pension update

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Pension Update

Combining previous LGPS membership

The Hutton Report

Thinking of Opting Out of the LGPS?

JANUARY 2011

LGPS Regulations 2010

Pensions Tax Relief

Shropshire County Pension Fund

The Local Government Pension Scheme (LGPS) is a public service pension scheme administered locally by 99 local authorities in England, Wales, Scotland and Northern Ireland.

Three of those pension funds; Shropshire, Warwickshire and Worcestershire are starting to work more closely together to produce newsletters for the members of the LGPS and this edition will be available to over 50,000 scheme members at these authorities either on-line or by post.

Why work together? The authorities have worked closely together in the past sharing expertise and (together with most local authorities) a common administration system which reduces the cost of administering the funds. The hope is that sharing the production of the newsletter will enable members to receive important information more quickly and cost effectively.

The aim of the newsletter is to keep the membership informed of important developments in the scheme and of changes that may affect your pension entitlement in the future. In this edition members are made aware of a one off opportunity to combine previous LGPS membership with current contributory membership, important changes to the tax regime from April 2011, an update on the ongoing review of public service pensions by the Independent Public Service Pensions Commission, chaired by Lord Hutton of Furness and important points to consider about being a member of the LGPS.

We welcome any suggestions you have for future editions of Pension Update.

IntroductionThinking of opting out of the LGPS - Think again!

If you’re considering opting out of the Local Government Pension Scheme (LGPS), you may wish to think again.

The LGPS is a statutory, funded pension scheme. As such it is very secure because its benefits are defined and set out in law. Some of the benefits of membership of the LGPS are:

A secure pension• The benefits you get when you retire are based on the length of your membership in the scheme and your final year’s pay. The pension you build up during your employment keeps pace with your pay rises. After you retire, your pension keeps pace with cost of living increases. Tax-free cash• You have the option to exchange part of your pension to provide a tax-free cash lump sum on your retirement. Peace of mind• Your family enjoys financial security, with immediate life cover equivalent to 3 years pay if you die in service, a ten year pension guarantee once you are on pension and pensions for your husband, wife, civil partner or nominated co-habiting partner and eligible children. If you ever become seriously ill and cannot work up to the age of 65 you could receive immediate ill health benefits. If you are made redundant and are over the age of 55 your pension benefits start immediately without reduction for early payment. Early retirement• You can choose to retire from age 60 and receive your benefits immediately, although they may be reduced for early payment. The normal retirement age of the scheme is 65.Flexible retirement• If you reduce your hours or move to a lower graded position at or after age 55 you can, provided your employer agrees, draw the benefits you have built up,

helping you ease into retirement, although your benefits may be reduced for early payment.

What if I change my mind – can I opt out of the LGPS?You can opt out of the LGPS at any time and retain the right to re-join at a later date, (assuming you are still eligible to join), no matter how many times you opt-out and opt-in.

It is important to understand that ceasing membership of the LGPS will end the valuable family protections that membership of the Scheme provides, including the death in service lump sum of three times pensionable salary.

You will also see an increase in the amount of Tax and National Insurance you pay once you cease membership. This is because whilst you are a member of the Scheme you get tax relief on your pension contributions and pay a lower rate of National Insurance.

You may wish to take independent financial advice before making a decision to opt-out as you will lose the valuable benefits of membership.

What will happen to my contributions?If you opt-out of the Scheme with less than 3 months membership you will be entitled to a refund of your pension contributions through payroll (providing you do not have previous LGPS service or transferred in service). Your refund will be less than the gross contributions you have paid in to take account of the reduced Tax and National Insurance contributions paid during your membership.

If you opt-out with 3 months or more membership you will be entitled to deferred benefits payable from retirement age. You can transfer these benefits to another pension arrangement if you wish. In these circumstances you would not be entitled to a refund.

Please Note:If you have worked part-time in either of your employments, then the pay figure you should use when making the comparison is the pay you would get if you worked full-time in that job, not the actual part-time pay i.e. full time equivalent pay (FTE).

