\"shadow membership\"

Hi InLimbo - I'm no expert - more like floundering about.
This is from the LGPS website - I'm sure you'll have read it - the section about being awarded a share on divorce of an LGPS pension :
For the ex-spouse member:
"If you have been awarded a share of your ex-spouse or ex-civil partner's LGPS pension rights following a pension sharing order, you have your own LGPS benefits, known as pension credit benefits.
Your pension credit benefits provide an annual pension for the rest of your life from age 65 (or later if the order was issued after then).
At the same time you will receive a tax-free lump sum ( three times your pension) as long as your ex-spouse or ex-civil partner had not already retired and received a lump sum when the order was issued."
For the employee member:
" On retirement, you will be able to exchange some of your yearly pension for a one off tax-free lump sum. .... You can take up to 25% of the capital value of your LGPS benefits as a lump sum (or, if lower, 25% of the lifetime allowance less an adjustment for other pension benefits)."

Is a lump sum of 3 times the annual pension the equivalent of 25% of the pension pot or is the ex-spouse staying in LGPS getting a worse deal?

Hi,

I am going to try to answer this last question rather than deal with the specifics of shadow membership (which I will leave for another time or further post).

The scheme rules of most public sector schemes allow for a lump sum of 3 times the starting pension as the default tax free cash position on retirement.

Since April 2006 the rules on pensions changed and with it the maximum allowable lump sum for all pensions became 25%.

Now, the public sector scheme is not a money purchase arrangement and so it is not easy to work out what 25% of the overall benefits will be. Guess what - this has to be actuarially calculated.

However, in most cases it is likely to provide a lump sum greater than 3x the starting pension. I deal with a lot of NHS cases and on retirement the 25% TFC is almost always greater than 3 x starting pension.

But there is a catch. Some of the starting pension would have to be given up (commuted) to achieve the 25% tax free cash.

So the decision on whether to take 25% tax free cash has to be decided against how much additional pension is being given up.

This is a personal decision. Do you want guaranteed (fully indexed linked) income benefits for life or a lump sum to spend as you wish.

As taking a higher lump sum reduces ongoing pension income liaibilities for the scheme they are keen to offer the 25% TFC option.

I hope this adds some clarity.

Regards

Phil



Please note: Although I am a Resolution Accredited Independent Financial Adviser my comments are given here as general guidance ­­­­­­­­base­­­­­­­­d on the (often limited) information available and does not constitute financial advice. They should not be seen as a substitute for detailed financial and legal advice.

As I read it 3 times the annual pension is a rather pathetic sum to be paid compared to ex's lump sum. Don't understand then if pension is shared why does person sharing get very reduced lump sum?

That was my point InLimbo - there are so many things you need to know about this deal - but on that aspect it looks like a worse than average deal?
I thought after April 2006 everyone could take a 25% tax free pension commencement lump sum by law?
LGPS can restrict just pension credit members to 3 x annual pension?

How did you manage to figure out your annual pension income from your probable share of the pension CETV if retained in LGPS ?
Are you Einstein?

LGPS offers pension credit ex-spouse members index-linking though:
"Your pension will continue to receive cost of living increases every year, as it is paid to you."
Is that amount capped?
It costs a fortune to index-link an annuity.
No knowing whether inflation will rocket?

...and also "valuable life-cover" - what's that worth and who would be the beneficiary?

Will LGPS give you a "pension promise" - ie guarantee now what your pension will be when you take it at age 65?
Not having to watch your pension fund go up and down - mainly down - and annuity rates going down - is worth an awful lot in terms of peace of mind and being able to plan your future.

The short answer to most of the above points is that there is generally no short answer! Different types of schemes can work very differently, even two money purchase schemes won't work identically.
Properly qualified IFA/Pensions advisors can answer most of the questions, and if it comes to calculating outcomes you may need an actuary.
Maggie, most Govt schemes, LGPS and also Police, Army etc are very generous in their inflation proofing etc compared with your average pension, it is one of the big perks of "Government" employment in its various forms.
As far as the lump sum point is concerned, just bear in mind that pension income and capital are linked: they are all coming out of the same pension "pot" or CETV. So if for whatever reason you can get a smaller lump sum than your spouse you aren't losing out overall, there is more left to generate income. (The Actuaries will say this is a gross oversimplification, but I'm a simple sort...)
Put another way, if anyone takes any capital from their pension, it impacts on what is left to provide income, its not a seperate capital fund and a separate income fund.