Taking your pension and paying extra

Overview

In this section you can find out what happens if you were paying extra when you take your pension. These rules apply if you:

leave your job voluntarily and take your pension immediately
take flexible retirement
leave due to redundancy or business efficiency when you are over age 55.

The sections below set out what happens depending on what type of extra contributions you have paid.

Please read the Ill health section if you are paying extra and retiring due to ill health.

If you are leaving the LGPS but you are not taking your pension straight away, find out what happens if you are paying extra in the Leaving before retirement section.

Additional Pension Contributions

You may have bought extra pension by paying Additional Pension Contributions (APCs). If your employer has met some or all the cost of buying the extra pension, these are known as Shared Cost APCs. Any reference to APCs in this section includes Shared Cost APCs. Any references to payments you have made includes payments made by your employer.

You may have made regular payments or paid a one-off lump sum. When you take your pension, this will include the extra pension that you have paid for.

If you choose to retire and take your pension before your Normal Pension Age, or you are retired on redundancy or business efficiency grounds before your Normal Pension Age, the extra pension you have bought will be reduced for early payment.

If you take your pension after your Normal Pension Age, the extra pension that you have bought will be increased because it’s being paid later.

You can choose to swap some of the extra pension you have bought to provide a tax-free lump sum in the same way that you can swap your main LGPS pension. Your pension fund will let you know about your options and the maximum lump sum you can take.

Flexible retirement

If you take flexible retirement, you can generally choose whether to take any extra pension you have bought by paying APCs. You must either take all or none of the extra pension. You cannot take part of it.

If you are still paying APCs when you take your pension and you decide to take the extra pension you have bought, the APC contract will stop. You will be able to take out a new APC contract. You will only be able to pay regular contributions if it is at least a year before your Normal Pension Age. You may be able to start a new Shared Cost APC contract, but this depends on your employer’s discretions policy.

Added Regular Contributions

When you take your pension you will be credited with the extra pension that you have bought by paying Additional Regular Contributions (ARCs). This will increase the value of your LGPS pension.

If you choose to take your pension before age 65, or you are retired on the grounds of redundancy or business efficiency before age 65, the extra pension you have bought will be reduced for early payment.

If you take your pension after age 65, the extra pension you have bought will be increased for late payment.

You can choose to swap some of the extra pension you have bought for tax-free lump sum in the same way that you can swap your main LGPS benefits.

Flexible retirement

If you take your benefits on flexible retirement, you can generally choose to take all or none of the extra pension you have bought. You cannot choose to take just part of it. If you are paying extra contributions when you flexibly retire and you choose to take the extra pension, your ARC contract will stop. You will not be able to start a new ARC contract. See Paying more for information about the other ways that you can pay extra in the LGPS.

Added years

If you are paying extra contributions to buy membership or added years, you will be credited with the extra years of membership that you have paid for. This extra membership is included in your membership built up in the LGPS before 1 April 2015. See the section on How your pension is worked out to find out more about how that extra membership will increase your pension benefits.

If your benefits are reduced due to early payment when you take them, then the benefits related to the added years you have bought are also reduced. The reduction is based on the Normal Pension Age that applies to the benefits you built up before 1 April 2015.

If you take your pension after age 65, the benefits related to the added years that you have bought will be increased because they are being paid late.

If you retire due to redundancy or business efficiency and you have an ongoing contract to buy added years, you will have an opportunity to pay the remaining contributions to complete the contract.

Flexible retirement

What happens to your added years when you take flexible retirement depends on what date you elected to start the added years contract.

If you elected to start the added years contact before 1 December 2006, you will be credited with the extra years you have paid for. If the added years contract is ongoing, it will stop. The extra years will increase the value of the benefits paid on flexible retirement.

If you elected to start the added years contract after 30 November 2006, you can choose whether to take all or none of the benefits related to the added years you have bought. If you choose not to be credited with the extra years when you flexibly retire, the added years contract will continue. If you choose to be credited with the extra years of membership you have bought and the added years contract is ongoing, it will stop.

You cannot start another added years contract. See Paying more for information about other ways you can pay extra in the LGPS.