On leaving a local government employment, your LGPS pension benefits are increased in line with inflation each year until retirement and it is this inflationary increase which needs to be taken into account when making comparisons in pay.

Unless you make a positive option to combine your LGPS membership, your earlier membership will remain separate. It is important you think about what is best for you. If you decide to combine your membership, you will need to complete and sign an election to do so. A form is available from Pension Services.

You will need to ensure that Pension Services are informed of your desire to combine your benefits as soon as possible, especially if you feel you may be affected by the changes to pension tax relief occurring in April 2011 (see Pensions Tax Relief).

to consider your own circumstances carefully before you make a decision and, as your circumstances might change in the future, your decision may have to be based on which you think are most likely to happen.

You may wish to seek the help of an independent financial adviser, as once an election has been made, it cannot be reversed. Here are the main things you need to think about in making your decision:

Differences in PayIf you keep your membership separate - you will receive two sets of retirement benefits. Those from your old job will be based on your membership and final year’s pay on leaving that job, increased in line with inflation. Benefits in your new job will be based only on your membership in that job (and your final year’s pay). If you combine your membership - you will receive one set of retirement benefits, calculated using your total membership (old job plus new job) and your final year’s pay in your new job.

Date Benefits are PaidIf you combine earlier periods of membership to those you are currently accruing, this may alter the date at which your benefits can be paid unreduced.

Early Payment of BenefitsIf your benefits are separate and you retire early on ill health grounds, are made redundant or retired on business efficiency grounds and you are entitled to immediate payment of benefits, your benefits will be calculated on yourre-employed membership only. Your benefits from your earlier period(s) of membership will still only be payable from your normal retirement date.

Combining previous LGPS membershipIf you have previous Local Government Pension Scheme (LGPS) pension rights as an employee in England or Wales which are currently held in the Scheme these are called deferred benefits.

If you have re-joined the LGPS then you can normally choose whether to:

Combine your previous LGPS •pension rights from your old job with your new membership, enabling you to enjoy one set of benefits based on your entire membership and linked to your final pay in your new job, orKeep them separate.•

Unless you make a positive option to combine your previous LGPS membership, your earlier membership(s) will remain separate.

Time LimitsYou normally have 12 months from re-joining the Scheme to elect to combine previous periods of LGPS membership, unless your employer gives you permission to extend this period. However, provisions contained in the LGPS (Miscellaneous) Regulations 2010 which came into force on 30 September 2010, allow requests to combine to be made until 1 October 2011, even if your 12 month time limit has passed, so long as you can answer ‘yes’ to all three of these questions:

Are you currently paying into the •Local Government Pension Scheme?Have you been a member of the •Scheme before?When you were re-employed, did •you keep the membership from your earlier employment separate from your current active membership?

There are a number of things to consider when deciding whether or not to combine your membership(s), and in this fact sheet we look at the most important of these. You need


Further InformationThe information provided is based on the Shropshire County Pension Fund’s understanding of the current situation in regards to the Hutton report. The main Hutton report should be published in time for Budget 2011 (March 2011).

Further details will be provided when available.

The Independent Public Service Pensions Commission, chaired by Lord John Hutton is currently undertaking a fundamental structural review of public service pension provision, to be completed in time for the 2011 Budget.

The commission’s aim is to make recommendations on how public service pensions can be made: “sustainable and affordable in the long-term, fair to both the public service workforce and the taxpayer and consistent with the fiscal challenges ahead, while protecting accrued rights”.

Lord Hutton’s interim report on the future of public service pensions was published on 7th October 2010. The report stressed the need for fairness and sustainability.

In the report he affirmed the important place public sector pension schemes, such as the LGPS, occupy in providing for a reasonable income in retirement.

He also acknowledged that Public Sector Pensions are not ‘Gold Plated’ and provide a relatively modest income on retirement.

He rejected the argument that public sector pensions should become comparable with private sector pensions stating that he rejected a ‘race to the bottom’.

