Pension basics

So, we have to start off somewhere and this section starts you off nice and easy.

What is a pension?

Put simply, a pension is a source of regular income to live on when you stop working (retire).

What is a tax-free lump sum?

Pension schemes, whether they are work based or personal pensions, allow members to take part of their benefits as tax-free lump sum when they retire. The Local Government Pension Scheme (LGPS) can pay a tax- free cash lump sum on retirement. You can usually take up to 25% of the amount built up in any pension as a tax-free lump sum.

Your period of membership in the Scheme will decide whether this is paid automatically or if it’s paid through giving up some of your pension.

What is a Local Government Pension Scheme (LGPS)?

This is a tax approved defined benefit occupational pension scheme. The amount of pension you earn in a scheme year is worked out each year and added to your pension fund. The total amount of pension in your pension fund is revalued at the end of each scheme year so your money keeps up with the cost of living.

The LGPS is very secure because the benefits are set out in law.

How do Career Average Revalued Earnings (CARE) schemes work?

In a CARE scheme, the pensionable pay for each year of membership is used in order to calculate a pension amount for that particular year. That pension amount is then revalued. These individual pension amounts are then added together to form the total pension payable from the scheme.

Meet Amanda…

Amanda is about to retire. She’s been a member of her employer’s CARE scheme for six years. The scheme’s accrual rate for building up pension is 1/80th for each year of membership. Amanda’s total revalued earnings are £126,000 over her period of membership of the scheme. After dividing her total revalued earnings by the six years that she was a scheme member, Amanda’s career average revalued earnings are £21,000 per year.

This means that Amanda can receive a pension of £1,575 per year (6/80 x £21,000) from the scheme.