Wife joining LGPS

Mistermeaner

hi my wife may be taking up a position at a local college and will be paid ~18k. She will as I understand it have an opportunity to join the LGPS which is i believe a very generous scheme.

We are fortunate to not need her income as my earnings cover everything and she has not been in work for 6 years now. We also have ~800K in DC pensions / LISA's etc. (albeit most of it in my name)

I want to understand a few things about the LGPS in order to maximise our return from what is on offer

From a brief read of the LGPS website;

I understand her contribution will be 5.8% - is this correct?

I understand the scheme to be a DB scheme, with a 1/49 per annum accrual which is then adjusted for cost of living each year (indexed) - so in essence for simple maths each year she works at £18K gets her £367/annum in pension.... to which cost of living adjustments are applied (and we would expect her 18k/annum to increase as well)? - somewhat confusingly the LGPS website refers to having a 'pension account' but for me this is misleading as its not money held in an account but a DB obligation to pay out every year

The scheme retirement age is state pension age so any early (or late) withdrawal of pension will result in an actuarial deduction in benefits?

Where I ended up in a rabbit hole is around how lump sums work (although given our DC balance we are unlikely to want these)?

Also how do AVC's work in this scheme - do they essentially go into a DC pot or can you over contribute to accrue more DB benefits?



Joining the scheme and making the minimal 5.8% contribution looks like a no brainer - the bits we need to decide on is how much more of her salary (up to 100%) we contribute vs keeping her low salary and me continuing to pay max DC contributions from my HRT earnings


Thanks

la531983

Mistermeaner said:

I understand her contribution will be 5.8% - is this correct?

I understand the scheme to be a DB scheme, with a 1/49 per annum accrual which is then adjusted for cost of living each year (indexed) - so in essence for simple maths each year she works at £18K gets her £367/annum in pension.... to which cost of living adjustments are applied (and we would expect her 18k/annum to increase as well)? - somewhat confusingly the LGPS website refers to having a 'pension account' but for me this is misleading as its not money held in an account but a DB obligation to pay out every year

The scheme retirement age is state pension age so any early (or late) withdrawal of pension will result in an actuarial deduction in benefits?

5.8% sounds about right - https://www.lgpsmember.org/your-pension/the-essentials/your-contributions/

And in simplistic terms yes, each year equals 1/49th when the pension is taken, which can be any time between 55 and 75. The annual statement will tell her what the forecast is for if she takes it at state pension age but there is no requirement to do so, obviously if she takes it (as an example) three years early, she will lose 3/49ths off the total.

The annual statement also adds on the inflationary figure from the year before, as statements are produced as of 31st March and the add on occurs on 6th April.

JoeCrystal

It may be worth looking into transferring DC pots in if her employer permits it as it will buy CARE pension and will mean that if she leave within minimum length of time, she still retains her LGPS pension rather than refund or transfer.

Dazed_and_C0nfused

la531983 said:

Mistermeaner said:

I understand her contribution will be 5.8% - is this correct?

I understand the scheme to be a DB scheme, with a 1/49 per annum accrual which is then adjusted for cost of living each year (indexed) - so in essence for simple maths each year she works at £18K gets her £367/annum in pension.... to which cost of living adjustments are applied (and we would expect her 18k/annum to increase as well)? - somewhat confusingly the LGPS website refers to having a 'pension account' but for me this is misleading as its not money held in an account but a DB obligation to pay out every year

The scheme retirement age is state pension age so any early (or late) withdrawal of pension will result in an actuarial deduction in benefits?

5.8% sounds about right - https://www.lgpsmember.org/your-pension/the-essentials/your-contributions/

And in simplistic terms yes, each year equals 1/49th when the pension is taken, which can be any time between 55 and 75. The annual statement will tell her what the forecast is for if she takes it at state pension age but there is no requirement to do so, obviously if she takes it (as an example) three years early, she will lose 3/49ths off the total.

The annual statement also adds on the inflationary figure from the year before, as statements are produced as of 31st March and the add on occurs on 6th April.

Maybe just a different way of explaining it but taking a LGPS CARE pension 3 years early won't means she loses 3/49ths.

She won't have the service to accrue an additional 3/49ths but nothing will be lost.

There would be an actuarial reduction if someone wanted the pension accrued to be paid for an additional 3 years though.

