Reasons for JoiningWhy should you join the Local Government Pension Scheme (LGPS)?
The Scheme is an important and valuable benefit for the staff working in local government (or an associated employer).
As a member, you get an excellent package of pension benefits, fully protected against inflation and guaranteed by the government.
Most informed opinion recognises that people will nearly always be better off if they belong to their employer's occupational pension scheme. The scheme has the full support of local government trades unions and professional bodies.
What does the scheme provide?
- a retirement pension based on your service and pay at retirement for
- a tax free lump sum (at a level you can determine)
- "Life Assurance" of three years' pay while you are a contributing member of the scheme
- pensions for your spouse/civil partner/a nominated dependent and children if you die
- benefits if you have to retire because of ill-health after three months membership
- improved benefits if you are made redundant at or after age 50
- a ten year guarantee of your pension at the point you retire.
Benefits are guaranteed and are based on your pay and membership of the scheme. You do not pay administration costs - the cost of administration is met by your employer.
Pension benefits can be transferred into and out of the scheme, but if you change jobs within local government (or an associated employer) your membership will continue.
You can increase your contributions to get increased benefits, if you are not potentially going to achieve the maximum allowed under Inland Revenue Rules.
What does it cost?
The scheme contribution rate is variable depending on the amount that you are paid.
The current bands (based on your full time equivalent pay) are:
| Band |
Salary Range |
Contribution Rate |
| 1 |
Up to £12000 |
5.5% |
| 2 |
£12001-£14000 |
5.8% |
| 3 |
£14001-£18000 |
5.9% |
| 4 |
£18001-£30000 |
6.5% |
| 5 |
£30001-£40000 |
6.8% |
| 6 |
£40001-£75000 |
7.2% |
| 7 |
More than £75000 |
7.5% |
The real cost is normally around 3.5% because
- you get tax relief on your contributions
- you pay a lower rate of National Insurance contributions because you are contracted out of the State Second Pension (S2P).
The benefits of the Local Government Pension Scheme are valuable. Independent actuaries have assessed them as being worth around 23% of your overall pay. Your employer and the Government pay the extra, if required, to meet the total cost of the benefits you will receive.
You can compare the benefits and cost of scheme membership by looking at the following. This will give you some information about the alternatives.
You should think very carefully before giving up scheme membership. If you decide other pension arrangements offer better value for money or for some other reason are more suitable, you should tell your employer. If you are "told" that the alternatives are better, you should ask for confirmation in writing.
The Alternatives to the Local Government Pension Scheme
Personal Pensions
You can choose to take out a Personal Pension through an insurance company, bank, building society, unit trust or friendly society.
The money you pay during your working life is invested to build up a cash fund at retirement which is used to buy an annuity to provide you with a pension.
Up to 25% of the fund can be taken as a tax-free lump sum at retirement. You can take Personal Pension benefits at any time from age 50.
You do not need to transfer your pension arrangement if you move to new employment outside local government (or an associated employer). But you should remember that a Personal Pension
- Depends on investment performance and the state of the Stock Market at the time you retire - neither can be guaranteed
- May be significantly reduced if you want family benefits or limited index linking
You will get tax relief on the payments you make, but your employer will not normally pay towards such a policy.
Commission and administration charges will reduce the amount actually invested to provide your pension. These costs vary but can be considerable.
The Securities and Investments Board, which regulates the Personal Pensions Industry, has stated that employees will nearly always be better off if they belong to their employer's pension scheme.
What do they cost?
Contributions vary according to the level of retirement benefits wanted. The lower the contributions, the lower the retirement benefits, so you need to make sure that you have some idea of the level of retirement benefits you are aiming for. Personal Pension providers will give you projected estimates.
State Pension
The State Pension Scheme has two parts:
A Flat Rate Basic Pension
This is paid to everybody at State Pension age, currently 60 for women and 65 for men. State pension age will change between April 2010 and 2020 to 65 for everybody.
The basic pension you get depends on your National Insurance (NI) contribution record.
An Additional Earnings Related Pension
This is known as the State Second Pension (S2P). The amount you get depends on the earnings on which you have paid NI contributions. State pensions are fully index linked.
Remember that
- all staff get a flat rate basic pension based on their contribution record
- by opting out of the Local Government Pension Scheme you are only adding the earnings-related pension (S2P)
- there are few benefits and they are likely to be far lower than those of the Local Government Pension Scheme.
What does it cost?
You will pay the full rate of NI contributions. The difference in cost is 1.6% of your pay.
You will not get any tax relief on this additional contribution.
Relying on the State for your pension is only slightly cheaper than joining local government (or an associated employer) Pension Scheme.
The essential thing to remember is that you should make your pension arrangements as early as possible in your working life. Delay will make it more expensive to ensure adequate arrangements later.
Contact us
Pension Services
Tel: 020 7525 4924
Fax: 020 7525 4920
lbspensions@southwark.gov.uk
Ninth Floor
Downstream Building
1 London Bridge
London
SE1 9AJ
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