Information for members on pensions tax relief - annual allowances and lifetime allowance
Joining the scheme
Membership of the LGPS is automatic: pension contributions are deducted from your your salary unless you opt out of the scheme. This applies to all local government employees appointed on a three-month contract or longer, working on either a full-or part-time basis.
If employed on a casual (ad hoc) basis, with no permanent contract, you will be automatically entered into the LGPS once you have completed three months of employment, even if this is achieved through one or more consecutive contracts, with the option to backdate contributions to your original start date. If you have more than one eligible job, it is possible to have more than one LGPS pension.
The LGPS is administered locally for participating employers through 99 regional pension funds. Visit the LGPS website at www.lgps.org.uk to find out how to contact your pension fund administrator, or ask your employer.
If working for an admitted body* you have to apply to join the LGPS, entry to which is at the discretion of your employer. You will need to ask your employer what pension arrangements are in place for you.
If you have opted out of the LGPS at any time and start a new post that you wish to be pensionable, it will be necessary for you to opt back in.
You may have pensionable and non-pensionable employment at the same time.
|Pay bands||Main section||50/50 section|
|Up to £13,600||5.50%||2.75%|
|£13,601 to £21,200||5.80%||2.90%|
|£21,201 to £34,400||6.50%||3.25%|
|£34,401 to £43,500||6.80%||3.40%|
|£43,501 to £60,700||8.50%||4.25%|
|£60,701 to £86,000||9.90%||4.95%|
|£86,001 to £101,200||10.50%||5.25%|
|£101,201 to £151,800||11.40%||5.70%|
|£151,801 or more||12.50%|
Remember, pension contributions continue to be tax free, meaning you pay tax on your earnings after pension contribution has been deducted.
Part-time workers, from 2014, pay the rate relating to the band their actual earnings fall into.
From 2014, the bands will be increased every three years. This means that as your pay increases you may move into a higher band, but when the bands are adjusted you may move back down into a lower band.
How benefits are calculated
On 1 April 2014, all members joined the new scheme, which is a career average scheme, sometimes known as a CARE (career average revalued earnings) scheme.
Consequently, if you were already a member of the LGPS prior to this date, you will effectively have benefits in the old and new schemes. You may also have pre- and post-2008 service, which have slightly different calculations that are explained below.
Benefits in the pre-2014 schemes
From April 2013 to March 2014, the contribution rates in the LGPS 2008 scheme were:
|Full-time pay rate||Contribution rate|
|Up to £13,700||5.5%|
|£13,701 to £16,100||5.8%|
|£16,101 to £20,800||5.9%|
|£20,801 to £34,700||6.5%|
|£34,701 to £46,500||6.8%|
|£46,501 to £87,100||7.2%|
|More than £87,100||7.5%|
Full-time equivalent salaries were used to determine contribution rates prior to April 2014.
You will retire with a pension of 1/80 of pensionable salary for each year of pensionable service up to 31 March 2008, plus an automatic lump sum of three times the annual pension.
You will retire with 1/60 of pensionable salary for each year of pensionable service from 1 April 2008, with no automatic lump sum but the option to convert up to a maximum of 25% of your pension fund’s notional value at a rate of £1 for £12 cash. There is a complex formula for calculating this notional value and your pension fund administrator can provide details as you approach retirement.
Benefits are payable by reference to your pensionable salary and total of pensionable service. If working on a part-time basis, your pension will be based on the equivalent full-time salary rate but service will be credited on a pro rata basis for those periods when working part-time, for example if you worked on a 0.5 contract for 20 years you will have accrued 10 years’ pensionable service.
For pension calculation purposes, a full-time equivalent (FTE) salary figure is used.
Example: If your local government pay scale point is £20,800 and you work 37/37 hours (full-time) but term time only (eg 40 weeks), your actual pay will be £16,000 (20,800 x 40/52). For pension calculation purposes your FTE pay will be recorded as £16,000.
In the same job if you worked part time on a 20/37 hours contract over 40 weeks, your actual pay should be £8,648 (20,800 x 20/37 x 40/52), but pensionable FTE would be recorded as £16,000.
CARE scheme from 1 April 2014
A career average (CARE) scheme is a pension based on all of your salaries in employment, not just those towards the end of your career. Each year worked adds one 1/49 (also referred to as the accrual rate) of your salary earned in that year.
This is ‘banked’ each year and your final pension is determined by adding together all the amounts of ‘banked’ pension you have accumulated in your career – with index-linking applied to protect against inflation.
Example: From 1 April 2014 to 31 March 2015, I earned £15,000 in pensionable pay. For that year, I have added £306.12 to my pension account: £15,000 x 1/49 = £306.12.
This amount of £306.12 will be ‘banked’ and your final pension is determined by adding together all the amounts of ‘banked’ pension you have accumulated in your career – with index-linking applied to protect against inflation.
