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.
Buying extra pension in the LGPS – additional pension contributions (APCs)
If you’re in the main section of the LGPS you can pay additional contributions to buy up to £7,316 of extra pension. 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.
Examples of how much APCs cost:
Bronwyn is 25 and she wants to purchase £2,000 a year extra pension for when she retires. She wishes to pay for this over 10 years.
Bronwyn will pay £111.46 each month for 10 years totalling £13,375 to receive extra annual pension of £2,000.
Based on Bronwyn paying 20% income tax or the 40% higher tax the net cost of her additional contribution each month would be approximately:
Monthly additional contributions – Gross monthly additional contributions (before tax relief):
- 20% taxpayer – £111.46
- 40% taxpayer – £111.46
Monthly additional contributions – LESS income tax
- 20% taxpayer – £22.29
- 40% taxpayer – £44.58
Monthly additional contributions – Net monthly cost (after tax relief)
- 20% taxpayer – £89.17
- 40% taxpayer – £66.88
Please note, you cannot elect to buy extra pension if you are in the 50/50 section of the LGPS.
Use the Buying Extra Pensions Calculator to work out the cost of buying either extra pension or lost pension.
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. Therefore, you receive tax relief automatically if you are a tax payer. You are given your own personal account and are able to decide how the money in your pot is to be invested.
You can elect to pay an AVC if you are in either the main or 50/50 section of the LGPS.
You can choose to pay a fixed amount or a percentage of your pay, or both, into an AVC – as long as it does not exceed 100% of your pay.
AVCs are taken from your pay, just like your normal pension contributions. Deductions start from the next available pay period after you’ve set up the AVC. You may vary your contributions or stop payment at any time while you are paying into the LGPS.
You can pay AVCs if you are in the Main or 50/50 section of the LGPS.
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.
As with all financial decisions, you should think about your own personal circumstances before you decide.
If you are interested in increasing you pension benefits through either APCs or AVCs, then contact Peninsula Pensions for application details.