Why are changes needed?Lord Hutton stated that a number of factors, including increasing life expectancy, a corresponding increase in the number of pensioners, the expansion of the public service workforce over the last four decades and the extension of pension rights for early leavers and women, has meant that the balance of risk and cost shared by employers and scheme members needs to be re-addressed.

Existing accrued pension rights will be protected. The interim report clearly states that

existing pensions either in payment or built up so far, would not be affected by his proposals, although he did acknowledge the government’s intention to move from RPI to CPI would impact on future increases for LGPS pensioners.

This means that the figures shown in your 2010 Annual Benefit Statement (ABS), under the heading ‘Present Value of Benefits’ will not be affected. However, the accrual of any future benefits is likely to change, resulting in the projected benefit figures for retirement at age 65 being different to those quoted in your 2010 ABS.

The interim report concluded the following:

The need to adopt a more sensible •approach to meeting the cost of public service pensions, in order to strike a fairer balance, between taxpayers (current & future generations) and public service employees.An assessment of the need for •some increase in pension contributions for public service employees, to better meet the real costs of providing these pensions while protecting the lower paid.For public sector employers to •continue to set a good standard of pension provision.To avoid opt-out of public service •employees from pension schemes and continue to encourage employees in the public sector to save for their retirement.The report will not have an impact •on any pensions that are currently in payment from the Fund.That final salary schemes were •unfair and did not meet the needs of the Public Sector.

Possible changes to the Local Government Pension Scheme (LGPS) – you and your benefits

It is likely that scheme members •will have to contribute more

towards their pension. There may be a review of pension •age in the light of increased life expectancy.The final salary scheme will almost •certainly be replaced with a new arrangement. One possibility is a scheme based on career average earnings; this may also include some element of a defined contribution. However, Lord Hutton has rejected an individual defined contribution scheme.The accrual rate • (the rate at which benefits are built up) may also be subject to review.

It is positive to note that Lord Hutton recognised the fundamental difference between the Local Government Pension Scheme (LGPS), which is funded, and the unfunded schemes and sees no reason to ‘defund’ the LGPS.

Lord Hutton’s final report will provide a range of alternative schemes for the Government to consider. These may include later retirement dates, career averaging, hybrid schemes and possibly some options from abroad. Rather than one recommendation in his final report, Lord Hutton intends to provide a range of options, with the Government to select from or ignore as it sees fit.

The Hutton Report(Independent Public Service Pensions Commission)

Further information can be found at: http://www.hm-treasury.gov.uk/indreview_johnhutton_pensions.htm


Most of the changes contained in the LGPS (Miscellaneous) Regulations 2010 are technical clarifications that either correct or are meant to clarify the intention of the LGPS changes that were introduced in April 2008 and amend the various LGPS Regulations.

Significant amendments include:

Ill health retirementsExperience of practical application of the ill health regime since its introduction in April 2008, means some amendments are needed to clarify some of the provisions and make some modifications to the ill health framework.

What has changed?In particular, a change has been made to the terms of the eligibility criteria by replacing the term ‘obtaining any gainful employment’ with the term ‘capable of undertaking any gainful employment’. The change is necessary because the Independent Registered Medical Practitioners (IRMPs) consider that the former wording seeks an opinion beyond their professional competence, which was not the intention of the regulations.

Uplift from tier 3 to tier 2Where a tier 3 ill health retirement is granted (with no enhancement) and it is then discontinued within the three year payment period, an employer is able to make a further determination of eligibility for an ill health benefit under the tier 2 conditions (actual membership plus 25% of prospective membership to age 65). A time limit has been added to this provision. An employer will only be able to make a further determination in respect of a pensioner member with deferred benefits within a three year period following the discontinuation of the tier 3 benefits. Once beyond three years members are able to apply for the early release of deferred pension early, in line with general principles of the scheme.

It has also been confirmed that a review or re-determination of a tier 3 award cannot be made once the member has achieved age 65.

