Councillor's Guide to the LGPS

Introduction

The information in this booklet is based on the Local Government Pension Scheme Regulations 1997 and other relevant legislation. The booklet is for councillors in England or Wales and reflects the provisions of the LGPS and overriding legislation at the time of publication in June 2020. The Government may make changes to overriding legislation and, after consultation with interested parties, may make changes in the future to the LGPS.

Please note that the LGPS (Transitional Provisions, Savings and Amendment) Regulations 2014 amended access to the LGPS for councillors in England. From 1 April 2014, councillors in England are unable to join the LGPS. Those councillor members in England who were in the Scheme on 31 March 2014 could remain in the Scheme until the end of the term of office they were serving on 31 March 2014. Councillors in England are not able to re-join the LGPS in any subsequent term of office.

Councillors in England should read the information in the note 'LGPS Councillors Pensions (England) Update' for the position from April 2014 on our website www.hackneypension.co.uk

Councillors in Wales continue to have access to the LGPS from 1 April 2014.

The guide is for general use and cannot cover every personal circumstance. In the event of any dispute over your pension benefits, the appropriate legislation will prevail as this booklet does not confer any contractual or statutory rights and is provided for information purposes only.

The guide explains the benefits offered by the Local Government Pension Scheme. It describes how the Scheme works, what it costs and the financial protection that it offers to you and your family.

Where pension terms are used, they appear in bold type. Definitions can be found in the Pension terms defined section at the end of the booklet.

The Choice

Your Pensions Choice

Taking your pension is a goal to look forward to. However, if your pension is to meet your expectations, you will need to plan now for your income in retirement.

Your retirement income and benefits, over and above the State Pension, will in general be provided by a personal pension plan, a stakeholder pension scheme or by an occupational pension scheme such as the Local Government Pension Scheme. These are described briefly below.

Personal pension plans and stakeholder pension schemes

Various institutions, such as banks, building societies and life assurance companies provide and administer personal pensions and stakeholder pension schemes. Your chosen organisation would invest your contributions and when you retire the investments are cashed in. The sum of money realised is used to buy retirement benefits from the insurance market. Since April 2015 the money realised can be taken as cash, subject to tax as appropriate. Your benefits are therefore based on investment returns and are not guaranteed or linked to your earnings. The age from which you may receive them will vary according to the plan.

Local Government Pension Scheme

The Local Government Pension Scheme (LGPS) is a statutory, funded pension scheme. As such it is very secure because its benefits are defined and set out in law.

Highlights of the LGPS are:

a tax-free lump sum when you retire
a pension based on your career average pay
the ability to increase your pension by paying additional voluntary contributions
voluntary retirement from age 55
retirement from age 50 with your Fund’s consent
an ill health pension from any age
a death in service lump sum of two times career average pay
a spouse's or civil partner’s pension
children's pensions
index-linked benefits to ensure that they keep pace with inflation.

In addition, as a member of the LGPS, your contributions attract tax relief when they are deducted from your allowances.

The Guide

Joining the Local Government Pension Scheme (LGPS)

Please note that the position for councillors in England changed from 1 April 2014.

Councillors in England should read the information in the note 'LGPS Councillor Pensions (England) Update' for the position from April 2014.

Who can join?

From 1 April 2014 the LGPS is not available to councillors and elected mayors of English county councils, district councils or a London borough councils.

The LGPS is available to all councillors of Welsh county councils or county borough councils who are offered membership of the Scheme under the council’s scheme of allowances and who are under age 75.

Those Welsh councillors who are offered membership are termed eligible councillors. If you have been offered membership of the Scheme it will be for you to decide whether or not to opt to join. If you make an election to do so you will become a member of the LGPS from the beginning of the first pay period following the receipt of your option. You can read about special rules for previous optants out in the Opting out of the LGPS section.

How do I ensure that I have become a member of the LGPS?

To secure your entitlement to Scheme benefits it is important that you complete and return the joining form if you wish to opt into membership of the Scheme. On receipt of your form, relevant records will be set up and an official notification of your membership of the Scheme will be sent to you. In addition, you should check your allowance payments to ensure that pension contributions are being deducted.

What if I already pay into a pension?

If you currently contribute to a personal pension plan or stakeholder pension scheme and decide to join the LGPS, you can continue to pay into the other pension arrangements.

There are HM Revenue and Customs controls on the total amount of contributions you can make into all pension arrangements and receive tax relief. You can, if you wish, pay up to 100% of your UK taxable earnings in any one tax year into any number of concurrent pension arrangements of your choice (or, if greater, £3,600 to a ‘tax relief at source’ arrangement, such as a personal pension or stakeholder pension scheme) and be eligible for tax relief on those contributions.