Pensionable pay is the amount on which you pay contributions. From 1 April 2014 it includes noncontractual (as well as contractual) overtime and any additional hours worked in excess of your contractual hours.
For both full-time and part-time workers, pensionable pay will be the actual salary earned during the year on which you paid contributions.
The underpin provides protection for those members nearing retirement. It will ensure you receive a pension at least equal to what you would have received had the scheme not changed on 1 April 2014.
The underpin applies to you if you were:
- an active member of the scheme on 31 March 2012, and
- within 10 years of your normal pension age on 1 April 2012, and
- you have not had a disqualifying break in service of more than five years.
The references to ‘normal pension age’ (NPA) above are to your NPA under the 2008 scheme, which is normally 65.
The 2014 LGPS scheme offers a number of flexibilities. They are worth being aware of in case they suit your circumstances, but think carefully before altering any element of your benefit and consider taking independent financial advice.
You can increase your pension by:
- paying additional voluntary contributions (AVCs)
- buying additional pension contributions (APCs) in the LGPS; the cost of this may be shared between you and your employer (1/3 to 2/3) if you had an unpaid break of service for maternity, paternity or adoption leave and you elect to repay this period within 30 days of returning.
You can reduce your contributions by:
- using the 50/50 option: pay half your contribution and build up half the pension (ie, 1/98 of pensionable salary per year); please note this option is open-ended in duration, but you must request to do this in writing to your employer. In order to avoid a situation where you continue with the option without realising or re-assessing your situation, your employer must re-enrol you into the main section of the scheme every three years, at which point you can revert to the 50/50 option if you wish.
NEU’s normal advice is to remain in the main section of the LGPS in order to accrue a good level of retirement benefit and only use the 50/50 option on a short-term basis. Of course, it is better to use the 50/50 option than to opt out of the LGPS completely, and you will retain full entitlement of the death-in-service life assurance cover. Again, consider any varying option carefully and think about the impact it will have overall.
With the agreement of your employer, it will be possible for you to draw down a percentage of your accrued LGPS pension rights from the age of 55 while continuing to work. If you are under NPA, the benefits taken will be actuarially reduced. You will also build up an additional pension as you continue to work, in addition to the remainder of your original pension.
Improving your pension benefits
You can improve your pension by buying up to £5,000 worth of annual pension provision, contributing to the in-house AVCs scheme or a free-standing AVC scheme, or contributing to a stakeholder pension.
Your employer also has the power to increase your pensionable service by up to a maximum of 6 2/3 added years or potential service to the age of 65 and to increase a pension by up to £5,000 per annum. This is entirely at your employer’s discretion and your employer should have a policy on the use of this discretion.
Cash lump sums
As with the LGPS 2008 service, there is no automatic cash lump sum in the career average scheme, but you can convert part of your pension for a cash lump sum if you want to. Under current legislation this is tax-free. There is an overall limit of how much you can take as a lump sum, which equates to 25% of your total pension benefits. Your fund administrator will advise you what amount of pension you could convert for the maximum allowable lump sum when you are approaching retirement and you can choose to take anything up to the maximum level.
For benefits built up before April 2014, your NPA is 65. This is the age at which you can take those benefits with no adjustment for early payment.
For the pension you build up from 1 April 2014, your NPA is not fixed at age 65, but instead is the same as your state pension age (with a minimum of age 65). You can check your normal pension age by looking up your current state pension age. A table showing state pension ages, including all proposed changes to the state pension age, is available here.
You can also use the government’s state pension age calculator to find out your state pension age. Please note, this calculator does not include further proposed changes to state pension age.
It is important to remember further changes to your state pension age are possible in the future, so the date currently quoted could change. If your state pension age increases in the future, your NPA for the LGPS pension you build up from April 2014 will also be increased.
If your employment is terminated by redundancy or “in the efficient discharge of the employer’s functions”, your pension benefits will be payable immediately with no actuarial reduction. Premature retirement is only possible from the age of 55
Actuarially reduced benefits
You can choose to take your benefits from the age of 60, or from 55 with your employer’s consent, but these will be actuarially reduced (unless your employer offers to waive the reduction and pay the difference themselves) to account for the fact that they are being paid early, ie before NPA.
Actuarially enhanced benefits
If you work past NPA without claiming your pension, your benefits will be enhanced to account for the fact they are paid late. However, all pension benefits must be put into payment before you reach the age of 75.
Please note, you cannot take benefits built up to April 2014 separately from the benefits you build up from April 2014. All of your pension would have to be drawn at the same time if retiring voluntarily. For instance, you could retire at age 65 but any post-2014 pension with a higher NPA would be actuarially reduced for early payment, or you could wait until your state pension age and your pre-2014 benefits, if they have a lower NPA, would be actuarially increased for late payment.
