LGPS v Defined Contribution

RyanIre · 14 February 2018 at 12:34PM

I’m not sure if anyone can help with the comparison between these two pensions?

Defined Contribution 7% and matched by the company
LGPS 1/49th of annual salary

Assumptions: Salary of £40,000 over 30 year period

Is one much better than the other?

JoeCrystal · 14 February 2018 at 12:45PM

Yes. LGPS is much better, especially on £40k.

Let assume you are 38 for example and want to retire on 68 with 30 years service. Assume that the cost of living is the same as payrise for LGPS. You are comparing apples against oranges. 1/49 is a percentage of the annual salary as pension that you will build up. The biggest difference is that LGPS is a DB pension in which your employer is taking all the investment risk while promising you a specific amount of income while other is a DC pension in which you took all the investment risk for yourself with no guaranteed income.

LGPS: Cost you £226 per month or 6.8% of 40k salary and you will get index-linked income of £24,489 per year from 68 (with host of other benefit like ill health retirement, death in service, spousal income and so on)

14% Contribution Worth £466 per month and will only yield you a pension pot worth £190,000 in thirty years time to get an index-linked annuity of £3,690. If you want to get £24,489 like LGPS, you will need to put aside a combined contribution of 93% of your salary. Quite a difference!

GunJack · 14 February 2018 at 12:47PM

t's not just about the numbers, LGPS is one of the premier DB(CARE) schemes left in the country, which not only provides the pension, but also death in-service, survivor's pension, ill-health retirement options, index-linked, etc., all without any investment risk to yourself.

What does the DC scheme/employer offer in respect of these things??

kidmugsy · 14 February 2018 at 12:59PM

And if ever you tire of LGPS you could transfer a cash equivalent amount to a money purchase scheme.

RyanIre · 14 February 2018 at 1:02PM

Much appreciated folks, was curious as offered a job on roughly same salary but with the LGPS pension rather than current DC scheme - Seems like financially it makes sense in the long run!

JoeCrystal · 14 February 2018 at 1:14PM

RyanIre wrote: »

Much appreciated folks, was curious as offered a job on roughly same salary but with the LGPS pension rather than current DC scheme - Seems like financially it makes sense in the long run!

Oh, I can make it even better. You can also buy additional pension with LGPS as well. (It cost £49,552 lump sum for 38 years old to buy £6,755 extra pension separately (or contribute monthly at £260.07 extra per month for next 29 years). You can also transfer in a DC pension scheme into it and use the sum to buy extra pension as well (I believe?) The latter can only be done within 12 months of join LGPS so bear that in mind

GunJack · 14 February 2018 at 1:45PM

...and possibly better job security in the public sector

kidmugsy · 14 February 2018 at 1:59PM

JoeCrystal wrote: »

You can also transfer in a DC pension scheme into it and use the sum to buy extra pension as well (I believe?) The latter can only be done within 12 months of join LGPS so bear that in mind

Could one take the mick by transferring a DC pension into LGPS and then later transfer the CETV out of LGPS into a money purchase scheme? Would that magically amplify the value of the original DC pension?

HappyHarry · 14 February 2018 at 2:19PM

kidmugsy wrote: »

Could one take the mick by transferring a DC pension into LGPS and then later transfer the CETV out of LGPS into a money purchase scheme? Would that magically amplify the value of the original DC pension?

It's a nice idea, but unlikely to work that way.

The DC pension will currently purchase very little LGPS (it's almost a reverse CETV). In the future, when CETV values are likely to be lower, then the OP could well get less when transferring back to a DC pension again.

Silvertabby · 14 February 2018 at 3:00PM

!!!8220; Could one take the mick by transferring a DC pension into LGPS and then later transfer the CETV out of LGPS into a money purchase scheme? Would that magically amplify the value of the original DC pension?
Originally posted by kidmugsy

HappyHarry wrote: »

It's a nice idea, but unlikely to work that way.

The DC pension will currently purchase very little LGPS (it's almost a reverse CETV). In the future, when CETV values are likely to be lower, then the OP could well get less when transferring back to a DC pension again.

Actually, the transfer in factors for the LGPS are currently very generous. As for any future transfer out, don't forget that the LGPS factors are set by GAD (rather than being linked to gilts) and, whilst are not so generous to start off with, are unlikely to drop with a bang.

Would the ploy work? In theory, yes - provided you are able to get a job in Local Government. Would it be the wisest thing to do? Your guess is as good as mine.

Happier_Me · 14 February 2018 at 8:41PM

Someone has already mentioned the option of buying additional pension (APC's) but you can also contribute to AVC's, which work in a similar way to a DC scheme. If early retirement is something you're interested in or you would like a tax free lump sum on retirement then an AVC scheme could be a good idea.

In the LGPS scheme, you receive an annual pension and there is no automatic right to a tax free lump sum. You can convert a portion of your annual pension to create a lump sum but it is considered relatively poor value. Your LGPS pension will also be subject to an actuarial reduction (as would any APC's I believe) if taken earlier than your NPA (approx 5% per year). So a massive reduction if you want to tool in at 55!

An AVC pot can be used in a number of ways but mainly to fund early retirement, therefore avoiding actuarial reduction of your main scheme or to create a tax free lump sum (of 25% of the value of your LGPS 'pot'). I'm looking to retire before my NPA so I need to save for early retirement to minimise actuarial reduction of my main pension. It makes sense for me to do this through AVCs as opposed to a private pension, because it keeps my options open. I have the option to either draw from this from 55 (as you would a DC scheme) or take the AVC pot alongside my pension as a tax free lump sum. Ideally I will have enough pension savings in various places to take the AVC as a tax free lump sum.

Also someone mentioned there may be better job security in the public sector. I've worked in or at least had strong links to this sector for over 20 years now and I can say that it has definitely changed from a 'job for life' for many to a roller coaster of restructure upon restructure. The cuts have been ongoing for many, many years and there is no sign of improvement, if anything the cuts are getting deeper. Some authorities are feeling this more than others though but it's just worth bearing this in mind.

LGPS v Defined Contribution

Comments

Categories

Get our FREE Weekly email full of deals & guides - and it’s spam-free