The local government pension scheme

How benefits are calculated

On 1 April 2014, all members joined the new career average scheme, sometimes known as a CARE (career average revalued earnings) scheme.

If you were already a member of the LGPS prior to this date, you will 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

Pre-2008 benefits

You get 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.

Post-2008 benefits

You get a pension of 1/60 of pensionable salary for each year of pensionable service from 1 April 2008. There is no automatic lump sum but you can convert up to 25 per cent of your pension fund’s notional value at a rate of £1 for £12 cash. There is a complex formula for calculating this and your pension fund administrator can provide details as you approach retirement.

Benefits are a function of your pensionable salary and total of pensionable service. If you work part time, your pension will be based on the equivalent full-time salary rate but service will be credited on a pro rata basis, for example if you worked on a 0.5 contract for 20 years you will have accrued 10 years’ pensionable service.

CARE scheme from 1 April 2014

A career average (CARE) scheme is a pension based on your salary over your whole career, not just those at or near retirement. You build up pension at 1/49 of your pensionable earnings each 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 2025 to 31 March 2026, if you earned £24,500 in pensionable pay. For that year, you have added £500.00 to your pension account: £24,500 x 1/49 = £500.00.

Pensionable pay

Pensionable pay is the amount on which you pay contributions. From 1 April 2014 it includes non-contractual (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.

Protection (underpin)

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.

Flexibilities

The LGPS contains a number of flexibilities. They are worth considering if 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); 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 to get maximum pension 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. 

Flexible retirement

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 £8,903 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 up to limits. This is entirely at your employer’s discretion and your employer should have a policy on the use of this discretion. 

Cash lump sums in career average

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. 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 per cent of your total pension benefits. You can choose to take anything up to the maximum level.

Retirement

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 career average pension, your NPA 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. Information 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. 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.

Premature retirement

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. The earliest age that you can take your pension will increase from age 55 to 57 from 6 April 2028.

Actuarially reduced benefits

You can choose to take your benefits from the age of 55 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, i.e. 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.

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. 

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.

Ill-health retirement

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, your employer must believe you are permanently incapable of doing your own job until normal pension age and incapable of ‘gainful employment’, defined as 30 hours’ work per week over 12 months. Your employer must get the opinion of an independent occupational health physician appointed by them before it makes its decision.

Tier 1

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.

Tier 2

If 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 but you are expected to be able to undertake gainful employment before NPA, your pension will be enhanced by 25% of your prospective service to NPA.

Tier 3

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 payment.

A pension will also be payable to your spouse, civil partner or cohabiting partner and any eligible dependent children. The pension payable to a spouse, civil partner or cohabiting partner will be 1/160 of your final pensionable salary for each year of pensionable service. This means 50 per cent of any pension built up before April 2008, 37.5 per cent of pension built up between April 2008 and April 2014 and 30.625 per cent of pension built up in the career average scheme. 

A pension for a cohabiting partner is only in respect of service from 6 April 1988. You must have been a contributing member on or after 1 April 2008. Co-habiting partners must have been in relationship for two years and be ‘financially interdependent’ at time of death. There is no requirement to nominate a partner but members can inform their local LGPS pension fund in advance. 

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 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 is a tax-free payment under current legislation, though there are plans to make it taxable for inheritance tax purposes. 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 is currently 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 left after that and had between three months and two years you have the choice of a refund of contributions, having a deferred pension or transferring your pension out to another pension scheme.

If you have a deferred pension, it is increased every year in line with the cost of living - as currently measured by the Consumer Prices Index (CPI). The minimum age at which deferred pensions can be taken is currently 55, but this is set to rise to 57 from April 2028.