Retirements
This section of the website provides guidance on retiring from the Local Government Pension Scheme.
Please follow the links below to find out more about how retirement benefits are calculated and when they can become payable.
How are retirement benefits calculated?
When can benefits become payable?
Conversion of annual pension to lump sum
Retirement on grounds of redundancy or efficiency
Capital costs of early retirement (excluding ill-health)
Ill-health retirement capital costs
What information is required?
The service standards require the employing authority to notify the scheme administrators of a retirement within 5 days of the date of retirement at the latest. The details that must be completed in Form LGS15C (or a different form as agreed between the Employing Authority and the Scheme Administrator) are as follows:
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Employer name
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Pay reference
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Post Number
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Surname
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Initials
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Title
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Home Address
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Email Address
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National Insurance Number
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Date of Birth
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Partnership Status
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Job Title
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Date of Withdrawal from the Scheme
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Whether employment has ended or member has opted out of scheme
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Reason For Leaving or Withdrawal
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Amount of Augmented Service to be awarded at the Employer's Discretion
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Whether Benefits are to be Released Early
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Whether Capital Cost Implications have been Understood
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Final Pay (best of the last 3 years) (Actual and FTE if Part-Time)
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Annual Pay on Day of Leaving (Actual and FTE if Part Time)
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Whether member has had a reduction in FTE pay during the last 10 years
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Whether the member has ever been issued with a Certificate of Protection of Pension Benefits
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Last Contractual Hours Per Week
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Full Time Equivalent Hours
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Last Contractual Weeks Worked Per Year
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Whether Term-time
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Average part time hours for year of leaving (where applicable)
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Final 2 years' pension contributions
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Final 2 years' NICO Earnings (only required where an entitlement to a refund of contributions exists)
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Was the member paying AVCs?
The notification must be signed and dated by an authorised signatory.
It is important to note that the service standards to members states that retirement lump sums will be paid within 30 days of retirement. It is essential that the above information is supplied in a timely manner in order to achieve this requirement.
How are retirement benefits calculated?If you have become a member since 1 April 2008...
If you became a member of the LGPS for the first time on or after 1st April 2008 your benefits will be calculated as follows:
Annual Pension: Scheme Membership ÷ 60 x Final Pay
Lump Sum NIL (with an option to convert part of your pension into tax-free cash).
In addition a pension will be paid to your surviving spouse, nominated cohabiting partner or civil partner if you die first. This will be calculated as:
Contingent partner's pension: Scheme Membership ÷ 160 x Final Pay
If you were member before 1 April 2008...
If you have membership of the LGPS that dates back to before 1 April 2008 your benefits will be calculated using 2 different formulae.
For membership prior to 1 April 2008:
Annual Pension: Scheme Membership ÷ 80 x Final Pay
Lump Sum: Scheme Membership ÷ 80 x Final Pay x 3
In addition a pension will be paid to your surviving spouse or civil partner if you die first. This will be calculated as:
Contingent Spouse's Pension: Scheme Membership ÷ 160 x Final Pay
Contingent Civil Partner's Pension: Scheme Membership from 6 April 1988 to 31st March 2008 ÷ 160 x Final Pay
EXAMPLE, take a member with 20 years of membership, 10 years pre April 2008 and 10 years post March 2008, and a final pay of £20,000. His benefits will be calculated as follows:
Annual Pension
10 / 80 x £20,000 £2,500
10 / 60 x £20,000 £3,333.33
Total Pension
£5,833.33
Lump Sum
10 / 80 x £20,000 £7,500
Contingent Partner's Pension
20 / 160 x £20,000 £2,500
Please note that a Spouse's, Nominated cohabiting Partner's or Civil Partner's pension is only payable if you die before your husband, wife, cohabiting partner or civil partner and that the term Civil Partner relates to a same sex partner with whom you have registered a Civil Partnership. If you have nominated a cohabiting partner or you have a civil partner, the contingent partner's pension will be based on your membership from 6th April 1988 only.
Your benefits may be calculated slightly differently if you are:
· A man with membership before 1st April 1972;
· A woman with membership before 6th April 1988;
If you are a married man with membership prior to 1st April 1972, your benefits may be calculated slightly differently. Prior to that date a widow's pension was paid for by a "2/80ths" reduction to your retirement lump sum. It was possible to pay extra contributions to avoid this reduction but if you did not pay these additional contributions your service up to 31 March 1972 will be reduced to 89% of its actual length. For example, if you had membership from 1 April 1971 to 31 March 1972 (1 year) it will only count as 325 days (89% of 365). This will effect the calculation of both your pension and your lump sum.
If you are a female scheme member your contingent spouse's pension may only be based on your membership from 6th April 1988 onwards. Your employer has discretion to allow your spouse's pension to be based on your membership before that date (back to 1 April 1972) and they should have a policy statement setting out how they intend to use that discretion available to them under the Scheme regulations. If for any reason you only wish your spouse to receive a pension based on membership from 6th April 1988 you have a right to elect to take that option.
When can benefits become payable?
Retirement benefits can become payable due to a number of different circumstances. The general principle in calculating a scheme member's yearly pension is 1/80th of final pay for each year (and part year) of scheme membership up to 31 March 2008 and 1/60th for each year and part year from 1 April 2008. In addition to the pension a tax free lump sum retirement grant will also become payable calculated at a rate of 3/80ths of final pay for each year (and part year) of scheme membership up to 31 March 2008.
However, this calculation may vary in respect of male employees with membership before 1 April 1972 and female employees with membership prior to 6 April 1988.
