20 Mar 2016

A question about : Local government pension scheme

Hi all.

I'm a complete newbie when it comes to pensions and I've been auto-enrolled into the LGPS. I'm not sure I know how it works.

From their website:

Quote:

Your pension will build up in a new way from April 2014.

The LGPS 2014 will remain a defined benefit scheme from April 2014. A defined benefit scheme means that your pension will continue to be worked out using a set formula.

However, from 1 April 2014 that formula will be different because the Scheme changes from a final salary scheme to a career average scheme:

For each year in the new scheme, you will build up a pension based on your pensionable pay in that year.
For each scheme year that you are a member, a pension equal to a 49th of your pensionable pay will be added to your pension account.
Inflation increases will be added to ensure that your pension account keeps up with the cost of living.

Let's say I earn Ј12,000 a year and this doesn't change for the next 25 years. Ј55 is taken from my wage each month and my employer also puts in Ј55. Then at the end of the year, 1/49th of my annual salary is also added to the pot.

My pot after one year should be (Ј110 x 12) + (Ј12,000 / 49) = Ј1565.
And after 25 years it should be no less than Ј39122.

These are all rough numbers, obviously, I just wanted to check I had the maths right.

As an aside, I'm not sure whether this type of pension is affected by the recent budget announcement. Will I be able to take a defined benefit scheme as one big lump sum at the end?

Best answers:

  • Under the new LGPS 2014 you will build up a pension of 1/49th of your actual pay each year. Year 1 will have a pension of Ј244.90.
    This pension is revalued each year, and the 1/49th pension for year 2 is added to the revalued pension, and so on until the end of the 25 years, as in your original example.
    So assuming salary of Ј12000 for year 2, a further Ј244.90 would be added to the Year 1 Ј244.90, (which has been revalued). The total at the end of Year 2 would therefore be Ј489.80 plus the revaluation amount on the Year 1 Ј244.90.
    At the end of 25 years the pension would be Ј6122, plus the revaluation each year.
    The contributions made by yourself and your employer do not show in the calculations as the LGPS is a defined benefit scheme, and the pension benefits are based on the 1/49th of actual pay formula.
    You won't be able to take it all as a lump sum at retirement, but you could reduce your pension and choose to have a lump sum, subject to HMRC limits.
  • Woah. Okay then this now looks like the worst decision I could make by staying in.
    I'm paying Ј55 a month (which on its own after 25 years is Ј16500) to get Ј6122 back?
    I figured the perk of a pension like this is the employer paying in the same if not more than my own contribution. But if that doesn't factor into how much money I get at retirement, what's the point? It may as well go in an ISA.
    Thanks for the replies.
  • Well if I'm paying Ј44 a month (Ј44 x 12 = Ј528) and for this year my pension is Ј244.90 then I will have lost Ј283.10.
    My salary is not likely to go up next year and who knows after that, so it seems a pension like this one is only suited for those with vastly better salaries than mine.
  • Yep - I am *just* that stupid. I seriously forgot the fact the amount would be for each year after I retire!
    God, better to make a fool of myself anonymously here rather than talk to the pensions guy at work.
    I won't be opting out. Thanks for putting up with me!
  • Better to look silly now and be rich in retirement, than make a big mistake by opting out now and be eating out of a skip in retirement.
Category: 
Auto-enrolment
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