power AVCs - a way of topping up benefits New freedom & choice causes confusion JUNE 2015, ISSUE 34

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1 pension power JUNE 2015, ISSUE 34 AVCs - a way of topping up benefits New freedom & choice causes confusion

2 Hello and welcome... to this latest edition of Pension Power, your pensions newsletter from GMPF. And a special welcome to you if this is the first copy of Pension Power you have received, either because you have only just joined GMPF, or because you are one of our Probation colleagues up and down the country whose pension arrangements have now moved across to us. In April 2014 when major changes to your pension scheme came into force, they brought with them a restriction affecting how much tax free cash new AVC customers could draw. This restriction has now been lifted - in line with a general freeing up of pensions in this country. You can read more about this on page 8. But this new found freedom with pensions is also causing plenty of confusion, with many people thinking changes aimed at personal pensions and the like also apply to schemes like ours, which they don t. So please see the Freedom & Choice article opposite for more detail. At the foot of this page, you will see our address in Droylsden. The Concord Suite in Droylsden has been our home since we came to Tameside in And whilst it has served us well over the years, we decided the time was right to move into a more modern, bigger building, to cope with our expanding operation. The move is due to happen in September, and you can find out more, together with our new address on page 6. That s all from me - I hope you enjoy this issue. All the best, Greater Manchester Pension Fund, Concord Suite, Manchester Road, Droylsden, M43 6SF Ged Dale, Assistant Executive Director, Pensions Administration. Greater Manchester Pension Fund is administered by Tameside MBC and is part of the Local 2 Pension Power February 2014 Government Pension Scheme

3 New found freedom with pensions - or is it? Over the coming months you ll see a lot of coverage in the papers and on TV about changes to the law surrounding pensions, giving people more freedom on how to draw their pensions. But most of the changes don t have any impact at all on schemes like ours, as the article over the page explains... Pension Power June

4 The Government s shake up of the pensions industry is being called Freedom & Choice in Pensions, and is designed to give people in some types of pension schemes far more choice about how to access their pension pots. Until now, people in personal pensions and even some types of staff pension schemes had to take the pension savings they had built up, and turn them into a pension by buying an annuity. So people in schemes like this faced two uncertainties... first, how well their pot would grow as it was invested, and second, what level of pension the annuity would create. Schemes like this are known as defined contribution schemes (DC schemes for short). And the changes you may hear about are largely aimed at giving more freedom and choice to people in this type of scheme, by removing the requirement to buy an annuity. People will still be able to buy an annuity if they want, but if they prefer, they will be able to draw all their pension savings as one cash amount. That sounds great, but only the first 25% will be tax free, with the rest being taxed. And there is the obvious risk that somebody might take all their pension savings in one go, then blow it all on a fancy car or a world cruise, leaving themselves with no money to live on in retirement. So does any of this affect my local government pension? Generally no, since the changes are targeted mainly at people in defined contribution schemes. The Local Government Pension Scheme is not this type of scheme, instead it is a defined benefit scheme. With our type of scheme, as a member you automatically build up a range of pension benefits - benefits which are tied in to your pay. So the weak link of having to buy an annuity simply doesn t exist with the Local Government Scheme. What s more you already have a feature built into the benefits package which allows you to give up some of your pension from us, and instead take it as tax free cash. So this is a very easy way of boosting your existing tax free lump sum (for members who joined before 2008) or creating a tax free lump sum (for members who joined from 2008). Could I join a defined contribution scheme instead? Yes, it s not compulsory being in the Local Government Pension Scheme. There is nothing to stop any of us opting out of the scheme, and joining a defined contribution scheme instead, then using the freedom & choice rules to access that new pot with more freedom. But by doing this you would face two big issues... first, your employer would be unlikely to pay into such a scheme 4 Pension Power June 2015

