Freedom and Choice – Transfers from the LGPS to defined contribuiton pension schemes
In the 2014 Budget the Chancellor announced a change to the way people can take their pensions. Currently individuals who contribute to their own pension pots (known as defined contribution arrangements) have to take part of their pension pot as an annual pension (an annuity) and some tax free cash depending on the scheme or policy rules. From 6 April 2015, individuals aged over 55 with defined contribution pension savings, will be able to draw these savings as a cash amount but the amount available will be subject to income tax depending upon personal circumstances.
But how does this affect you as a member of the Local Government Pension Scheme (LGPS)?
The LGPS is not a defined contribution scheme. The options for those individuals age 55 or over who are members of LGPS are; to choose to retire on a voluntary basis with immediate access to pension benefits or transfer the pension benefits to an alternative pension arrangement.
Retiring at Age 55 from LGPS
Benefits are paid in the form of an annual pension only or a combination of a tax free lump sum payment plus annual pension. The amount of tax free lump sum is limited by rules imposed on the Scheme by HM Revenue and Customs (HMRC). Pension benefits can only be paid after leaving employment.
Transferring Pension Benefits to an Alternative Arrangement
The LGPS will be able to continue transferring pension benefits to alternative providers after 6 April 2015 where an individual opts-out of the Scheme or leaves employment. The new legislation imposes a requirement on the LGPS member though to take independent financial advice from an approved Financial Advisor before proceeding with any transfer of benefits from the LGPS. Where the transfer value exceeds £30,000 taking approved independent financial advice is mandatory. The financial advice would be at the members own cost and would need to be evidenced to the Pension Fund before any transfer to another provider can take place. For those members where the value of the transfer payment is less than £30,000 there is no requirement to take financial advice but it is strongly recommended that professional advice is sought, as prior knowledge of the amount of commission and tax charges should be understood in advance of taking any action to transfer benefits from the LGPS.
How do I Find an Independent Adviser?
An authorised independent advisor can be located by accessing one of the following websites:
Points to Note
- A transfer cannot take place of the member’s main scheme benefits where the member is within 12 months of their Normal Pension Age. This will be age 65 or the member’s new State Pension Age if greater than 65.
- Where a member has more than one LGPS benefit the transfer value amounts in total must not exceed £30,000 (compulsory financial advice).
- The value of a member’s Additional Voluntary Contribution Plan is not taken into account when deciding whether financial advice must be obtained.
- An AVC plan can be transferred independently of the member’s main scheme benefits.
- A transfer cannot be taken from LGPS where the member is an active contributing member.
- A transfer to another arrangement may incur tax charges and your financial advisor should bring this to your attention if tax charges will be incurred.