There are also controls, known as the lifetime allowance and the annual allowance, on all the pension savings you can have before you become subject to a tax charge. Most scheme members’ pension savings will be less than these allowances. Please also refer to our member factsheet – Tax Controls on Pensions for more information.

I'm already receiving an LGPS pension – will it be affected?

If you become a councillor you must tell the the London Borough of Hackney Pension Fund (the administering authority that pays your pension) about your new position, regardless of whether you join the Scheme in your new position or not. They will then check to see whether the pension they are paying should be reduced.

Contributions

What do I pay?

Your contribution is currently 6% of the pay you receive.

Your contributions are very secure. As the LGPS is set up by Statute, payment of benefits to its members is guaranteed by law.

What does the council pay?

The council pays the balance of the cost of providing your benefits after taking into account investment returns. Every 3 years, an independent actuary calculates how much the council should contribute to the Scheme. The amount will vary, but the present underlying assumption is that you contribute approximately one third of the Scheme's costs and the council contributes the remainder.

Do I receive tax relief on my contributions?

The Scheme is fully approved by HM Revenue and Customs, which means that, if you earn enough to pay tax, you will receive tax relief on your contributions. To achieve this, your contributions are deducted from your allowances before you pay tax. So, for example, if you pay tax at the rate of 20%, every £1 that you contribute to the Scheme only costs you 80p net.

There are restrictions on the amount of tax relief available on pension contributions. If the value of your pension savings increases in any one year by more than the annual allowance you may have to pay a tax charge. Most people will not be affected by the annual allowance. Please also refer to our member factsheet – Tax Controls on Pensions for more information.

Can I make extra contributions to increase my benefits?

Members can increase their benefits by making additional voluntary contributions (AVCs). Additionally, you may pay contributions into a personal pension plan or a stakeholder pension scheme. These options are explained in more detail in the Increasing your benefits section. Please also refer to our member factsheet – Increasing your Future Pension Benefits for more information.

Is there a limit to how much I can contribute?

There is no limit on the amount of contributions you can pay (although there is a limit on the amount you can pay into the Scheme’s AVC arrangement – see the Increasing your benefits section). However, tax relief will only be given on contributions up to 100% of your UK taxable earnings (or, if greater, £3,600 to a ‘tax relief at source’ arrangement, such as a personal pension or stakeholder pension scheme).

There are also HM Revenue and Customs controls known as the lifetime allowance and the annual allowance on all the pension savings you can have before you become subject to a tax charge. Most scheme members’ pension savings will be less than these allowances.

Can I transfer pension rights into the LGPS?

The rules of the Scheme do not permit you to transfer pension rights into the LGPS from another pension scheme or, indeed, from another LGPS administering authority.

Points to Note on contributions

If you have a deferred benefit from a previous period of councillor membership in the same LGPS administering authority you may opt to aggregate the earlier councillor membership with the current period of councillor membership. You must opt to do this within 12 months of re-joining the Scheme or such longer period as your council allows. This is a Fund discretion; you can ask the Hackney Fund what the policy is on this.
Pension rights built up as an employee in England or Wales cannot be joined with rights built up a councillor or mayor in England or Wales and vice versa.

Retirement benefits

Please note that the position for councillors in England changed from 1 April 2014.

Councillors in England should read the information in the note 'LGPS Councillor Pensions (England) Update' for the position from April 2014.

When can I retire?

You can retire and receive your LGPS benefits in full once you have attained age 65. The Scheme also makes provisions for the early payment of your LGPS benefits and these are detailed in the sections on Ill Health and Early Retirement.

In addition to your LGPS benefits, you may also qualify for a state retirement pension paid by the government from State Pension age.

A single tier, flat rate State Pension has been introduced for people who reach State Pension age on or after 6 April 2016. It replaces the basic and additional State Pension that is payable to people who reached State Pension age before 6 April 2016. You will be able to claim the new State Pension when you reach State Pension age if you’re:

a man born on or after 6 April 1951
a woman born on or after 6 April 1953

and, normally, have at least 10 qualifying years on your National Insurance record.

If you do not know what your State Pension age is you can use the State Pension age calculator to find this out.

As a member of the LGPS, if you are eligible for the new State Pension you might not receive the full amount. This is because as a member of the LGPS you are likely to have paid a lower amount of National Insurance in previous years. More information about this and the new State Pension can be found at www.gov.uk/yourstatepension.

What are my retirement benefits?

When you retire, you will receive a pension and a tax-free lump sum from the LGPS. At State Pension age you may also receive a state retirement pension if you have paid sufficient National Insurance contributions during your working life.

