Public sector pensions, including the Local Government Pension Scheme (LGPS), are preparing to face some of the most significant changes since their introduction.
It is expected that these changes will impact members in different ways. Some could be better off as a result, for some there may be no impact. Some could face a shortfall in their retirement benefits.
We think it's important for you to know more about these changes, so here's an overview of the key changes happening in April 2014.
You are still a member of a good pension scheme. However, you need to consider how these changes could affect you and all the options available to you to help improve your retirement benefits.
The following information applies to the Local Government Pension Scheme (England and Wales) only. It is expected that the Local Government Pension Scheme (Northern Ireland) changes may be very similar. The changes currently do not apply to Scotland.
The Chancellor invited Lord Hutton to conduct an independent review of Public Service Pensions (this includes the LGPS). In 2011, the Government accepted Lord Hutton's recommendations and introduced draft legislation (the Public Service Pensions Bill) in September 2012. This Bill became law in April 2013, and establishes the framework within which the LGPS regulations will be made.
These LGPS England & Wales regulations are currently being drafted and are subject to consultation. But once finalised, they are expected to be implemented in April 2014.
The reforms apply to all LGPS members in England and Wales. However, under the new scheme proposed, members who were within 10 years of their Normal Pension Age (NPA) of 65 on 1st April 2012 will be entitled to receive a pension that is at least equal to the pension they would have received before these changes (this may mean that post-April 2014 benefits may be calculated under old scheme rules).
All pension benefits built up before April 2014 will continue to be linked to your final salary at retirement and the current normal pension age.
1) A switch to a Career Average Revalued Earnings (CARE scheme). Your pension entitlement is calculated based on your earnings for that year -so each year is treated separately. Your pension benefits built up each year are then banked and revalued annually for inflation.
2) The standard accrual rate, or the proportion of pensionable pay that each year of LGPS membership adds to your pension, will change to 1/49th. This means that for each year of membership, you will build up a pension of 1/49th of your pensionable pay for that year.
Example of how this might look before the pension is revalued for inflation:
3) An increased number of contribution tiers, ranging from 5.5% for the lowest paid to 12.5% for the highest paid.
Remember that your pension contributions benefit from tax relief and your employer pays the balance of the cost of providing your benefits in the LGPS.
|Up to £13,500||5.5%|
|More than £150,000||12.5%|
4) Your Normal Pension Age for the LGPS will be linked with your State Pension Age. The State Pension Age will be increasing as follows:
- To 65 for women (equal to men) between April 2016 and November 2018.
- To 66 for both men and women by October 2020.
This is just a brief overview of the changes, and how they will impact you will depend on your individual circumstances. For more information you should contact your scheme administrator or visit the LGPS 2014 website, Prudential is not responsible for the content or reliability of this linked website.
The LGPS and Prudential have been working together for over 20 years, to provide you with a tax-efficient savings vehicle - Additional Voluntary Contributions (AVCs). They could help you boost your main scheme benefits so you can maintain a comfortable lifestyle in retirement.
Your contribution comes straight from your salary before it's taxed. The money that you normally pay to the taxman goes into your AVC pot instead.
See the example below to view the comparison of two payslips based on a basic rate taxpayer earning £25,000 per year.
|Income tax (20%):||£416.66|
|Income tax (20%):||£391.66|
The above is for illustrative purposes only and does not take into account any potential deductions, or allowances, and is based on our understanding as at June 2013, of taxation rules which may change. The tax impact will depend on your individual circumstances.
You can adapt your AVCs to suit the changes in your life. Increase, decrease, start or stop your savings as you wish - just by picking up the phone. Changing your contributions may affect your benefits in retirement.
You have a wide range of funds to select from, that your Pension Fund has chosen. Prudential also have a team who can give you information about these funds to help you decide what investment is right for you. Or you could use the interactive guide to pension funds to get an idea of things to consider when choosing funds.
You can potentially take 100% of your AVC pot as a tax-free lump sum when you take your AVC benefits at the same time as your LGPS benefits (as long as this isn't more than 25% of the total value of your LGPS benefits taken). You could also use your AVC pot to provide a taxable retirement income, or you could select a mixture of both. Remember - this is in addition to your LGPS pension benefits.
Prudential is the partner to 69 of 99 Local Government Pension Funds. They have been working with the LGPS for over 20 years and in 2012 helped LGPS members retire with an average pension pot of £17,803.
Remember, the value of your plan can go down as well as up and you may not get back as much as you put in.
You have the opportunity to take control of your pension and your retirement. Help yourself stay one step ahead during a time of fast moving change.