The Local Government Pension Scheme Important Update for Scheme Members February 2014 In this update we cover recent developments to pension provision that may impact on members of the Local Government Pension Scheme (LGPS). The Local Government Pension Scheme (LGPS) is changing from 1 April 2014. Since September 2012, trade unions, employers and government have been working hard to get new scheme regulations agreed and in place. The main rules of the new scheme were laid before Parliament in September 2013 with those rules covering the protections for those members in the scheme before the changes take effect due to be laid before Parliament soon. On 1 April 2014, if you are paying into the LGPS you will automatically join the new career average pension scheme. All of the pension you have built up in the LGPS before this date is fully protected. This means that your pension, based on your membership built up to 31 March 2014, will continue to be based on your final pay when you leave. Go to http://lgps2014.org/content/how-will-it-affect-me to find more information about what the changes mean for you. Pension age Your pension built up in the scheme before 1 April 2014 has a protected Normal Pension Age, which for almost all is age 65. If you retire and draw all of your pension at your protected Normal Pension Age, the pension built up in the scheme before 1 April 2014 will be paid in full. If you choose to take your pension before your protected Normal Pension Age, the pension you have built up in the scheme before 1 April 2014 will normally be reduced, as it s being paid earlier. If you take it later than your protected Normal Pension Age, it will be increased because it s being paid later. The amount of any reduction or increase will be based on how many years earlier or later than your protected Normal Pension Age you draw the pension you have built up in the scheme to 31 March 2014. The benefits you build up in the career average scheme from April 2014 will have a Normal Pension Age linked to your State Pension Age (but with a minimum age of 65). You cannot take your benefits built up to April 2014 separately from the benefits you build up from April 2014 as your entire pension will have to be taken at the same time (except in the case of Flexible Retirement). 1
Member contributions From April 2014 you will continue to receive tax relief on your pension contributions. To achieve this, your contributions are deducted from your pay before you pay tax. From 1 April 2014, there will be 9 employee contribution rate pay bands and the contribution rate you will pay will be based on actual pay. Overtime and additional hours will also be pensionable. This means that some part time members may pay less and some members may pay more, as outlined in the table below: Pay bands Actual Pensionable Pay Contribution Rate Up to 13,500 5.5% 13,501-21,000 5.8% 21,001-34,000 6.5% 34,001-43,000 6.8% 43,001-60,000 8.5% 60,001-85,000 9.9% 85,001-100,000 10.5% 100,001-150,000 11.4% More than 150,000 12.5% Each April, your employer will decide your appropriate rate of contributions for each employment by matching your actual pensionable pay to the appropriate band in the contributions table. If your pay changes during the year, your employer may decide to review your contribution rate. If this results in a change to your contribution rate, they will let you know. It is expected that the contribution bands will be reviewed every three years. 2
You will also continue to pay reduced national insurance contributions, although the government plans to remove this reduction for all pension schemes from April 2016. Reductions in pay due to sickness, child related leave, reserve forces leave or other absence will be ignored for contribution band assessment. During periods of half pay or no pay sickness, employer contributions are payable on notional pay and if any employees are currently on half pay or no pay sickness, the employer contribution is due from 1 April 2014. The first 30 days contributions on unpaid leave rule will no longer apply and the strike day 30 period to elect to pay will be removed. Additional contributions You are able to elect to pay more contributions to buy extra pension, known as Additional Pension Contributions (or APCs) and you continue to have the option to pay Additional Voluntary Contributions (or AVCs). From 1 April 2014 you will be able to buy extra pension of up to 6,500 by paying APCs regularly, over a period of time (minimum 1 year, maximum to your Normal Pension Age), or you can buy extra pension by paying a one-off lump sum. The amount it will cost will depend on the amount of extra pension you want to buy, the age you start paying the extra contributions and the length of time you want to pay them for. In the new scheme you will only be able to buy extra pension for yourself and not for additional dependants benefits. AVCs allow you to pay more to build up extra savings for retirement. From 1 April 2014 your contributions to an AVC arrangement taken out after March 2014 will no longer be limited to 50% of your pay, so you can, if you wish, pay up to 100% of your pay towards an AVC, after allowing for any tax and National Insurance liability or any other existing deductions you may have. Another change for new contracts is that the maximum amount of your AVC which you can take as tax-free cash will be 25% of your AVC pot for contracts taken out on or after 1 April 2014. Any existing contracts taken out before April 2014 have the option of taking up to 100% of their AVC pot as tax free cash (subject to HMRC limits) but the contributions to such contracts are limited to a maximum of 50% of your pensionable pay (as defined in the 2008 Scheme). Please note however that relevant anti-forestalling measures may be put in place by the Government. Existing additional pension contracts All existing Additional Voluntary Contribution (AVC), shared cost Additional Voluntary Contribution (SCAVC), Added Years, Additional Regular Contribution (ARC), Preston part-time buy-back, and Additional Survivor Benefit Contributions (ASBC) contracts in force immediately prior to 1 April 2014 will continue from April 2014 on the terms of the contract when they were originally taken out. Where a Shared Cost APC (SCAPC) contract is taken out to cover the pension lost during a period of unpaid leave of absence, the cost is shared 1/3rd employee, 2/3rds employer. 3
