NILGOSC

 

Circular 03-2006

 

 

Dear Colleague

 

Changes to the Local Government Pension Scheme and New Tax Regime

 

In Circular 02/2006, we informed you that a new tax regime would come into effect from 6 April 2006, and that amendments to the Local Government Pension Scheme were expected to incorporate some of the flexibilities allowed under the new tax rules. The Local Government Pension Scheme (Amendment) Regulations 2006 were made in England and Wales on 29 March 2006, and while the Northern Ireland Regulations have not yet been amended, NILGOSC has been given powers to anticipate the changes.

 

A brief summary of the main changes follows. All references to the Regulations are to the Local Government Pension Scheme Regulations (Northern Ireland) 2002.

 

From 6 April 2006

 

  1. A member who retires (with entitlement to the immediate payment of benefits) on or after 6 April 2006, can elect (in writing to NILGOSC) before any benefits become payable to increase his retirement grant by commuting part of his pension at a rate of £12 for each £1 of annual pension surrendered. The maximum tax free lump sum permitted is 25% of the capital value of his accrued benefits. In simple terms, the capital value of accrued benefits is (pension X 20) + (scheme retirement grant) + (value of AVC fund), though account may need to be taken of pension benefits in other arrangements outside the LGPS. Such a surrender of pension does not affect the spouse’s or dependants’ pension payable on death. In effect, this will enable members to take a substantially bigger tax free lump sum (almost double) than that previously allowed under the Regulations, although pension will be smaller as a result. As the member must elect to receive the bigger lump sum before his benefits become payable, we have had to re-design the LGS51 Claim Form, which can be downloaded from our website, www.nilgosc.org.uk . The new form is currently being printed and will be available shortly. If you are unable to download from the Internet, please telephone Jim Robinson on 028 90764198 ext 224 or email jim.robinson@nilgosc.org.uk.

 

  1. Employees now become members of the Scheme at any age up to their 75th birthday (unless they opt out in writing, or are casual, in which case they must opt in).

 

  1. The only limit on total amount of benefits is now the Lifetime Allowance, set at £1.5 million for the 2006/07 tax year and rising to £1.8 million in 2010/11. Therefore, there is no longer a 15% limit on contributions (a member can pay the full amount of his salary in pension contributions if he wishes), the earnings cap (£105,600 in 2005/06) no longer applies to members who joined on or after 17 March 1987, and pensionable service is no longer limited to 40 years (45 years at 65 for pre-1989 joiners).

 

  1. Since all contributory membership can now be counted for pension purposes, Regulation 14 (employer’s discretion to waive or reduce member’s contributions when 40 years LGPS membership completed) is deleted. In the case of members who are currently enjoying a contribution holiday at their employer’s expense, contributions should commence again from 6 April 2006. Any contributions which an employer has paid on a member’s behalf may be recovered from the member.

 

  1. If a member works beyond age 65 and does not draw his pension, benefits will be actuarially increased when they do come into payment.

 

  1. Benefits must be taken at age 75, even if employment continues beyond that age.

 

  1. A member who continues to be employed by a Scheme employer is only entitled to receive his benefits without reduction payable from his NRD if his employer consents.

 

  1. A member who is aged 50 or over and who reduces his hours or his grade, can elect to receive payment of his benefits (on a reduced basis, if under 65). The employer can choose to waive, in whole or in part, any reduction on payment of the actuarial cost. Any benefits payable under this provision are not subject to abatement.

 

  1. Children’s pensions which come into payment on or after 5th April 2006 must cease on the child’s 23rd birthday (except incapacitated children) even if full-time education is not complete.

 

  1. Regulation 54 (Augmentation) – the limit of 40 years total membership is removed (limits of lesser of 6 2/3 years or service to 65 remain). Therefore, a 60 year-old with 42 years service could now be granted 5 added years.

 

  1. Members are permitted to purchase a maximum of 6 2/3 added years, but there is no limit on contributions (for practical purposes, as the member can pay up to the full amount of his salary) or maximum total service. For example, a member could purchase 6 2/3 years even though his potential service to 65 is 47 years.

 

  1. Regulation 60 is deleted – members can no longer elect to convert lump sum to pension.

 

  1. Regulation 61 is deleted – conversion  pension to lump sum is now subject to the rules outlined in paragraph 1 for all members.

 

From 1st October 2006

 

14. The 85 year rule is removed. Therefore, if a member retires voluntarily before age 65, his benefits are subject to an actuarial reduction, but there is some transitional protection for members who joined the scheme before 1 October 2006 (existing members).

 

15.  Existing members who will be aged 60 or more on 31st March 2013 will not suffer any reduction to benefits accrued before that date if they retire early under 85 year rule provisions. (But, for example, if a member who is aged 60 exactly on 31 March 2013, decides to work a further 3 years and retire at age 63, the benefits accrued between 31 March 2013 and 31 March 2016 would be reduced because they are being paid before age 65).

 

  1.  Existing members who will be aged under 60 on 31 March 2013 will not suffer any reduction on service before 1st October 2006 if they retire before age 65, having met the rule of 85.

 

  1. Service credits (transfers, purchases, augmentation) instigated before 1 October 2006 will count as service before that date.

 

The foregoing list is not exhaustive, but is intended to help employing authorities identify the areas in which they will need to alter their current employment practices and possibly the information or advice they give members about retirement or other pension matters. We are still getting to grips with the detail of the new regulations and the “tax simplification” changes ourselves, but will endeavour to answer any questions you may have to the best of our ability. However, you should be aware that there is still a number of grey areas which have yet to be resolved with regard to the detailed implementation of the changes. We will keep you informed of future developments and we will be informing all members of the changes by means of a mailshot in due course.

 

 

Yours sincerely

 

Lynda White

 

L M White (Mrs)

Pensions Manager