5 with you. And second, you would be swapping your very secure defined benefits, for much a much riskier personal pension type arrangement. What s of even greater concern is that people opting out of the Local Government Scheme could also transfer the value of their benefits into the new DC scheme they had joined instead. Then the value of everything they had ever built up could be adversely affected by a fall in the stock market. Getting the right advice Freedom and choice is fine, as long as people make the right choice! So especially where people are considering transferring what are being called safeguarded benefits (like ours) into a defined contribution scheme, they will have to take proper independent financial advice, if the transfer value is 30,000 or more. The Government has also set up a service called Pensionwise, which offers online help, and there is also one to one information from bodies like Citizens Advice. They won t advise people what to do, but will offer guidance by helping them weigh up their options. And we re sure that if you asked them their opinion on leaving the Local Government Pension Scheme, they would tell you to apply extreme caution! Types of pensions Defined contribution scheme: Personal pensions, and the less secure company pension schemes fall into this category. They are so called because members pay in a known amount - a defined contribution - but have no accurate way of knowing what they will get out. Until now members have had to take the pension pot they have built up, and turn it into a regular income, by buying an annuity. Especially in recent times, annuity rates haven t been very good, so members in this type of scheme have had a raw deal. The new freedom in pensions is largely aimed at addressing this issue. Defined benefit scheme: The Local Government Pension Scheme is an example of a defined benefit scheme. In this type of scheme, members pay in a known amount (this is set by the Scheme rules). But unlike other schemes, they do have a good idea of what their benefits will be - hence defined benefits. Schemes like this already offer members some choice, for example by allowing them to take more tax free cash by giving up some pension, so they can tailor their package to their own needs. The worry is that members will transfer out of these types of scheme under the new freedom & choice initiative, but end up getting stung in the process. For some people though, a transfer out could be the right move. Pension Power June

6 Pensions are on the move The Concord Suite in Droylsden has been the home of GMPF since we came to Tameside in And whilst it has served us well, we have clearly outgrown the space it offers, especially given our recent expansion. So we are moving to a new building, probably in September. Our new building is still in Droylsden - literally across the road, and it will have the capacity for the pensions administration function together with other areas such as pensions accountancy and investments to all work under one roof. The new building has been named after a young soldier from Droylsden who was tragically killed in Afghanistan. The new postal address is: GMPF Guardsman Tony Downes House 5 Manchester Rd, Droylsden, Manchester M43 6SF 50/50 update... The April 2014 changes brought in something called the 50/50 option. This is a chance to pay in half the standard pension contribution for half the pension benefits in return. A change in the rules might affect you if you take some child related leave - in other words maternity, paternity or adoption leave. If you ve been in the 50/50 scheme, but then take some unpaid ordinary child related leave, the 50/50 option is cancelled, and you will be put back into the main scheme. That means you will build up main scheme benefits during this time - even though you aren t paying into the Scheme. But if you then take some unpaid additional child related leave, that won t count for pension purposes, unless you buy back that lost pension by paying APCs (additional pension contributions). Find out more about APCs at: 6 Pension Power June 2015

7 No minimum membership for dependants pensions and lump sum life cover The wording in the scheme Regulations has been subtly modified to make it clearer that for the purposes of dependant s pensions, and lump sums paid when a member dies, the member doesn t need to have completed 2 years membership. Whereas this two year minimum does apply to many other aspects of the scheme... for example you normally need two years or more to choose deferred benefits if you re leaving, or to draw your benefits when you retire. To find out more about death benefits in general, and who we regard as a dependant to receive a pension, please go to our website at: Do we have your address? If we already have your address, you should have had a link to the online version of this Pension Power (unless you ve opted to still receive a paper version). If you got the paper version, it means we don t have a valid address for you. If you would like to give us your address, then you will stop getting the printed version mailed to you, and you will then be subscribed for links to a digital Pension Power instead. The benefits are you get Pension Power a little earlier than the printed copy, and of course it s cheaper and greener. And you will also get other alerts, newsflashes, etc. To sign up for this, please visit and follow the link to paperless communications on the homepage. Pension Power June

8 Tax free cash... as easy as AVCs AVCs stands for additional voluntary contributions, and it s one of the ways of topping up your benefits. Recent restrictions have now been lifted, making AVCs just as flexible for all members... A recent restriction meant that if you signed up for our in house AVCs from April 2014 onwards, you were subject to tighter limits than other members on drawing your AVCs as tax free cash. What s changed? Anyone who is paying AVCs - or starts paying them from now onwards - now has the same flexibility on drawing all or part of their AVCs as tax free cash. How much tax free cash can I take? That s a tricky one! In the run up to your retirement, we will assess the size of your total pension pot with us, and see whether you have scope to take all your AVCs as tax free cash. In most cases you can do this, unless you have a large AVC pot compared to relatively small main fund benefits. See the example on the right to give you an idea. And opposite is some general information about AVCs in case you want to know more... 8 Pension Power June 2015 Example Brenda has been in the scheme 29 years, and she is about to retire. The value of her main scheme benefits is: Pension: 9,885 Lump sum: 20,625 She also has AVCs of 15,000. Let s see if she can take all that as tax free cash. To value her pot, we take 20 times her pension, plus the one off value of the lump sum and the AVC, which means: Value of pot = 233,329 She can take up to 25% of this as tax free cash, so the total of her standard lump sum and her AVCs is well within the limit. And remember, the tax man gave Brenda s AVC savings a helping hand by giving her tax relief on her contributions as well. Good news for Brenda! But if she also wanted to swap pension for lump sum, the maths would get a bit more tricky - please ask if you need to know more.