New 50/50 option From April 2014 there will be two sections of the LGPS; the main section and the 50/50 section. The 50/50 option will give you the opportunity of paying a lower level of contributions. You will be able to elect for this option at any time, pay half your normal contributions and build up half your normal pension. This option has been introduced to encourage members who might otherwise opt out because of financial difficulties to stay in the scheme and save for retirement. Because of this, joining the 50/50 section is seen as a short-term option. The amount of life cover and ill health cover you get from the scheme will be unaffected. If you have more than one job you can choose 50/50 for one, some or all of your jobs. You can remain in the 50/50 section for up to 3 years because your employer has to bring you back into the main section of the scheme whenever their 3-yearly automatic re-enrolment date falls. You would have to elect again to re-join the 50/50 section if you wanted to continue paying reduced contributions at that point. Protections Even though the scheme is changing, protection is in place to ensure you can use your final pay when you leave to work out your pension for the membership you built up to 31 March 2014. This means that any future pay increases will be included in the final pay used to work out these benefits. In addition, if your pay is reduced, or increases to your pay are restricted in your last 10 years of continuous employment with your employer, you continue to have the option to have all your pre April 2014 membership based on the average of any 3 consecutive years pay in the last 13 years (ending on a 31 March). If you have a certificate of protection which was issued by your employer for a reduction or restriction in pay beyond your control before 1 April 2008 and you leave the LGPS within 10 years of the reduction or restriction, then this protection continues to apply after April 2014 for benefits built up in the final salary scheme. Rule of 85 If you have rule of 85 protection this will continue to apply from April 2014. The only occasion where this protection does not automatically apply is if you choose to voluntarily draw your pension on or after age 55 and before age 60 (see section 'Rule of 85 and drawing your pension on or after age 55 and before age 60' for more information). The rule of 85 protects some or all of your benefits from the normal early payment reduction. To have rule of 85 protection you must have been a member of the LGPS on 30 September 2006. The rule of 85 is satisfied if your age at the date when you draw your pension plus your Scheme membership (each in whole years) adds up to 85 years or more. Working out how you are affected by the rule of 85 can be quite complex, but here is some information to help you work out your general position when you draw your benefits. o If you would not satisfy the 85 year rule by the time you are 65, then all your benefits are reduced if you choose to draw your pension before your Normal Pension Age. The 4
reduction will be based on how many years before your Normal Pension Age (protected Normal Pension Age for pension built up to April 2014 and new Normal Pension Age (linked to State Pension Age) for pension built up from April 2014) you draw your benefits. o If you will be age 60 or over by 31 March 2016 and choose to draw your pension before your Normal Pension Age, then, provided you satisfy the 85 year rule when you start to draw your pension, the benefits you build up to 31 March 2016 will not be reduced. o If you will be under age 60 by 31 March 2016 and choose to draw your pension before your protected Normal Pension Age, then, provided you satisfy the 85 year rule when you start to draw your pension, the benefits you ve built up to 31 March 2008 will not be reduced. Also, if you will be aged 60 between 1 April 2016 and 31 March 2020 and meet the 85 year rule by 31 March 2020, some or all of the benefits you build up between 1 April 2008 and 31 March 2020 will not have a full reduction. Please note that if you have rule of 85 protection but do not pay for absences, your rule of 85 effective date will change. For a more detailed understanding of your own position you should contact your pension fund directly. Rule of 85 and drawing your pension on or after age 55 and before age 60 From April 2014 there is a new option in the LGPS where you can choose to draw your pension voluntarily on or after age 55 and before age 60 without the need for your employer s permission. The rule of 85 will not automatically be applied if you decide to draw your benefits under this new option but your employer can exercise their discretion to apply it. If they do, and you meet the rule of 85 at the date of drawing your benefits, the rules set out in the second and third bullet points above will apply. If your employer does not exercise the discretion to apply the rule of 85, the protections referred to in the second and third bullet points above do not apply in full. From 1 July 2014 you will be able to ask your employer what their policy is on exercising the discretion to apply the rule of 85 to benefits drawn before age 60. Underpin An additional protection exists for those who are nearing retirement to ensure that you will get a pension at least equal to that which you would have received in the scheme had it not changed on 1 April 2014. This protection is known as the 'Underpin'. The 'Underpin' applies to you if you were paying into the Scheme on 31 March 2012, were within 10 years of your Normal Pension Age on 1 April 2012, you haven t had a disqualifying break in service of more than 5 years, you've not drawn any benefits in the LGPS before Normal Pension Age and you leave with an immediate entitlement to benefits. If you are covered by the Underpin, a calculation will be performed at the date you cease to contribute to the Scheme, or at your Normal Pension Age if earlier, to check that the pension you have built up is at least equal to that which you would have received had the scheme not changed on 1 April 2014. If it isn t, the difference will be added to your pension. If you are covered by the Underpin, your Pension Fund will carry out the underpin check when you leave the scheme. 5
