Pensions Newsletter 1 Pensions Newsletter The Government argue change is needed because we are living longer and this means pensions have to be paid over increasingly longer periods with a resulting increase in costs. The Government’s reform agenda is based on the recommendations of the Hutton Commission. These include linking scheme Normal Retirement Age to State Pension Age and replacing the current final salary schemes with career average arrangements. Arguably, however, the most controversial measure has been the proposal to increase member contributions by an average of 3.2% of pay over a 3 year period. This led to deadlock between Unions and Government and culminated in the public sector industrial action in November. The Local Government Pension Scheme (LGPS) is different from other public sector schemes in that monies have actually been set aside (in locally administered pension funds) to pay for future benefits. This funded characteristic of the scheme may allow the UK Government to be more flexible in reaching an agreement with the Trade Unions. At the time of going to press, a Heads of Agreement has been signed by Government and Unions for the LGPS in England and Wales. This would see the introduction of career average arrangements in April, 2014, no contribution increases for the majority of members, past service benefits being fully protected including linkage to final salary; and absolute protection for those within 10 years of retirement. In Scotland, responsibility for the LGPS rests with the Scottish Government. Throughout negotiations, they have expressed concern at the speed of the UK Government’s reform programme and have ruled out imposing member contribution increases in the LGPS. Equally, they have still to make any firm announcement about the extent of any “Hutton” reforms for the LGPS in Scotland. The future of the LGPS in Scotland may become clearer if the deal between Unions and Government in respect of the LGPS in England and Wales sticks. Either way, it seems that the calculation of members benefits is likely to be increasingly complicated. DECEMBER 2011 Reform . . . New Options for Partners Pensions If you live with someone but you are not married to them or in a civil partnership with them, then they will only be considered for a pension on your death if you have both completed a Partner’s Nomination Form. Until now, only membership from 6/4/88 counts towards a partner’s pension. However, under new rules, members can elect to pay additional contributions in order to count their pre 6/4/88 membership towards a partner’s pension. We will be writing to members affected by this change early in 2012 to give them more information about this option. A N E F O R A ' look forward with confidence Inside this issue: P ensions news in 2011 has been dominated by UK Government efforts to reduce public sector pension costs and spread the burden of cost more evenly amongst scheme members, employers and taxpayers. Spe ci a l p oi nt s o f i nte r e st: l Latest on S chem e R efo rm l Find o u t ab ou t Opt in g O ut l Be briefe d ab o u t new tax ru les l Learn ab ou t P ension Fun d repr es e nt ati on p roposals Opting Out page 2 Linking Up LGPS Rights page 2 Tax and Pensions page 3 Pathfinder page 4 Governance page 4 Pension Fund Accounts page 4 The Story So Far
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Pensions Newsletter 1
Pensions
N e w s l e t t e r
The Government argue change is neededbecause we are living longer and this meanspensions have to be paid over increasinglylonger periods with a resulting increase incosts. The Government’s reform agenda is based onthe recommendations of the HuttonCommission. These include linking schemeNormal Retirement Age to State Pension Ageand replacing the current final salaryschemes with career average arrangements.Arguably, however, the most controversialmeasure has been the proposal to increasemember contributions by an average of 3.2%of pay over a 3 year period. This led todeadlock between Unions and Governmentand culminated in the public sector industrialaction in November. The Local Government Pension Scheme(LGPS) is different from other public sectorschemes in that monies have actually beenset aside (in locally administered pensionfunds) to pay for future benefits. This fundedcharacteristic of the scheme may allow theUK Government to be more flexible inreaching an agreement with the TradeUnions.
At the time of going to press, a Heads ofAgreement has been signed by Governmentand Unions for the LGPS in England andWales. This would see the introduction ofcareer average arrangements in April, 2014,no contribution increases for the majority ofmembers, past service benefits being fullyprotected including linkage to final salary;and absolute protection for those within 10years of retirement. In Scotland, responsibility for the LGPSrests with the Scottish Government.Throughout negotiations, they haveexpressed concern at the speed of the UKGovernment’s reform programme and haveruled out imposing member contributionincreases in the LGPS. Equally, they have stillto make any firm announcement about theextent of any “Hutton” reforms for the LGPSin Scotland. The future of the LGPS in Scotland maybecome clearer if the deal between Unionsand Government in respect of the LGPS inEngland and Wales sticks. Either way, itseems that the calculation of membersbenefits is likely to be increasinglycomplicated.
DECEMBER 2011
Reform . . .