Taking your Additional Voluntary Contributions

You may have paid Additional Voluntary Contributions (AVCs) arranged through the LGPS. These are known as in-house AVCs. Your AVC contributions will stop when you stop paying into the LGPS, unless you elect to stop them earlier.

See Leaving before retirement to find out what happens to your AVC if you leave the LGPS but do not take your pension straight away.

This section covers the different ways that you can use your AVC when you take your LGPS pension. Some options are not available to all members. You can take a combination of the options that are open to you.

However, before you take your LGPS pension, you may be able to withdraw multiple cash lump sums from your AVC fund. You can do this from age 55 (or earlier on ill health). The first 25 per cent of each withdrawal is usually tax free with the remaining 75 per cent taxed as ordinary income. Speak to your AVC provider for more information.

Getting guidance

Deciding how to use your AVC plan is one of the most important financial decisions you are likely to make, so we recommend you get guidance from Pension Wise to help you decide which option is best for you.

Pension Wise is a government service from MoneyHelper that offers free, impartial guidance about your defined contribution pension options. Your AVC is a defined contribution pension that is attached to your LGPS pension.

Because it is such an important decision, your local pension fund is not allowed to proceed with your application to take AVCs until you tell them you have with either received guidance from Pension Wise or you do not wish to take it. This is a legal requirement.

Your local pension fund will offer to book a Pension Wise appointment for you when you contact them about taking your AVC plan.

Tax-free cash

If you take your AVC plan at the same time as your main Scheme benefits, you can take up to 100% of it as tax-free cash. You can do this as long as your total lump sums from the LGPS are not more than:

25% of the total value of your LGPS benefits, including the AVC plan
£268,275
£268,275 less any tax-free lump sums you have already taken from pensions.

A limit of £1,073,100 will also apply if you have received a serious ill health lump sum from a different pension scheme. This limit will be reduced by the serious ill health lump sum and any other tax-free lump sums that you have already received.

If you would like to take your AVC as a lump sum, use the Lump sum calculator to find out more about your options and whether you could also exchange part of your pension to provide a lump sum.

Use the Maximum AVC lump sum calculator to find out the maximum AVC fund you could take as a lump sum, based on your annual LGPS pension.

Annuities

You can use your AVC plan to buy one or more annuities from an insurance company, bank or building society of your choice. An annuity is a regular guaranteed income that is paid to you for life. Your chosen provider will take the AVC plan and pay you a pension in return. The amount of pension you are paid depends on:

your age
interest rates
whether you choose an annuity that includes dependants’ benefits that will be paid after you die.

Annuities offer different features which may be of interest to you, such as a guaranteed minimum payment period, improved terms if you are in poor health and annual increases to keep up with the cost of living. When you buy an annuity, you can usually take some of your AVC plan as a tax-free lump sum at the same time.

Buy a top-up LGPS pension

If you were a member of the LGPS after 31 March 2015, you can buy a top-up LGPS pension with your AVC plan. The top-up pension you buy will increase in line with inflation. You can decide whether the top-up pension will also increase any pensions payable to your survivors when you die.

If you left the LGPS before 1 April 2015 and did not take your pension immediately, you cannot use your AVC to buy a top-up pension.

Buy extra membership in the LGPS

If you elected to pay AVCs before 30 June 2005, you can use your AVC plan to buy extra membership in the LGPS. Contact your pension fund for more information if you think this option is open to you.

Defer taking your AVC plan

If you left the LGPS before 1 April 2015, you do not have to take your AVC when you take your main LGPS benefits. You can leave your AVC plan invested up to age 75 at the latest. If you do not take your AVC when you take your LGPS benefits, you will not be able to take 100% of the AVC plan as tax-free cash.

If you were a member of the LGPS after 31 March 2015, you must take your AVC at the same time as you fully retire. Different rules apply if you take flexible retirement. These are set out in the next section.

AVCs and flexible retirement

If you elected to pay AVCs before 30 June 2005, your AVC contract will end when you flexibly retire. You will have to use all of your AVC plan in one of the ways set out above when you take your flexible retirement benefits.

If you elected to pay AVCs on or after 30 June 2005, you can choose to take all or none of your AVC plan when you flexibly retire.

Local Government Pension Scheme