Additional payments with local authority pension scheme

Whattodo2

I am in the local authority pension scheme. Last year I did a lot of overtime, so much so I decided to stop in February to prevent my annual salary going over £56600, because if it does my pension contribution goes up from 6.8% to 8.5% on my entire salary, which means I would actually take home almost £1000 less earning say £56001 than £56000, which is crazy and it would not even increase my pension either as the employers contribution is reduced. I am looking this year to maybe putting part of my salary into another pension scheme to avoid this, but will this work? So for example if I earned £58k, paid £2k into private pension would my salary then be classed £56k and stay in the lower contributions bracket? Also if I did this can I access this £2k as a tax free lump some at say 60 years old and if so would it be £2k plus some inflation or would it be less as taking it early? From reading up on this I understand the extra pension contribution is taken from my salary prior to national insurance, which is strange as I pay national insurance on my current earnings that go into the pension scheme, If I don't pay national insurance on this £2k of salary will this reduce my state pension? I understand the need to pay tax, NI and pension, but there comes a point where I may decide it's just not worth working so many extra hours when the take home rate is so little. Thanks for any help. 

Marcon

Whattodo2 said:

I am in the local authority pension scheme. Last year I did a lot of overtime, so much so I decided to stop in February to prevent my annual salary going over £56600, because if it does my pension contribution goes up from 6.8% to 8.5% on my entire salary, which means I would actually take home almost £1000 less earning say £56001 than £56000, which is crazy and it would not even increase my pension either as the employers contribution is reduced. I am looking this year to maybe putting part of my salary into another pension scheme to avoid this, but will this work? So for example if I earned £58k, paid £2k into private pension would my salary then be classed £56k and stay in the lower contributions bracket? Also if I did this can I access this £2k as a tax free lump some at say 60 years old and if so would it be £2k plus some inflation or would it be less as taking it early? From reading up on this I understand the extra pension contribution is taken from my salary prior to national insurance, which is strange as I pay national insurance on my current earnings that go into the pension scheme, If I don't pay national insurance on this £2k of salary will this reduce my state pension? I understand the need to pay tax, NI and pension, but there comes a point where I may decide it's just not worth working so many extra hours when the take home rate is so little. Thanks for any help. 

The contribution rates for the current tax year give you a little more headroom - up to £57,700 before the % increases.

No, contributing to a private pension outside the LGPS won't 'decrease' your pensionable pay, which is defined as:

Pensionable pay is the pay that pension contributions are deducted from. Pensionable pay includes:

• your normal salary or wages
• bonuses
• overtime – both contractual and non-contractual
• pay for additional hours if you work part time
• maternity, paternity, adoption and shared parental pay
• shift allowance
• any other taxable benefits specified as pensionable in your contract.

Silvertabby

Whattodo2 said:

I am in the local authority pension scheme. Last year I did a lot of overtime, so much so I decided to stop in February to prevent my annual salary going over £56600, because if it does my pension contribution goes up from 6.8% to 8.5% on my entire salary, which means I would actually take home almost £1000 less earning say £56001 than £56000, which is crazy and it would not even increase my pension either as the employers contribution is reduced. I am looking this year to maybe putting part of my salary into another pension scheme to avoid this, but will this work? So for example if I earned £58k, paid £2k into private pension would my salary then be classed £56k and stay in the lower contributions bracket? Also if I did this can I access this £2k as a tax free lump some at say 60 years old and if so would it be £2k plus some inflation or would it be less as taking it early? From reading up on this I understand the extra pension contribution is taken from my salary prior to national insurance, which is strange as I pay national insurance on my current earnings that go into the pension scheme, If I don't pay national insurance on this £2k of salary will this reduce my state pension? I understand the need to pay tax, NI and pension, but there comes a point where I may decide it's just not worth working so many extra hours when the take home rate is so little. Thanks for any help. 

No, your contribution rate is based on your actual pensionable pay - ie, before reductions for tax and NI (and any other additional pension payments).  

When I say 'pensionable pay' I'm sure that you know the difference between the pay used to calculation your final salary linked pre 2014 accruals, and your post 2014 CARE benefits.  But, for the benefit of others, LGPS final salary pensionable pay is your whole time equivalent contractual salary, whereas your CARE pensionable pay includes overtime and any other non-contractual extras.  So you would get a bit more CARE pension due to being in receipt of a higher salary.

If paying 8.5% is really a problem for you, then you could look at opting for the 50:50 scheme while you are doing so much overtime. This means that you would only pay 4.5% instead of 8.5%, but your CARE accrual from the date of the option would be half of what it would have been had you continued on the full rate.  ie, £58K full CARE accrual would be £1,183,67 annual pension for the rest of your life, while being on the 50:50 option would mean that your annual pension accrual would only be £591.84.  Not a decision to be taken lightly.

Whattodo2

Thank you both Marcon and Silver Tabby, I now understand what is included in the salary figure. I think I will keep my overtime down this year to under £57700 as it just not worth working. Might look at putting maybe £3k into another scheme so at least I don't lose 40% tax on the bit over £54k.

SarahB16

Whattodo2 said:

Thank you both Marcon and Silver Tabby, I now understand what is included in the salary figure. I think I will keep my overtime down this year to under £57700 as it just not worth working. Might look at putting maybe £3k into another scheme so at least I don't lose 40% tax on the bit over £54k.

Making LGPS AVC contributions would likely be a very good idea. 

Silvertabby

LGPS AVCs are indeed an easy option to keep you below the 40% tax barrier, but not really the best choice if you want to cash it in at 60 while you carry on working.

Most people who take out AVC contracts do so in order to maximise their tax free cash without giving up any of their annual pension - but all or part of AVCs may be used to buy additional LGPS pension benefits if that is your preference.  

Alternatively, you could open a private pension and vary your monthly payments at will - but these contributions can't be taken direct from your salary.  You would have to make the payments from your bank account, and then sort out the tax issue yourself.