, you have to complete the transfer within the first year. 

My understanding is you have to START the process within 12 months i.e. fill in and submit appropriate form not necessarily COMPLETE in that time frame.

TBH that makes sense as the LGPS admins / DC admins could spend months doing their bits through no fault of yours.

karlos007

AlanP_2 said:

You are basically comparing Apples with Oranges so be careful.

Your current pension is Defined Contribution which means you / your employer define / set how much is paid in and invested in equities / bonds etc. How much that will be worth come retirement is in the lap of the gods as none of us know how markets will perform over the next few weeks let alone a couple of decades.

The LGPS is a Defined Benefit scheme where your employer is guaranteeing how much annual pension they will give you for each year of service irrespective of how much they need to pay in to deliver on that promise.

BTW - Ignore the 16% they are contributing, it is irrelevant to you and the pension you will get. If the scheme actuaries work out that they need to pay 5% or 25% of your salary in going forwards it makes no difference to the pension you get.

As to working out what each will be worth at retirement it is quite easy with the LGPS CARE scheme. Each year you will accrue a pension worth 1/49th of your salary in that year, fully CPI linked until you retire at 67/68 (normal scheme age) and fully CPI linked once in payment.

For your DC pension a reasonably safe withdrawal rate to cover ~30 years of retirement would be 3-4% a year so say £3,600 to £4,800 based on current pot size.

Based on your contribution rate of 6.8% your salary is in the £38-48K range so each year you will accrue £775 to £980 of annual pension. Will take about 3-5 years to be the same as your "safe" withdrawal amount from your current DC pot.

I did the same as you are considering. I took a cut of about 25% on my salary when I went in to the LGPS from the private sector but reckon the pension was worth around 40% of salary overall.

If you do make the move ask for a quote on what your £120k DC pot will "buy" you in LGPS pension as that could be a sensible option. I did that and it worked out well.

Also look at the AVC and APC options if you want enhanced LGPS benefits.

Final thought - you need to try and estimate how much you will need / want in retirement to see if you are on course to have enough from all sources (State Pension / LGPS / DC / ISAs etc) including partners numbers if applicable.

Thanks so much for this. Explains it perfectly. If the pension is worth around 40% then I can take the hit of buying a car which will reduce my monthly disposable income but the long term benefits look like worth having.

Lemon_dr1zzle

AlanP_2 said:

MX5huggy said:

LGPS is a brilliant pension scheme worth hugely more than it costs you. 

You and your employer pays the contributions. In exchange the pension fund promises to pay 1/49th of that’s years total earnings as a pension every year from retirement to death. 

So if you earn £30000 per year 1/49th is £612 per year. Work for 30 years your pension would be £18360 per year. It’s all index linked to CPI, so you can ignore it for all practical purposes.

there are a number of other benefits, death in service, dependent pension.

If you take the job, get a quote for transferring the existing pension to LGPS, do it quickly, you have to complete the transfer within the first year. 

My understanding is you have to START the process within 12 months i.e. fill in and submit appropriate form not necessarily COMPLETE in that time frame.

TBH that makes sense as the LGPS admins / DC admins could spend months doing their bits through no fault of yours.

This is correct. It has to be started within 12 months. 

draiggoch

The £120K private pot if transferred in would be worth in the vicinity of £10,000 per year at today's values when you reach 67.