A guide to the effect of the State Pension on the LGPS

Transcription

1 A guide to the effect of the State Pension on the LGPS

2 A guide to the effect of the State Pension on the Local Government Pension Scheme Introduction This guide explains how your State Pension can affect the Local Government Pension Scheme (LGPS) pension you receive from the Kent Pension Fund. Both are protected against increases in the cost of living, but part of the yearly increases applied to your LGPS pension may, from State Retirement age, be paid with your State Pension and not with your Local Government Pension. There is a glossary of terms and abbreviations at the end of this information leaflet. The Local Government Pension Scheme, State Earnings Related Pension Scheme and the State Second Pension Scheme All employees pay National Insurance contributions up to State Retirement Age, which go towards State benefits. Part of your National Insurance contribution is linked to the amount that you earn between lower and upper earnings limits. From 6 April 1978 to 5 April 2002 this part went towards the State Earnings Related Pension Scheme (SERPS). Since 6 April 2002, SERPS has been replaced by the State Second Pension Scheme (S2P). As was the case with SERPS, the LGPS is contracted-out of S2P. As a consequence the earnings related National Insurance contributions of LGPS members are reduced. Although this means that LGPS members did not earn a pension under SERPS, their LGPS pension should be at least equal to what their SERPS entitlement would otherwise have been. Between 6 April 1978 and 5 April 1997 members of the contracted out pension schemes accrued a notional SERPS pension which is called the Guaranteed Minimum Pension (GMP). This GMP is paid, from State Retirement Age, as part of your LGPS pension, not as an addition to it. However, if your LGPS pension is less than your GMP, your LGPS pension is increased to match it. From 6 April 1997 members of contracted out pension schemes ceased to accrue a GMP. However, contracted out schemes had to conform to the requirements of a model scheme, the benefits of which should normally equal or exceed those that would have been accumulated through membership of SERPS. Widows, widowers and registered civil partners of LGPS members inherit half 2

3 of the GMP, but, in the case of widowers and civil partners only the GMP accrued in respect of Local Government service since 6 April 1988 applies. The statement which The Pension Service (part of the Department for Work and Pensions (DWP)) sends you when you claim your State Retirement Pension, or State Bereavement Allowance, shows your Additional Pension. This is your total SERPS entitlement, including any GMP earned in Local Government service or elsewhere. Your GMP, together with any post 1997 SERPS rights you or your spouse or partner would otherwise have accrued, are shown in the DWP statement as a Contracted-out deduction (COD). The DWP describe these elements as the COD because they represent the earnings related pension that you did not accrue because you were contracted out of SERPS. They should also send you a separate notification of your entitlement to a GMP. Guaranteed Minimum Pension and Pension Increases Your LGPS and State Retirement pensions are increased each April to protect them from the effects of inflation. The amount of the increase is set by the Government to keep pace with increases in the cost of living, as measured by the Retail Price Index. This is known as Index Linking and shows in your payslip as Pension Increase. Although your GMP is included in the pension paid by us*, from State Retirement Age pension increase on the GMP may be partly or wholly paid by the DWP with your State Retirement Pension. Kent County Council deduct the Pensions Increase due before paying your pension. Your LGPS pension may therefore not show the full index linking that you would expect, but any balance due is paid with your State Pension. Deferred Retirement and GMP Increments If you continue working in Local Government for more than 7 weeks beyond State Retirement Age, you earn GMP increments. These are added to your GMP and are calculated as 1/7 th or 1% for each complete week that retirement is deferred. This protects the value of your GMP while it is not being paid. After five years, however, we must pay your GMP, plus GMP increments. * The DWP pay some or all of the increases to your GMP with your Bereavement Allowance. 3

4 Pension Increase Example (a) Example of a Pension Increase calculation where the last day of service was before 6 April 1988 Mr Jones retired in April 1987 with a LGPS pension of 150 per month. By the time he reached State Retirement Age in November 2000 the Local Authority was paying his pension at the rate of per month made up as follows:- Original LGPS pension Pensions Increase Total At State Retirement Age, Mr Jones GMP was 50 per month, so the increase of 3.3% due in April 2001 was calculated as:- Total LGPS pension Less GMP Total x 3.3% = 5.14, so his LGPS pension was increased by 5.14 to per month made up as follows:- Original LGPS pension Pensions Increase ( ) Total The DWP started to pay PI of 1.65, i.e. 50 x 3.3% on Mr Jones GMP from April 2001 so that his total pension in respect of his Local Government service was increased (overall by the Local Authority and the DWP) by 3.3%. This can be checked as follows:- Total increases due % = 6.79 Increase paid by the Local Authority 5.14 Increase paid by the DWP 1.65 ( 50 x 3.3%) Total increase paid 6.79 Pensions Increase Example (b) Example of a Pension Increase calculation where the last day of service was after 5 th April

