LGPS pension principles
How does the LGPS differ from other pensions?
The biggest difference are the LGPS guarantees that apply to the amount of pension, and any tax-free cash you’ll receive when you retire.
The appeal of the LGPS is that you’re not directly affected by stock markets and how they’re doing. You’ll know exactly where you stand every year. It’s reassuring to know that the amount of income you’ll receive is fixed, likewise your take tax-free cash if you choose to take any.
This certainty of what you might receive is compared to other types of pension where your retirement income and tax-free cash are dependent upon how much is paid in and how well your savings grow. These are known as money purchase or defined contribution schemes.
We all know that stock markets can go up and down. For money purchase schemes that are mostly invested in stocks and shares, this means how much your pension pot is worth each year goes up and down too. Similarly, the income you’ll get to live on in retirement can vary.
Build up those benefits!
Each year your LGPS will send you a statement showing how much benefit you have built up since joining the scheme. The annual benefit that’s credited to you is a fraction, for example 1/49th of your pensionable pay. Now, that doesn’t sound a lot does it? Actually, that’s pretty valuable and over the years those little fractions will add up to nuggets of pension gold.
When you retire, the LGPS will multiply the number of 1/49th benefits you’ve earned by the average of your salaries during your service and hey presto, that will be your pension income!