New Options for Partners PensionsIf you live with someone but you are not married to them or in a civilpartnership with them, then they will only be considered for a pension onyour death if you have both completed a Partner’s Nomination Form. Untilnow, only membership from 6/4/88 counts towards a partner’s pension.However, under new rules, members can elect to pay additionalcontributions in order to count their pre 6/4/88 membership towards apartner’s pension. We will be writing to members affected by this change early in 2012 to givethem more information about this option.
AANNEE FFOORR AA''
look forward with confidence
Insidethisissue:
Pensions news in 2011 has been dominated by UK Government efforts to reduce publicsector pension costs and spread the burden of cost more evenly amongst schememembers, employers and taxpayers.
Special points of interest:l Latest on Scheme Reform
l Find out about Opting Out l Be briefed about new taxrules
l Learn about Pension Fundrepresentation proposals
Opting Outpage 2
Linking Up LGPS Rights
page 2
Tax andPensions
page 3
Pathfinderpage 4
Governancepage 4
Pension FundAccounts
page 4
The Story So Far
Pensions Newsletter2
Linking Old LGPS Rights with New OnesIf you have changed jobs in the LGPS and moved from one employer to another, you mayhave left some pension rights behind with your old employer in the form of a deferredbenefit. You may have done this if you have moved to a job with a lower salary.
The rules allowing scheme members to link previous LGPS rights with current LGPS rightsare changing. In future, new members will only have 12 months from re-joining thescheme in which to combine their rights, whilst existing members who have not yet linkedtheir rights will have to make a final decision about this by a designated cut-off date, likely tobe 31/12/2012. Scottish LGPS Funds are currently in discussions to agree a suitable cut-offand to ensure that scheme members are alerted to any relevant deadlines.
At a time of pay freezes, rising fuel costs andeconomic hardship - not to mention possiblechanges to public sector pensions - it mightseem tempting to opt out of the LocalGovernment Pension Scheme to save somecash and boost take home pay.
This may not be in your long term financialinterest and you should think carefullybefore opting out.
Here’s why!
For every £10 you pay into the scheme, youremployer pays around £30. Opt out andyou miss out on this valuable employeebenefit.
In fact, the longer you are out the schemethe worse it gets!
Let’s say you earn £20,000 per year, so yourcontributions to the Scheme will be roughly£1,100 per year and your employer’scontribution will be around £3,300. If youhave opted out, then over a period 20 years,you will have missed out on an employercontribution to your pension pot of over£60,000.
Also remember that if you opt out and yourcontribution is say £100 per month, yourtake home pay will not increase by £100.You will lose the Tax and National insurancereliefs that pension contributions attract soyour pay might only increase by around £65per month.
Opting out isn’t just about missing out onthose contribution from your employer, italso means that you will lose:
l the lump sum death cover of 3 timesannual pensionable pay,
l and the enhanced benefits that arepayable if you are retired on ill healthgrounds
At a time when payment dates for StatePensions are being gradually pushed backfrom age 65 (to age 68 for those born after5/4/1978), it is more important than everthat individuals make adequate pensionprovision for themselves.
Whilst it is possible that the LGPS will bereshaped over the coming years to allow it toremain sustainable and affordable for all itsstakeholders, it is likely to remain a verygood scheme and well worth contributingtowards.
For the vast majority of members, theamount of money you (and yourdependants) will get back by way ofscheme benefits will be a lot more thanyou put in as a member.
If you are thinking about stopping yourpension, please stop and think again, Ifnecessary, discuss your circumstances withan independent advisor before making a finaldecision. You can find an advisor on thewebsite www.mylocaladviser.co.uk
Opt Out Now - Lose Out Later
Pensions Newsletter 3
In last year’s newsletter, we highlighted thefact that Government were reducing theLifetime Allowance and Annual Allowancefor pensions. To recap:
l the Lifetime Allowance is the amount ofpension pot you can build up during yourlifetime before you become liable for a taxcharge, and
l the Annual Allowance is the amount bywhich your pension pot can grow annuallybefore you are liable to pay a tax charge.
Both the Lifetime Allowance Tax Chargeand the Annual Allowance Tax Charge arepayable in addition to any income tax thatmight be deducted from your pension.
Lifetime Allowance (LTA)
The LTA is reducing from£1.8m to £1.5m fromApril, 2012. Broadlyspeaking, this means thatanyone whose earningsare over £100k (or whothinks that their earnings
will be at this sort of level in the future)should pay particular attention to thisarticle.