5 Mr Smith retired in 2000 at the age of 65, with a LGPS pension of 200 per month. This included a GMP of 90 per month, of which 25 was earned after 5 April The increase due in April 2001 was calculated as:- Original LGPS pension Less GMP earned after 5 th April Less GMP earned before 6 th April Pension to be increased ( 110 x 3.3%) + 25 post 88 GMP x 3%) = 4.38 So Mr Smith s LGPS pension went up by 4.38 to per month made up as follows:- Original LGPS pension Pension Increase 4.38 Total The balance of the 3.3% PI award (0.3%) on his GMP earned after 5 April 1988 was paid by the DWP, along with the full PI award on his GMP earned before 6 April So Mr Smith s total pension in respect of this Local Government service was increased (overall by the Local Authority and the DWP) by 3.3%. This can be checked as follows:- Total increase due x 3.3% Increase paid by the Local Authority 4.38 Increase paid by the DWP 2.22 ( 65x 3.3%) + ( 25 x 0.3%) Total increase paid 6.60 Recalculation of Pension Increases Sometimes the DWP is unable to pay the pensions increase (PI) on your GMP and then the local authority pay it instead. This happens if your State Pension is not being paid, for example, if you have a period of long term hospitalisation, or you move abroad to a Country that does not have a reciprocal arrangement (see for further information). The DWP should notify Kent County Council if your State Pension is not being 5

6 paid, and the date from when it happened. Once we receive notification we will then arrange for the PI on the total LGPS pension (including the GMP) to be paid, until we receive further notification from the DWP that they are able to pay it again. If the DWP is late telling us to pay all the PI on your GMP, your LGPS pension may be underpaid. As soon as the DWP does tell us, we calculate and arrange to pay you the underpayment and inform you of your new rate of pension. If they are late telling us that they can pay the PI on your GMP again, your LGPS pension may be overpaid. Again, as soon as the DWP tell us, we calculate and inform you of your new rate of pension, the amount of the overpayment and the arrangements for recovery, which will be dealt with as sympathetically as possible. Sometimes the DWP do not tell us of these changes until some years after they happen and this can result in quite large adjustments having to be made to the pension we pay you. Sometimes, the DWP do not inform us of GMP rates by the time State Retirement Age is reached. If this happens in your case, we will calculate and adjust your LGPS pension, once we are told by the DWP, of the amount of your GMP. This guide is for general use and cannot cover all individual circumstances. If you would like further information specific to your own circumstances then please contact the Pensions Section, contact details are given on the back page of this leaflet. When contacting us please quote your National Insurance Number. Abbreviations COD DWP GMP LGPS PI RPI SERPS SRA S2P Contracted- out Deduction Department for Work and Pensions (formerly DSS) Guaranteed Minimum Pension Local Government Pension Scheme Pension Increase Retail Price Index State Earnings Related Pension Scheme State Retirement Age State Second Pension Scheme Please see overleaf an explanation of these and other terms. 6

7 Glossary Additional Pension This is your total entitlement under SERPS, and includes any GMP entitlement earned whilst in Local Government employment. Contracted-out Deduction (COD) How your GMP entitlement is described on your State Pension statement or booklet. It represents a reduction to your Additional Pension as paid by the DWP. Guaranteed Minimum Pension (GMP) The minimum pension that Kent County Council must pay you. It is calculated by reference to the SERPS entitlement that you would have earned, between April 1978 and April 1997, had you not been in the LGPS. It is paid as part of your LGPS pension, not as an addition to it. Pension Increase on this part of the LGPS pension may be partly or wholly paid by the DWP. Local Government Pension Scheme (LGPS) This is the pension scheme for Local Government (and certain other) employees. It is a statutory scheme with regulations laid down by Parliament. National Insurance National Insurance contributions paid while you are working give entitlement to State Pension benefits. Pensions Increase (PI) The amount by which your LGPS pension is index-linked each April. It is based on movement in the Retail Price Index during the 12 months to September in the previous year. Post 88 GMP GMP earned in respect of National Insurance contributions paid between 5 April 1988 and 5 April It is treated differently for Pension Increase purposes. Retail Price Index (RPI) The Treasury s measurement of change in the cost of living, reflecting the movement of prices covering a range of goods and services over time. 7

8 State Earnings Related Pension Scheme (SERPS) The State benefit earned between 6 April 1978 and 5 April This is held in addition to the flat rate State Retirement Pension and is calculated from National Insurance contributions between the lower and upper limits. State Retirement Age (SRA) Currently age 60 for women and 65 for men, this is the age at which the State Retirement pension may be collected and the date from which the GMP is effective. From 2010 a woman s State Retirement Age will change as shown in the table overleaf. State Second Pension (S2P) Replaced SERPS with effect from 6 th April Date of Birth State Retirement Age Before 6 April April April 1951 Between 60 and 61 6 April April 1952 Between 61 and 62 6 April April 1953 Between 62 and 63 6 April April 1954 Between 63 and 64 6 April April 1955 Between 64 and 65 After 5 April

9 Kent County Council Kent County Council Pensions Section Pensions Section 2nd Floor Brenchley House 2nd Floor Brenchley House Week Street Week Street Maidstone Maidstone Kent ME14 1RF Kent ME14 1RF Tel: Tel: (main KCC switchboard) Fax: Fax: Amended