Rule of 85 protection
For those members who have ‘rule of 85 protection’, this will continue to apply. It protects some or all of a member’s benefits from the normal early payment reduction and will automatically be applied (except where a member voluntarily draws their pension on or after age 55 and before age 60, as this is a new option in the scheme from April 2014). To have rule of 85 protection you must have been a member of the LGPS on 30 September 2006.
From 1 April 2008 there was a three-tier ill-health retirement scheme. This remains unchanged in the LGPS 2014 scheme.
To qualify for ill-health retirement you must have two years’ membership of the LGPS and, in most circumstances, you will have been dismissed on the grounds you are incapable of carrying out your duties or those of a comparable post. If dismissed, your case will be passed to an independent, specially qualified doctor, who will assess and determine whether or not an award will be made, and the level of that award.
If it is found there is no reasonable prospect of you being able to return to work before the age of 65, your pension will be enhanced with service equal to all prospective service from date of termination of contract to NPA.
It is possible to be medically retired from one post and receive a pension while still working in a second post. This is currently under consideration as a result of the introduction of the term ‘gainful employment’, which is defined as 30 hours’ work per week over 12 months.
If your employment is terminated on the grounds your ill-health leaves you permanently incapable of undertaking your current duties and you are unlikely to be able to undertake gainful employment within a reasonable time, your pension will be enhanced by 25% of your prospective service to NPA.
If you are certified as being permanently incapable of doing your job but are likely to be able to undertake gainful employment within three years, you will get a pension based on the amount of service you have accrued but with no enhancement for a fixed period of three years. If you secure gainful employment your pension will be stopped.
If after 18 months you have not secured gainful employment, your employer will have to review your situation and seek a further medical assessment to determine whether or not you are likely to be capable of undertaking gainful employment by the end of the three years. Following this, it is possible you will be awarded a tier 2 pension if your employer decides, in hindsight and as a result of the review and at their discretion, that a tier 2 pension would have been more appropriate. Otherwise your pension will cease at the end of the three-year period.
Death and survivor benefits
Death in service
If you die in pensionable service, a lump sum payment of three times your annual salary is payable (whether or not you are taking the 50/50 option). This will be based on actual earnings for part-time staff, rather than the equivalent full-time salary. You should make a nomination for the recipient(s) of this grant, although the regional fund has ultimate discretion over who this is paid to. In the event of no nomination being made, executors need to apply to the LGPS.
A pension will also be payable to your spouse, civil partner or nominated cohabiting partner and any eligible dependent children. The pension payable to a spouse, civil partner or nominated cohabiting partner will be at the rate of 1/160 of your final pensionable salary for each year of your pensionable service, although a pension for a nominated cohabiting partner is only in respect of service from 6 April 1988. You must be a contributing member on or after 1 April 2008 in order to nominate a cohabiting partner.
From April 2014, a survivor’s pension will automatically be payable to a cohabiting partner without the need for the scheme member to have completed a form nominating them to receive a survivor’s pension.
Pensions for children will be payable to children in full-time education up to the age of 23, with the amount depending on the number of children and whether or not a spouse, civil partner or nominated cohabiting partner’s pension is also payable. If you have more than one eligible child, your pension fund administrator will decide how to share the children’s pension between them.
Death in deferment
If you were to die after you left pensionable service, but before accessing your pension benefits, a lump sum would be payable to a nominated person or persons or to your estate, as above.
This lump sum would be calculated as being five times the pension that would have been payable to you, had you retired at the date of death. This would be a tax-free payment under current legislation. Survivor pensions would also be payable as above.
Death after retirement
If you were to die within 10 years of retirement and before 75, a lump sum of 10 times your pension at date of death, less the pension already paid, would be payable. This would be a tax-free payment. Survivor pensions would also be payable, as above.
Leaving the LGPS
If you voluntarily leave LGPS service with less than two years’ membership in the scheme, you will receive a refund of your pension contributions, unless you choose to transfer your pension out to another pension scheme.
However, if you were in the scheme before 1 April 2014, but leave after then and have been in the scheme for three or more months but less than two years, you will have the choice of taking a refund of contributions, having a deferred pension or transferring your pension out to another pension scheme.
Most people would leave and have a deferred benefit. If you have been in the scheme for two years or more, and you leave before you can take immediate payment of your pension, then the amount of pension you built up is deferred until you choose to take it - at any time from age 55. The amount of your deferred pension is increased every year in line with the cost of living - as currently measured by the Consumer Prices Index (CPI), to ensure it keeps its value.
The above is a general overview of the LGPS. Every local authority has its own pension fund. There could be variations between funds, so before making any decisions regarding your pension you should speak with your pension fund administrator.
The LPFA website contains more information about the new scheme and what it means for you.
Details on the career average scheme for LGPS members introduced from April 2014 – overview of the scheme, how career average works and contribution rates.