9 AVC FAQs I ve not looked into AVCs before... what are they? Short for Additional Voluntary Contributions, AVCs are simply a form of investment to build up a separate pot of money, which you draw as a separate pension, as tax free cash, or a bit of both. Funds like us use outside companies to run their in house AVC schemes, and Prudential has been our AVC provider since day one. Can I choose who to pay AVCs with? No, if you want to have the kind of flexibility shown here, you need to pay AVCs with GMPF s AVC provider, Prudential. Can I choose how much or how little to pay in? Within reason yes. Although a very small AVC of say 1 a month would hardly be worthwhile. And at the other end of the scale, all members can pay up to 50% of their pay, and in some cases, even more. Do I get tax relief? Yes, if you are a basic rate tax payer, every 100 you pay in costs you 80 after tax relief. And as a higher rate tax payer, the cost falls to 60. Can I change how much I pay in AVCs? Yes, the beauty of AVCs is that they are very flexible - you aren t paying in a set contribution to get a set benefit. So you can easily increase or decrease what you pay. To find out more... Join online from 1 July Simply go to Prudential s local government AVC website, where you can join online, or call the number shown Pension Power June

10 Time limits freed up for buying back some types of lost pension On page 6 we mention buying back lost pension by paying APCs - additional pension contributions. This is a useful way of buying back the pension you have lost following a break such as: Unpaid additional child related leave (that s maternity, paternity or adoption leave, or unpaid shared parental leave) Authorised unpaid leave Strike break Sharing the cost Unless it s a strike break, your employer will share the cost of buying the lost pension with you on a two thirds/one third split. But to benefit from this, you normally have to notify your employer within 30 days of coming back to work. That s fine for one long break, such as unpaid additional maternity leave. But it can be a problem, say where you take one or two days unpaid leave, then not long afterwards, do the same again. It s actually quite a lot of work for both you and your employer to treat each short break separately. So the scheme now gives employers the discretion to extend the normal 30 day limit, which would for example allow you to bundle together several short absences and just make one election to buy back the lost pension. If this applies to you, ask your employer what their policy is. Other types of APCs As well as paying APCs to buy back lost pension, you can also pay APCs at any time to simply buy some extra pension from us. You can boost your pension by as much as 6,675 a year, but with this type of APC, you have to pay the full cost, as your employer does not pay towards it. But for some members, this might be a more suitable way of topping up their benefits. Find out more about topping up in general on our website. 10 Pension Power June 2015

11 The cost to you The cost to you is based on a series of contribution bands - a system that s been a feature of our scheme since Each year the bands just nudge up in line with prices, to help make sure that if you get an ordinary annual pay award, it doesn t push you into a higher percentage band. Here are the bands which came in on 1 April Band Yearly pay Standard contributions 1 Up to 13, % 2 13,601-21, % 3 21,201-34, % 4 34,401-43, % 5 43,501-60, % 6 60,701-86, % 7 86, , % 8 101, , % 9 151,801 or more 12.5% Are my contributions based on ALL my pay? In many cases yes. The pay we use is called pensionable pay. That s your pay before deductions and includes things like basic pay, standby, shift allowance, and now all overtime too. But car mileage is not included. Can I pay LESS than the rate shown? Yes, you could choose the 50/50 option, which allows you to pay in exactly half the standard rate and build up half the standard pension. Please see our website for more. What if I m PART TIME? From 2014 the scheme has been much simpler, in that it s your PART TIME pay which decides which band you fall into. And you then of course pay that percentage of your PART TIME pay. Pension Power June