For the purposes of the LTA, you calculateyour pension pot by multiplying your pensionby 20 and adding on any lump sum. So ifyour pension is £20k and your lump sum£60k, then your pension pot, as measuredagainst the LTA, would be [20 x £20k] +£60k = £460k.
If, on retiring, your pension pot exceeds theLTA (i.e. £1.5m from 6/4/12), tax is payableon the excess above the threshold. If theexcess is paid to you as a pension then thetax on the excess is at the rate of 25%. If theexcess is paid as a lump sum then the rate is55% on the excess.
You can apply to HM Revenue for “FixedProtection” to maintain your LTA at £1.8m.
You must apply on theHM Revenue FormAPSS227 and theform must be receivedby HM Revenuebefore 6th April,2012. Details of theapplication process are given at http://www.hmrc.gov.uk/ pensionschemes/ lifetime-allowance/ savings.htm
Protection is not absolute and will only applyif there is little or no further increase in thevalue of scheme rights from 2012/13onwards. Members with queries regardingtheir tax position should seek independentfinancial or specialist tax advice.
Annual Allowance (AA)
As trailed in last year’s newsletter, theAnnual Allowance was reduced from £255kto £50k in April, 2011. This means that if youhad pensions growth of more than £50kduring 2011/12 (and you have no unusedallowances from the 3 years prior to 2011/12to offset against the excess growth), you willbe liable for a tax charge. If you have such acharge, this will be notified to you later in2012 and you will then have to include it onyour self assessment tax return for 2011/12.
Retirement Before Age 55
If you retire from the LGPS before age 55(excl. medical retirements) and resumeemployment with your old employer (or aclosely connected employer) within sixmonth of retiring, you may become liable forsubstantial tax charges. These rules arecomplex and are set out more fully in HMRevenues webpage at www.hmrc.gov.uk/manuals/rpsmmanual/RPSM03106064.htm.
If you fall into this category, you are advisedto seek specialist advice before accepting anoffer of employment.
Watch out . . . theTaxman’s About!
Pensions Newsletter4
NewGovernanceArrangementsFalkirk Council is changing the way in which itconducts its pension fund business in order togive constituent stakeholder groups a greatersay in the running of the Fund.
From later on this year, the work of the mainCommittee, which includes monitoringinvestment performance and appointing fundmanagers, will be supported by a PensionsPanel, made up of representatives from majorFund interest groups such as Unions,Employers and Pensioners.
Three members of the Panel will be elected tosit on the main Committee and will have fullvoting rights. We will be seeking nominationsfor pensioner representatives shortly.
PathfinderProjectLast years’ newsletter included afeature about the Pathfinder Initiative- a research project, sponsored byCOSLA and the Improvement Service,to assess efficiencies from reducingthe number of Scottish LGPS pensionfunds.
An independent study by consultants,Deloitte, has concluded that there isno business case to support themerging of the existing 11 ScottishFunds, although it has recommendedcloser working by Funds on issuessuch as procurement. The analysistook into account the results of amember survey which generallyindicated a high satisfaction level withexisting fund services.
Falkirk CouncilPensions SectionPO Box 14882Municipal BuildingsFalkirk FK1 5ZF
Tel: 01324-506316Fax: 01324-506334
E-mail: [email protected]: www.falkirk.gov.uk/pensions Pr
inted and Designed by Falkirk Prin
tworks Tel: 0
1324
501
490 Fax: 013
24 501
491 e-mail: [email protected]
Pension Fund Accounts 2010/11£m
Fund Value at 31 March 2010 £1,073.4Plus: Money inContributions from employers 52.3Contributions from staff 17.2Transfers from other schemes 3.9
£1,146.8Less: Money outPension payments 32.1Lump sum retirement grants 19.5Refunds and transfers 3.9Administration costs 0.4
£1,090.9Plus: Returns on investmentsInvestment income (net of tax) 19.4Change in investment value 74.4Investment management fees -3.5Fund Value at 31 March 2011 £1,181.2
How the Fund has changed in 2010/11
Fund Manager Mandate £mAberdeen Asset Global Equities £166.5Baillie Gifford Bonds 153.0Legal and General Passive Equities 256.5Newton Global Equities 239.8Schroder UK Equities 184.3Schroder Property 96.4SL CapitalWilshire/M&G Alternatives 71.9Other Net Assets - 12.8Fund Value at 31 March 2011 £1,181.2
The full Annual Report and Accounts can be viewed at
www.falkirk.gov.uk/pensions
How the Fund is invested at 31/3/2011
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