It's valuable to understand your Local Government Pension Scheme (LGPS) pension and how it works. This will help you to make important decisions to safeguard your financial future. Not only for yourself, but your loved ones too.
As a member of the Avon Pension Fund, you pay in whilst you are working, for a regular income when you retire. On top of your LGPS pension, you will also get a state pension from the government when you retire.
Your LGPS pension is an annual amount, paid monthly to you, for the rest of your life once you retire. An inflation linked increase is added to your pension every year, so it keeps up with the cost of living.
About the LGPS
The LGPS is one of the largest public sector pension schemes in the UK, with 3.5 million members nationwide. It’s a defined benefit scheme, meaning your pension is worked out using a set formula, which considers the years you’ve been a member of the scheme and your salary.
Under the Career Average (CARE) 2014 scheme, 1/49th x your pensionable pay + cost of inflation is added to your pension account. This figure is calculated and added to your account each year. You can stay up to date with your pension using my pension online.
Your pension isn’t determined by the performance of investments, stock markets, or cost of annuities. As a member of the LGPS, your pension is guaranteed by government. You may have read about our responsible investments, for the LGPS is a “funded” scheme. This means we invest in a number of ways to increase the Fund’s overall value, but our investments do not put your pension at risk.
The scheme offers appealing benefits, such as flexible retirement and life cover - giving members peace of mind for the future.
Your LGPS contributions
Your monthly contributions and your pension value in the LGPS are different. Our members sometimes assume their contributions build up their pension. This is not the case with a defined benefit scheme. Your payments are a contribution towards the cost of your membership within the LGPS pension scheme. Your membership is more than just a pension when you retire. As a member of the LGPS, additional benefits give you peace of mind for yourself and your family.
Your contributions are a percentage of your pay, which are deducted from your salary every month. Your employer also contributes to the fund - you pay a third of the cost and your employer pays two-thirds.
Tax free lump sum
When you retire, you can elect to give up some of your pension for a cash lump sum (which is tax-free). As a member of the LGPS, for every £1 of yearly pension you give up, you will get £12 cash lump sum.
If you were in the pension scheme before 1 April 2008, you will be entitled to an additional tax free lump sum, which is equal to three times your pension.
Other types of pension
Personal pensions
A personal pension is one that you take out yourself, for example if you're self-employed or your employer doesn't offer a pension arrangement. These are a type of money purchase pension. You choose the provider and make arrangements for your contributions to be paid.
Stakeholder pensions
Stakeholder pensions are money purchase pensions and must have certain features. Some of these are:
- limited charges
- low minimum contributions
- flexible contributions
- penalty-free transfers
- a default investment fund – a fund your money will be invested in if you don't want to choose
Company (occupational) pensions
An occupational pension is a private pension scheme run by some employers and is also known as a works pension, company pension or superannuation.
Group personal pensions (through your employer)
Some employers offer these schemes. They build up a personal fund for each employee which is converted into an income when you retire. They are a type of money purchase pension. The scheme is run by the pension provider that your employer chooses, but it is an individual contract between you and the provider.
Defined benefit schemes (such as the LGPS)
Defined benefit (DB) schemes usually provide a pension income based on:
- The number of years you’ve been a member of the scheme – known as pensionable service
- Your pensionable earnings – this could be your salary at retirement (known as ‘final salary’), or salary averaged over a career (‘career average’), or some other formula
- The proportion of those earnings you receive as a pension for each year of membership – this is called the accrual rate and some commonly used rates are 1/60th or 1/80th of your pensionable earnings for each year of pensionable service
These schemes are run by trustees who look after the interests of the scheme’s members. Your employer contributes to the scheme and is responsible for ensuring there is enough money at the time you retire to pay your pension.
Defined contribution (DC) /money purchase schemes
You build up a pension fund using your contributions and your employer’s contributions (if they make any) plus investment returns (if any) and tax relief. When you retire you can take a tax free lump sum from your fund and use the rest to secure an income – usually in the form of an annuity.
Annuity
An annuity converts your money purchase pension into an income for the rest of your life. Annuities are sold by life insurance companies and defined-contribution pension schemes and get different types depending on your needs and circumstances. As the local government pension scheme is a defined-benefit scheme, you do not need to buy an annuity when you retire with Avon Pension Fund.
State pension
In addition to any pension arrangements you have you may also qualify for a state retirement pension paid by the government. The Basic State Pension is based on the National Insurance contributions you pay, or which are given as credits, during your working life.