Payment of deferred pension benefitsWhere a former member has had tier 3 ill health payments discontinued, they are classified as a ‘pensioner member with deferred benefits’ from the date the suspension of pension payments takes effect. The deferred pension is then payable from age 65. Backdated to 1 October 2008, the LGPS Regulations will now allow this class of member to make an election to receive payment of the deferred pension earlier but at an actuarially reduced rate. This may be any time from age 55 (with the former employer’s consent being required if the application is before age 60). The former employer will also have the option to not apply the appropriate reduction on compassionate grounds, in line with other benefits.

Tiers 1 and 2A further amendment has been made affecting members who, having been retired due to ill health and granted a tier 1 or 2 ill health enhancement, rejoin the scheme and are again retired due to ill health under either of tiers 1 or 2. In these rare cases the individual will be limited in the amount of ill health enhancement that can be awarded overall.

In simple terms the membership from the ill health retirements will be aggregated and the overall membership period used in all awards will be limited to the total membership period that would have applied had the original ill health determination been based on a tier 1 award (actual membership plus 100% of prospective membership to age 65).

Where the membership is restricted, it is the membership in relation to the first ill health retirement that is reduced, rather than membership in relation to the subsequent periods.

Local Government Pension Scheme (LGPS) (Miscellaneous) Regulations 2010


Pension credit membersThis amendment extends the rights of individuals who have been awarded a share of retirement benefit following their divorce from a member of the LGPS. Such pension credit members have only been able to receive their benefits at age 65, but the amendment provides for benefits to be taken at any time from age 60 onward that the member chooses. An appropriate actuarial reduction will be applied to benefits taken before age 65. This amendment is backdated to 6 April 2009.

AcademiesChanges have been made and regulatory references introduced to enable the old and new style academies to be treated as ‘scheduled bodies’ for the purpose of access to the LGPS for non teaching staff.

Contact Us

Pension Services

Shropshire Council, Shirehall,

Abbey Foregate, Shrewsbury,

SY2 6ND

Pensions helpline: (01743) 252130

Email: [email protected]

Web: www.shropshirecountypensionfund.co.uk

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The Government has announced a change to the tax limits applying to pensions some of which will take effect from April 2011. The tax limits set by HM Revenue and Customs are the Lifetime Allowance (LTA) and the Annual Allowance (AA)

What are the changes?In October 2010, the Government announced details of the way it intends to restrict tax relief on pension contributions. These changes will replace those introduced by the previous government.

the • Annual Allowance; the maximum tax-free pension savings you can have each year is being drastically reduced andthe • Lifetime Allowance; the overall value of pension savings that you can build up over your entire working lifetime before a tax penalty applies, is also being reduced.

These changes may affect high earners, but also anyone who has a significant increase in pensionable pay and has

significant membership, or anyone who combines a sizeable period of previous scheme membership with their current membership at a higher pensionable pay.

Annual AllowanceFor the tax year 2010/2011 it is currently £255,000, but will reduce to £50,000 for the 2011/2012 tax year (and will then be fixed until at least 2015/2016).

To calculate the value of any annual increase in the Local Government Pension Scheme (LGPS) you need to work out the difference in the total value of any accrued pension benefits (over and above inflation) over a “pension input period” usually April to March each year. This is done by multiplying the value of the increase in pension by a factor of 16 and adding the increased value of any lump sum and AVC fund.

Lifetime AllowanceFrom April 2012 the LTA for tax privileged pension savings will decrease from £1.8 million to £1.5 million.

Temporary rules to 5 April 2011To stop employees whose income is above a certain level from paying substantial contributions before the rules change, temporary rules, called “anti-forestalling” will limit tax relief for employees who:

have total • “relevant income” of at least £130,000 in the current tax year (or in either of the last two tax years);increase their usual pension •savings; andhave total pension savings of •more than £20,000 in the year.

If all three conditions apply, a special annual allowance tax charge applies on any new pension savings by you or your employer.

If you believe you may be affected by the issues covered in this note, you should contact your own tax adviser.

Pensions tax relief

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