How much will my pension be?

Your LGPS pension is based on your total membership and your career average pay. The example below shows how your pension is calculated by dividing your career average pay into 80ths and multiplying this figure by your total membership to give you your annual pension.

How much will my lump sum be?

The lump sum automatically paid on retirement is 3 times your annual pension and is tax-free. Like your pension, it is based on your career average pay and your total membership. The calculation for the lump sum is 3/80ths of your career average pay for every year of total membership. When you take your benefits you will be able to exchange some of your pension to receive a bigger tax-free lump sum. Further information on giving up some of your pension to increase your lump sum is provided below.

Example pension and lump sum calculation

On retirement at age 65, a Scheme member has:

10 years and 204 days total membership and career average pay of £16,200.

The annual pension is:

1/80 x £16,200 x 10 years plus 204/365 days = £2,138.18

The tax-free lump sum automatically paid is:

3/80 x £16,200 x 10 years plus 204/365 days = £6,414.53

Can I give up some of my pension to increase my lump sum?

You can exchange some of your pension for a bigger tax-free lump sum on retirement. You will be able to take up to a maximum of 25% of the capital value of your pension benefits as a tax-free lump sum providing the total lump sum does not exceed 25% of the lifetime allowance (for year 2020/21 the lump sum maximum is £268,275 (2020/21 lifetime allowance limit = £1,073,100 x 25%).

If you have previously taken payment of (‘crystallised’) pension benefits you have already used up some of your lifetime allowance, therefore the maximum tax-free cash you can take is the lower of 25% of the capital value of your pension benefits or 25% of your remaining lifetime allowance.

In the example above, the lump sum automatically paid on retirement roughly equates to 15% of the capital value. Any amount you take as a lump sum above the automatic lump sum would be achieved by exchanging part of your annual pension for a one-off tax-free cash payment. For each £1 of annual pension you give up you would receive £12 lump sum.

An election to take extra lump sum must be made in writing before your benefits are paid. So that you have plenty of time to make up your mind and seek financial advice if you wish, it is important that you contact the pension administrator, Equiniti, well in advance of your intended retirement date so they can provide you with more details.

Your pension will be reduced in accordance with any election you make to receive extra lump sum. Any subsequent spouse’s, civil partner’s and/or children’s long-term pensions will not be affected if you decide to exchange part of your annual pension for extra lump sum.

How will my pension be paid?

Monthly pension payments will be made direct into your bank or building society account. Similar arrangements can also be made to pay your pension into your account should you move abroad. Further information regarding payment of pensions will be provided on retirement.

Will my pension increase?

After age 55, members’ pensions in payment will be revalued each year in line with the appropriate cost of living index (currently the Consumer Prices Index (CPI)). If you retire before age 55, the accumulated effect of inflation since you retired will be added to your pension when you reach age 55. See the Ill health retirement section concerning increases to ill health pensions.

General points to note on retirement benefits

If your pension benefits are subject to a Pension Sharing Order issued by the Court following a divorce or dissolution of a civil partnership, or are subject to a qualifying agreement in Scotland, your benefits will be reduced in accordance with the Court Order or agreement. See the Pensions and Divorce section for further details.
There are HM Revenue and Customs controls on the pension savings you can have before you become subject to a tax charge when you take them (over and above any tax due under the PAYE system on a pension in payment). These are known as the lifetime allowance and the annual allowance.
Under HM Revenue and Custom rules, if the LGPS makes an unauthorised payment or if you pay some or all of your LGPS lump sum back into a pension arrangement, there will be a tax charge.
If, after retiring, you return to employment or office within Local Government or employment with another organisation that participates in the LGPS, your pension may be reduced or suspended in accordance with the discretion policy adopted by the Hackney Pension Fund. You can find a copy of the Fund’s discretion policies on our website www.hackneypension.co.uk. Further details can also be provided on request to Equiniti.

Ill Health Retirement

What happens if I have to retire early due to ill health?

If you have at least 3 months total membership and an independent registered medical practitioner approved by the Hackney Fund certifies that you have become permanently unable (until age 65) to perform the duties of your office efficiently because of ill health or infirmity of mind or body, you will receive your pension and lump sum immediately. The medical practitioner must be qualified in occupational health medicine and must not have previously been involved in your case.

How is an ill health pension and lump sum calculated?

Ill health pensions and lump sums are calculated in the same way as detailed in the section on Retirement Benefits, except that the total membership used in the calculation will be enhanced if your total membership is 5 years or more. This is to reflect that you are having to retire early. The amount by which it will be enhanced is shown in the table below:-