12 Tax limits and your pension... When it comes to pensions, many members can pay into the scheme without ever having to worry about the size of their total pension pot, or how much their pension is growing year on year. But there are two key limits which affect some members, and these are the lifetime allowance and the annual allowance, so we are featuring them here in case they become an issue for you. Lifetime allowance In the March 2015 Budget the Government announced that the lifetime allowance reduces from its current limit of 1.25 million to 1 million from 6 April And from 6th April 2018 the lifetime allowance will increase annually in line with inflation (the Consumer Prices Index) so it maintains its value in real terms. To soften the impact of the reduction, new protections for pension savings already over 1 million will be introduced alongside this. At the time of writing this article, the details of these protections have yet to be released. What is lifetime allowance? Lifetime allowance is a limit on the total value of your pension savings that you can have without triggering an excessive benefits tax charge. This includes: Your benefits in the LGPS, and Any pension benefits you may have in other tax-registered pension arrangements. But it does not include: Most State pensions and dependant s pensions. members will not If the value of your pension benefits when they come be affected by the into payment are more than the lifetime allowance, you lifetime will have to pay tax on the excess benefits. allowance. Am I likely to be affected by the lifetime allowance rules? No, most members are unlikely to be affected by lifetime allowance, but we have shown the formula for working out the value of your benefits in case you want to check. 12 Pension Power June 2015

13 How do I work out the value of my pension savings to test against the lifetime allowance? The method used to work out the value of your pension savings in the LGPS with GMPF is as follows: Pension x 20 + Lump sum (if applicable) + AVCs (if applicable) When are my pension benefits tested? Pension benefits are tested against the lifetime allowance when your benefits are brought into payment. With the current lifetime allowance limit of 1.25 million the level of pension savings is equivalent to a pension of 46,875 a year if you take the maximum 25% tax free lump sum. With a lifetime allowance limit of 1 million the level of pension savings is equivalent to a pension of 37,500 a year if you take the maximum 25% tax free lump sum. How do I test my GMPF pension savings against the lifetime allowance? You can check if you are close to or exceed the lifetime allowance limit with your GMPF pension savings by looking at the values in your pension statement which will follow later in the year. As well as your GMPF pension savings, if you have pension benefits in other pension arrangements you will need to add up your pension savings and how much you have across all your pension arrangements. Where can I find out further information? For more details about lifetime allowance please use the A-Z search facility in our website at: or you can visit the HMRC website at: Pension Power June

14 Tax limits and your pension... Annual allowance What is the annual allowance? Annual allowance is a limit on the total amount each year that you can either... Pay into a defined contribution pension scheme, or Build up in a defined benefit pension scheme As the Local Government Pension Scheme is a defined benefit pension scheme, it is the amount you build up (or pension savings) which applies. How are my pension savings assessed against annual allowance? We calculate the increase in your pensions savings over the year from 1 April to 31 March using a formula provided by HMRC. The increase in your pensions savings is then measured against the annual allowance, which is currently 40,000. Am I likely to be affected by the annual allowance rules? The annual allowance will not affect most members because the value of their pension savings will not increase by that much. However, you might be affected if you are a very high earner, a long serving member who receives a significant pay increase or make substantial additional contributions (such as APCs or AVCs). How will I know if I exceed the annual allowance? We will automatically write to you if your LGPS pension savings with GMPF exceed the annual allowance limit in any year. However, we will only know if you have breached the annual allowance after the event. You should therefore consider whether you are likely to breach the annual allowance in the year to 1 April 2016 (for further details see I think I may exceed the annual allowance where can I find out more?) What if I exceed the annual allowance? If your total pension savings are greater than the annual allowance, you may have to pay a tax charge. This depends on whether you have any unused allowances from previous years that you are able to carry forward. If you have used up all your allowances and have a tax charge to pay, you may be able to ask GMPF to pay the charge on your behalf and in turn we will 14 Pension Power June 2015

15 reduce your benefits. This is known as the scheme pays facility. I think I may exceed the annual allowance where can I find out more? Further details about the annual allowance can be found on our website: members/limits/annual.htm Here you will find details of how we work out pension savings, including a worked example, details of how unused allowances can be carried forward from year to year (including a link to the HMRC calculator), further details about the scheme pays facility and answers to many FAQs. We also have an online calculator to help you estimate your pension savings in 2015/16: members/limits/annual/ calculator.htm In the meantime, this example may help... Example Mike is a long serving member and he earns 45,000 a year. He then gets promoted and his salary increases to 60,000 a year. Mike s pay rise also increases the pension that he has built up in the Fund. Using the formula prescribed by HMRC his pension has increased in value by 100,000 over the year. However, the annual allowance is only 40,000, therefore he has exceeded this by 60,000 (i.e. 100,000-40,000). He has unused allowances from the previous three years (which is as far back as the HMRC will allow us to take into account), which reduces the excess to 30,000. Mike then has to pay a tax charge on this based on his marginal rate of tax. This is 40% and so the tax charge comes to 12,000. Mike doesn t pay AVCs, but if he had the tax charge would have been greater. So if you are a longer-serving member and expect to receive a significant pay increase, please consult our website for more information about the annual allowance. Very high earners should also note that you can breach the annual allowance without receiving a substantial pay increase Pension Power June