Nebulous2

The situation we are in, albeit on lower figures than yours, is that almost all the pension is in my name and very little in my wife's. That means I have retired early with an LGPS pension which is subject tax, while my wife has an unused personal allowance. 

My suggestion would be that you are still in a position to avoid that. Ploughing more into her pension would mean that stopping before state pension age would allow you to reduce the tax you are collectively paying, if she was drawing on tax-free money to fund that, rather than you drawing taxable money from a DC pot. 

hyubh

Mistermeaner said:

hi my wife may be taking up a position at a local college and will be paid ~18k. She will as I understand it have an opportunity to join the LGPS which is i believe a very generous scheme.

We are fortunate to not need her income as my earnings cover everything and she has not been in work for 6 years now. We also have ~800K in DC pensions / LISA's etc. (albeit most of it in my name)

I want to understand a few things about the LGPS in order to maximise our return from what is on offer

From a brief read of the LGPS website;

I understand her contribution will be 5.8% - is this correct?

Yes, that's the current contribution band for a member on 18K.

I understand the scheme to be a DB scheme, with a 1/49 per annum accrual which is then adjusted for cost of living each year (indexed) - so in essence for simple maths each year she works at £18K gets her £367/annum in pension.... to which cost of living adjustments are applied (and we would expect her 18k/annum to increase as well)?

Yes. As a CARE not final salary scheme, her rate of pay going up does not retrospectively make previous years' membership go up in value. However the accrual rate is generous to make up for the fact.

somewhat confusingly the LGPS website refers to having a 'pension account' but for me this is misleading as its not money held in an account but a DB obligation to pay out every year

The meaning is by (very) rough analogy, yes.

The scheme retirement age is state pension age so any early (or late) withdrawal of pension will result in an actuarial deduction in benefits?

An actuarial reduction if taken before SPA, yes, to reflect the fact the pension will likely be drawn for longer. But an actuarial increase if taken after SPA, to reflect the fact the pension will be drawn for less time.

Where I ended up in a rabbit hole is around how lump sums work (although given our DC balance we are unlikely to want these)?

Exchange annual pension at retirement for lump sum at a rate of 1/12. So, for example, forgoing £1000 of pension will get you a lump sum of £12000.

Also how do AVC's work in this scheme - do they essentially go into a DC pot or can you over contribute to accrue more DB benefits?

An AVC contract in an LGPS context means a linked DC pot. It is 'linked' in the sense the pot can be put with the capital value of the DB pension on retirement to take a lump sum from the total - so in effect, potentially taking the entire DC pot as cash without touching the DB pension. An AVC can also be used to purchase additional DB pension on retirement, at rates not to be sniffed at.

The other sort of additional pension contract in the LGPS is an Added Pension Contract (APC). This buys the member additional DB pension - factors are by age and sex, so it's not exactly additional CARE pension, however it 'revalues' in the same way. One limitation of an APC is that it won't come with additional survivor pension (additional DB pension bought with an AVC, in contrast, does). But that probably wouldn't be a concern for you.

Mistermeaner

hi thanks all for input 

My wife has a SIPP with £128K in it - what would happen if this is transferred into the LGPS? Does it buy extra years/extra income or go into a linked DC pot

I understand from above that the 'linked DC pot' can be treated as part of the total value of the DC+DB pension to allow potential withdrawal of the DC pot as part of the TFLS... is there anything else that can be done with it?

What are pro's and con's of maintaining a separate SIPP outside of the LGPS vs chucking everything in there?

Thanks

MX5huggy

If she transfers the SIPP it’s turned into additional annual pension that is index linked. I did a small one £4200 of SIPP gave me £540 of annual pension at State Pension Age at the time 30 years away. So it’s good value. 

So it’s worth asking for the figures (some LGPS schemes, LGPS is actually  86 separate schemes, don’t allow transfers in or have limits on the value allowed). You have to complete the transfer in the first year of membership. 

Having a SIPP along side DB pension is perfect really but I would seriously consider transferring this SIPP then building up another one, or use the LGPS AVC if available via Salary Sacrifice but she’ll hit the minimum wage limit on that quickly only earning 18k. 

You could put 100% of her earning in a SIPP. (There’s more detail required for the exact limit).