Most of us look forward to a happy and comfortable retirement. You may wish to consider paying extra pension contributions now to boost your income in later life. There are two ways you can pay extra contributions in the LGPS. You can pay Additional Pension Contributions, Additional Voluntary Contributions or both. You can also pay extra outside of the LGPS to increase your retirement income.
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Additional Pension Contributions
If you are in the main section of the LGPS, you can pay additional contributions to buy extra pension. The most that you can buy is £7,579 of extra yearly pension. You can pay for the extra pension by paying Additional Pension Contributions (APCs) over a number of complete years or by paying a lump sum.
The cost of buying extra pension depends on your age, how much yearly pension you buy and how you choose to spread the payments. The cost of buying extra pension is reviewed every few years. If you buy extra pension by paying regular contributions, the amount you pay each pay period may change in the future.
You cannot buy extra pension if you are in the 50/50 section of the LGPS.
If you wish to buy extra pension by paying a lump sum, there are two ways that you can do this:
If you pay Additional Pension Contributions over a number of years, the regular contributions would be taken from your pay, just like your normal pension contributions. Your normal contributions and additional contributions are deducted before your tax is worked out. If you pay tax, you will receive tax relief automatically through the payroll. Tax relief is available on all pension contributions up to 100% of your taxable earnings.
The shortest period that you can spread APC payments over is 12 months. The maximum is the number of years to your Normal Pension Age. Your Normal Pension Age is linked to your State Pension age. If you are a year or less from your Normal Pension Age, you can only pay by lump sum.
Use the Extra pension calculator to find out more about paying Additional Pension Contributions and the cost to you.
Employer awards of extra pension
Your employer can award you with extra pension of up to £7,579. They can award this to you while you are an active member. They can also award you extra pension within six months of leaving your job, but only if you leave because of redundancy or business efficiency. This is a discretion. You can ask your employer about their policy on awarding extra pension.
Taking your extra pension
Any extra pension that you or your employer has paid for is attached to your LGPS benefits. The extra pension will be paid to you when you take your main LGPS pension. The extra pension is payable from your Normal Pension Age. It will generally be reduced if you take your pension early, or increased if you take it later. Different rules apply if you retire because of ill health. You can find out more about buying extra pension in the Buying extra pension – terms and conditions.
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Additional Voluntary Contributions
When you pay Additional Voluntary Contributions (AVCs), you build up a pot of money which is used to provide benefits on top of your LGPS benefits. AVCs are taken directly from your pay before your tax is worked out, so if you pay tax, you receive tax relief automatically.
All local government pension funds have an arrangement with an AVC provider that you can invest money in – an in-house AVC. The AVC provider is often an insurance company or building society. You have your own personal account and you decide how the money in your pot is invested.
You can pay AVCs if you are in the main or 50/50 section of the LGPS.
You can pay up to 100% of your pensionable pay into an in-house AVC. Your employer can also pay towards your AVC at their discretion. This is known as a Shared Cost AVC.
You can also pay AVCs to provide extra life cover. As an active member of the LGPS, you already have cover of three times your pay if you die in service. You can pay AVCs to increase this cover and to provide additional benefits for your dependants if you die in service. Any extra cover you buy will stop when you retire or leave. Not all AVC providers offer extra life cover.
Contact your pension fund for more information about paying AVCs and how to start a contract.
See Taking your pension and paying extra to find out about the different ways you can use your AVC fund when you take your LGPS pension. You can transfer your AVC to another pension arrangement. Read more about this option in the next section.
Deciding how to use your AVC plan is one of the most important financial decisions you will make. You should consider getting guidance or independent financial advice to help you when you are making your decision.
Pension Wise, a service from MoneyHelper, is a free, impartial service offered by the Government to help people over 50 understand their pension option. This includes your AVC options. You can find out more on the Pension Wise website - This link opens in a new browser window or by calling 0800 138 3944 to book a phone or face to face appointment. You can also use MoneyHelper to help you Find a retirement adviser - This link opens in a new browser window.
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Transferring your AVC
You have the right to transfer your AVC. You can do this even if you are still paying into the main LGPS scheme. You can only transfer your AVC if:
- you have stopped paying AVCs in all LGPS employments
- you are not receiving an annuity or a top-up pension bought with an LGPS AVC
- you transfer all LGPS AVC plans at the same time, if you have more than one. You do not have to transfer an AVC plan that was awarded to you as part of a divorce settlement at the same time
- if you are currently a member, or if you left the LGPS after 31 March 2014, you can only transfer your AVC before your LGPS benefits are paid to you.
If you transfer your AVC plan to one or more different pension arrangements, you may be able to use your AVC in ways that are not offered in the LGPS.
If you are thinking of transferring your AVC plan, you should be aware that scammers operate in these markets and are after your pension. The Pensions Regulator provides useful information on how to Avoid pension scams - This link opens in a new browser window.
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Other ways to increase your retirement income
Free Standing Additional Voluntary Contributions
These are similar to in-house AVCs but are not linked to the LGPS in anyway. With Free Standing Additional Voluntary Contributions, you choose a provider, usually an insurance company. You may want to consider the different charges, alternative investments and past performance when you do this.
Personal or stakeholder pensions
You can pay into a personal pension plan or stakeholder pension scheme at the same time as paying into the LGPS. With these arrangements, you choose a provider, usually an insurance provider. You need to consider their charges, alternative investments and past performance when you choose.
You may wish to obtain independent financial advice before starting any sort of additional pension savings.
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There is no limit on the amount of pension contributions you can pay. You will only get tax relief on:
- contributions up to 100% of your UK taxable earnings
- up to £3,600 if your earnings are below £3,600.
There are HM Revenue and Customs limits on the pension savings you can have before you have to pay extra tax. Most people will not be affected by these limits but if you are considering paying additional contributions you should be aware of them. You are more likely to be affected if you are a higher earner or if you pay a large amount of extra contributions in a year. See the section on Tax to find out more.
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