Most of us look forward to a happy and comfortable retirement. However, you may wish to consider paying for extra contributions, in order to have that little bit extra during your retirement years.
As a member of the LGPS you have access to two tax efficient ways of increasing your pension benefits in addition to the benefits you are already building up:
- Additional Pension Contributions (APC’s)
- Additional Voluntary Contributions (AVCs)
Additional Pension Contributions (APCs)
If you’re in the main section of the LGPS you can pay additional contributions to buy extra pension. The maximum amount you can buy alters each year in line with the Consumer Price Index. The APC Calculator confirms the current maximum you can buy. You can choose to pay for the extra pension by spreading the payment of APCs over a number of complete years or by paying a lump sum.
If you wish to spread the payment, the regular contributions would be deducted from your monthly pay, just like your normal pension contributions. Your normal contributions and the APCs are deducted before your tax is worked out, so you receive tax relief automatically through the payroll if you’re a tax payer.
If you wish to buy extra pension by paying a one-off lump sum, you can do this via your pay or by making payment directly to your pension fund. If you choose to make payment directly to your pension fund, you will need to arrange tax relief directly with HMRC as the contributions are not being deducted from your pay. You can do this via your self assessment tax return or by contacting HMRC.
Tax relief is available on all pension contributions up to 100% of your taxable earnings.
You can spread the payment of APCs over a minimum of 12 months, and the maximum being the number of years until your normal pension age. Your normal pension age is linked to your State Pension age (but with a minimum of age 65). If you’re a year or less from your normal pension age you can only pay by lump sum.
Please note, you cannot elect to buy extra pension if you are in the 50/50 section of the LGPS.
You can use the Buying Extra Pensions Calculator to work out the cost of buying either extra pension or lost pension.
APCs and Ill Health
If you retire on ill-health Tier 1 or Tier 2 grounds, any outstanding APC payments will be deemed to have been paid and credited to your pension account to be included in your benefit calculations.
However, pension purchased by APCs will be subject to reduction (even if your normal benefits are fully protected) or enhancement if taken before or after the member’s Normal Pension Age (NPA) under the 2014 Scheme in all other circumstances.
If you elect to buy £2,000 or more additional pension, you will need to get our medical form completed by your GP with any cost borne by yourself.
Buying back the whole of the lost pension will ensure the period of leave of absence is included when calculating certain protections if you were a member of the scheme before 1 April 2014. For example, if the Underpin or the Rule of 85 applies to you.
Please note APCs only buy pension for your own pension benefits and do not provide pension for any dependents.
Additional regular contributions (ARC) and purchase of added years (PAY)
If you elected to pay extra contributions to the fund before Additional Pension Contributions (APCs) were introduced on 1 April 2014, they’re still valid. They were previously known as Additional Regular Contributions (ARC) and Purchase of Additional Years (PAY).
Additional Regular Contributions (ARC) is where you elected to purchase extra pension payable when you retire on top of your standard Local Government Pension Scheme (LGPS) benefits. You will still receive the benefit from ARC benefits when you retire, assuming that your contract has been completed by then.
Purchase of Added Years (PAY) is where you elected to pay a percentage of your pay to buy extra membership in years and days under the final salary arrangements before 1 April 2014. You will still receive the extra membership in the final salary part of your pension benefits when you retire on the same basis that you agreed to buy them, assuming that your contract has been completed by then.
As with an APC, if you draw your pension early, your ARC or PAY extra pension will be reduced, unless you retire on the grounds of ill health, redundancy or business efficiency.
See the national LGPS member website for more information.
Additional Voluntary Contributions (AVCs)
When you save AVCs you build up a pot of money which is then used to provide additional benefits to your LGPS benefits. Our appointed in-house AVC provider is Prudential and you can find more specific information on their website.
The money is deducted directly from your pay before your tax is worked out, just like your normal pension contributions, so you receive tax relief automatically if you are a tax payer. You can choose to pay a fixed amount or a percentage of your pay, or both, into an AVC and you can pay up to 100% of your pensionable pay (after the statutory deductions) into an in-house AVC. Deductions start from the next available pay period after you’ve set up the AVC.
You are given your own personal account and are able to decide how the money in your pot is to be invested and you may vary your contributions or stop payment at any time while you are paying into the LGPS.
You can elect to pay an AVC if you are in either the main or 50/50 section of the LGPS.
Your employer can also pay towards your AVC at their discretion. This is known as a Shared Cost AVC.
Extra life cover
You can also pay AVCs to provide extra life cover. Your membership of the LGPS already gives you cover of three times your assumed pensionable pay if you die in service, but you can pay AVCs to increase this and provide additional benefits for your dependants (if the facility your pension fund has set up includes it) if you die in service. Any extra cover you buy will stop when you retire or leave.
Flexible ways to use your AVC
There are loads of different ways you can use your AVC plan when you retire. These options give you greater choice and control over how and when you retire. We recommend reading through these options and noting any that may apply to or benefit your own situation:
- Take your whole AVC pot as a 100% tax-free lump sum
You can take your whole AVC pot as a 100% tax-free lump sum. This is only possible if you take your main LGPS benefits at the same time. The total tax-free lump sum you take cannot be more than 25% of the total value of the LGPS benefits you take at that time. This includes any LGPS lump sum and your AVC pot and is subject to overall HM Revenue & Customs limits. Your LGPS scheme administrator will help you work out what you can take at the time.
- Get a guaranteed income for life
You can buy an annuity – it pays you an income (a bit like a salary) and is guaranteed for life. These payments may be subject to income tax. In most cases you can take 25% of the money in cash, tax-free. You’ll need to do this at the start and you need to take the rest as income. You must normally take your LGPS benefits at the same time.
- Get a tax-free lump sum and more LGPS pension
You can usually take up to 25% as a tax-free lump sum and use the rest to give you more LGPS pension. This is only possible if you take your main LGPS benefits at the same time.
- Take more than one option
You can normally mix and match the above options as long as you are eligible for those options.
As with all financial decisions, you should think about your own personal circumstances before you decide.
If you are interested in increasing your pension benefits through either APCs or AVCs, then contact Peninsula Pensions for application details.
Please refer to the LGPS Members Guide to AVC’s for more information.
Ways to increase your retirement benefits outside of the LGPS
- Free Standing Additional Voluntary Contributions (FASVCs)
These are similar to in-house AVCs but are not linked to the LGPS in anyway. With FSAVCs, you choose the provider, usually an insurance company. You may want to consider the different charges, alternative investments and past performance when you do this.
- Personal or Stakeholder pensions
You may be able to make your own arrangements to pay into a personal pension plan or stakeholder pension scheme at the same time as paying into the LGPS. With these arrangements, you choose a provider, usually an insurance provider and again, you need to consider their charges, alternative investments and past performance when you do this.
You may wish to obtain independent financial advice before taking out any form of additional pension saving.