16 Change to rules for members who opt out then later rejoin Pension Power June 2015 If you opt out of the scheme, one of your choices is deferred benefits. This is where you leave your benefits on hold with us, to draw at a later date, and it is an option as long as you ve been a member for two years or more. If you opt out in future, and choose deferred benefits, then you will normally not have the right to combine those deferred benefits with your new active pension account if you rejoin. The only exception is if you are a member for more than one job (we call this having concurrent employments) and just opt out from one of them. Common sense approach to paying childrens pensions Some of our pensioners are no longer able to manage their own affairs, due to a health problem such as dementia. So the rules already allow us to pay their pension to another person, on their behalf. We also pay pensions to dependant children and in many cases they too are incapable of managing their money and other affairs, simply because of their age. But the scheme rules didn t specify what we should do in such cases, so for some time we had been taking the same common sense approach to paying childrens pensions too. The recent amendments to the scheme rules now formally allow us to do this.

17 Pension fund in the fast lane On our website you can find our annual report, which includes details of GMPF s investment performance, and examples of the types of things we invest in, such as Ford Motor Company. Since the 2014 report was published we have: Taken on around 56,000 extra members, largely due the fact we are now the one fund for probation staff up and down the country Taken on an extra 3 billion worth of assets for the same reason. As of a result of that, and our investment performance, at 31/3/2015, GMPF was worth over 17 billion. Did you know? As well as investing in equities (in other words holding stocks and shares in UK and overseas companies) we also invest in other areas such as property, and private equity - offering financial backing to things like management buyouts. An example of this type of activity from last year s report was the 300 million acquisition of iconic footwear brand Dr. Martens by one of our private equity partners Permira. Go to publications.htm to find this year s annual report, which is due out in September. Reductions in hours due to ill health If you reduce your hours due to a medical condition, then the same condition leads to you retiring on ill health on tier 1 or tier 2, we have to work out your benefits using the pay you would have been on, had you not reduced your hours. This has to be certified by an approved doctor. A recent change in the rules brings into line the position for death in service... If you reduce your hours due to a medical condition, then the same condition leads to you dying in service, we will use the pay you would have been on to work out the death lump sum, and any survivors pensions due. Pension Power June

18 This year s pension statements As usual, we will be sending out pension statements later this year. Last time round, the scheme rules told us not to forecast future benefits, as part of the switchover from a final salary to a career average scheme. But this year, we are back on track, so we will be showing both current values and an estimate of future values as well. In the new career average scheme which has been running for just over 12 months now, your pay each year actually sets your benefits for that year. So it s never been more important that your employer gives us an accurate pay figure for you. So when you get your statement, if you think the career average pay is wrong, please do query it with your employer as soon as possible. If you re still not satisfied, you do have the right of appeal. Short term contracts - joining the scheme For anyone with a contract of employment of less than 3 months, there s a slight change in the rules affecting the date they can join (as long as they are eligible)... If they ask to join the scheme, they will be brought into the scheme from the beginning of the next available pay period rather than from the date of their election to join. 18 Pension Power June 2015

19 Keeping your house in order On page 7 we mention the lump sum life cover you have as a member... This means that if you die in service we will normally pay out a lump sum of three times your pay. But have you thought about who this lump sum would go to if you died? There s an easy way of letting us know your wishes, and that s by filling in a lump sum nomination form. Even if you have already filled in a form, please do remember to keep it up to date - this is especially important if your circumstances change, or the person you ve nominated has died. If you want to change a nomination, all you need to do is fill in a new one, and that replaces any earlier ones. If you don t fill in a nomination form, we will still pay out the lump sum, but we will use our discretion to decide who to pay it to - normally a spouse, partner, and so on. But it s far better to let us know your wishes. The quickest way of getting your lump sum nomination form is to download it from our website, or you can ring our helpline Do we have your correct address? On the subject of housekeeping, do please tell us if you move house or if this newsletter didn t come to the right address. The best way of doing this is by using the contact us page of our website. Alternatively you can phone us, write in, or call in. Thank you. Pension Power June

20 Can we help you? Here are the ways you can find out more or get in touch with us. If you do contact us, please quote your National Insurance number. Please let us know if you move house or if this didn t come to the right address... Visit our website to find out more or to contact us by Or call our friendly helpline on: Or call in at our offices: GMPF, Concord Suite, Manchester Rd, Droylsden, M43 6SF.