Protection if you leave and re-join the LGPS in the future If you leave the scheme before being able to immediately draw your pension and you have sufficient membership to have built up a pension entitlement (see 'Vesting Period' below), you will be awarded deferred benefits which remain in the scheme (unless you elect to transfer them to another pension scheme). If you are automatically moved to the career average scheme on 1 April 2014, subsequently cease membership with entitlement to a deferred benefit and then re-join the scheme at a later date, provided you do not have a break in membership of more than 5 years from any public service pension scheme, your final salary benefits will be linked to your new pension account and will be calculated on your final salary in your new employment when you leave. You can elect to keep your benefits separate but you would need to notify your Pension Fund of this within 12 months of re-joining the scheme. If the break in membership from public service pension schemes is more than 5 years, any final salary benefits in the LGPS are transferred across to the career average scheme unless you choose to retain them as separate final salary benefits. Restriction of tax relief on pension contributions The amount of your pension savings that benefits from tax relief is limited to an Annual Allowance. From April 2011 the Government reduced this amount from 255,000 to 50,000. From tax year 2014-15 onwards the annual allowance will go down to 40,000. The Lifetime Allowance is the maximum value of tax-advantaged benefits you can receive from all tax-advantaged pension plans. Importantly, the LTA covers not just your LGPS pension, but also any previous and future pensions from other employers and private arrangements - hence the name 'Lifetime Allowance'. Your pension benefits will be tested against the LTA when certain events happen, including when they come into payment on your retirement or death (if earlier) and if you transfer your benefits overseas. The LTA was first introduced from 6 April 2006 and was set at 1.5 million for the tax year 2006-07. It gradually increased to 1.8 million but from 6 April 2012 it reduced to 1.5 million and the Government has announced that there will be a further reduction to 1.25 million from 6 April 2014. Because the Lifetime Allowance has reduced, there is a form of protection called Fixed Protection. Fixed protection 2014 will work in a similar way to the existing fixed protection regime introduced in April 2012 and if you wish, you can fix your Lifetime Allowance at 1.5 million which means you can take pension savings worth up to 1.5 million without paying the Lifetime Allowance charge. You can use the HMRC Lifetime Allowance checking tool to help you decide whether to apply for fixed protection 2014 and if you decide to do so, you'll have to apply before 6 April 2014. Please note that it is each member s responsibility to do this for themselves. Enhanced and Primary Protections in place will continue to apply. For more information on this topic, please visit the link below: http://www.buckscc.gov.uk/about-your-council/local-government-pension-fund/scheme-members/ 6
Other points to note for existing members For new joiners from 1 April 2014, the period of time you have to pay into the scheme in order to be entitled to a pension will increase from 3 months to 2 years. If you were in the scheme prior to April 2014 and you then leave or opt-out of the scheme with less than 2 years membership you will have the option of taking a refund of contributions from the scheme (unless you are disqualified from receiving a refund because, for example, you already have, in an LGPS Fund in England and Wales, a deferred pension or a pension in payment) or you can choose to have deferred benefits. From April 2014 you must have 2 years membership of the scheme to be awarded pension benefits for reasons of redundancy/ efficiency or ill-health. From April 2014 the pension you build up in the career average scheme will be worked out on your pensionable pay received in the Scheme year (1 April to 31 March). However, if you receive pay after March 2014 which relates to work carried out before April 2014, this will not count towards the pension you build up in the career average scheme but will, instead, be allocated to the pre 1 April 2014 period for which it was due. If you cease membership of the scheme within 12 months of when the payment was due, it will be included in the final pay figure used to calculate benefits on your pre April 2014 membership of the scheme. Remember that every year you will be issued with an Annual Benefit Statement. This statement will include the value of any final salary benefits you have built up before April 2014 in addition to details of the pension you build up in the new career average scheme. It s important that you check your Annual Benefit Statement each year. Further information Topic based videos can be found at www.lgps2014.org, a dedicated site for LGPS members dealing with the changes to the scheme from 1 April 2014. We hope you find this information helpful. Otherwise, please contact Bucks County Council Pensions & Investments Team via email at pensions@buckscc.gov.uk or by telephone on 01296 383755. Disclaimer This is a brief update explaining the latest situation for members of the LGPS who have built up benefits in the scheme before 1 April 2014. The Pensions & Investments Team is able to provide general information regarding the proposed changes. We are not tax advisers and it is recommended that scheme members seek expert tax advice regarding the changes. It reflects the known changes at the time of publication in February 2014. In the event of any dispute over your pension benefits the appropriate legislation will prevail. This newsletter does not provide any contractual or statutory rights and does not override any legislation. 7