Prior to the introduction of the LGPS Regulations 1997, married male scheme members provided for a widow's pension in respect of pre 1 April 1972 membership by suffering a 2/80ths reduction in their lump sum retirement grant for each year of membership prior to that date. The 2/80ths reduction could be avoided by paying additional contributions. This facility no longer exists and any married male scheme member who had previously elected to pay additional contributions had to re-elect, before 1 April 1998, to continue paying them after 31 March 1998. Where an election was not made, any pre 1 April 1972 membership not purchased now counts at a rate of 89% of it's actual calendar length.
Similarly, should a currently unmarried male scheme member, who has pre 1 April 1972 membership, become married, his pre 1 April 1972 membership will be converted to 89% of it's actual calendar length.
An employer discretion under the LGPS (Transitional Provisions) Regulations 1997 was to deem that all female scheme members with membership between 1 April 1972 and 5 April 1988 had made an election to provide for a widower's pension in respect of that membership. Administrators will need to check the policy decisions made by their employing authority in order to determine the potential benefits payable to a scheme member.
Retirement benefits become payable from a scheme member's Normal Retirement Date (NRD) providing the member has at least 3 months' membership of the LGPS or has transferred in rights from another pension scheme or arrangement. The NRD is one of the following:
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The day before the member's 65th birthday;
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Age 60 or over (although benefits may be actuarially reduced);
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An age between 55 and 59 inclusive with the agreement of the employer to retire early (although benefits may be actuarially reduced);
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The age of 55 or over where retiring on the grounds of redundancy or efficiency;
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A date from which the member becomes too ill to continue working regardless of age.
An employee could also continue to work beyond the age of 65 and remain in the Scheme right up until 2 days before his 75th birthday.
Early Retirement Reductions
The actuarial percentage reductions from the age of 55 to 65 are as follows:
Percentage Reduction
|
Period Remaining (years) |
Annual Pension |
|
Lump Sum |
|
|
Male |
Female |
All members |
|
0 |
0 |
0 |
0 |
|
1 |
6 |
5 |
2 |
|
2 |
11 |
10 |
5 |
|
3 |
16 |
15 |
7 |
|
4 |
20 |
19 |
9 |
|
5 |
24 |
23 |
12 |
|
6 |
28 |
27 |
14 |
|
7 |
32 |
30 |
16 |
|
8 |
35 |
33 |
18 |
|
9 |
38 |
36 |
20 |
|
10 |
41 |
39 |
22 |
For example, if a male scheme member retired at age 60, a full 5 years before meeting the 85-year rule, his annual pension would be reduced by 24% and his lump sum by 12%.
These actuarial percentages were amended in 2006 and in general are now less severe then previously. This is due partly to life expectancy increasing.
Where the period remaining (i.e. the period between date of retirement and the date the 85-year rule is achieved) is not an exact number of years, the percentage reductions are interpolated accordingly. For example a female scheme member retiring at age 62 years and 6 months, who would not meet the 85-year rule until the age of 65, is retiring 2.5 years early. The percentage reduction, in respect of the annual pension, for retiring at age 62 (3 years early) would be 15% and for age 63 (2 years early) 10%. The difference between the two is 5% of which only 6 months is applied. Therefore the total percentage reduction is 12.5% (10% (2 years) plus 2.5% (6 months)). The same applies to the lump sum, the total reduction being 6%.
The actuarial percentage reductions are set by the Government Actuary's Department (GAD).
Conversion of Annual Pension to Lump Sum
A further option available to active and deferred members since the introduction of the LGPS (Amendment) Regulations 2006 from 6th April 2006, is to convert pension into lump sum at a standard conversion rate of £12 for every £1 of pension given up.
To calculate the maximum lump sum available the post-commutation figures have to be taken i.e. the pension and lump sum after the conversion from pension to lump sum has taken place. The maximum lump sum is also limited to one-quarter of the capital value of accrued rights in accordance with guidance issued by the Government Actuary.
The following formula can be used to calculate the maximum additional tax-free lump sum cash:
((P1 - (LS1 x 3/20)) x 30/7 = LS2
Where:
P1 = Pre-commutation pension
LS1 = Pre-commutation lump sum
LS2 = Maximum additional lump sum
This formula only works where the original lump sum is exactly 3-times the annual pension (which is for the vast majority of cases) but a more complex calculation will be needed where a member has Additional Voluntary Contributions or any periods of membership for which pension only, and not lump sum, counts. By commuting benefits, the member does not reduce any subsequent spouse's, civil partner's or dependants benefits that may become payable.
Important Note - to be able to commute pension into lump sum the member must make an election before the date that their benefits become payable. Therefore, the pension administrators need to be aware of retirements before they occur and sufficiently in advance to notify the member of their tax-free cash options and for the member to consider their options and make an informed decision.
Flexible Retirement
Regulation 18 of the LGPS (Benefits, Membership & Contributions) Regulations 2007 allows a scheme member who has attained the age 55 to draw all or part of their retirement benefits even though they have not retired providing:
i. The employer consents;
ii. There has been a reduction in hours, or
iii. There has been a reduction in grade.
Benefits taken under the flexible retirement provisions will be subject to reduction if drawn earlier than the member's earliest retirement age. However, the employer can choose to waive all or part of the reduction providing they pay the extra strain costs arising to the Pension Fund.
Retirement on the grounds of redundancy or efficiency
Benefits are paid immediately to a scheme member who is aged 55 or over with at least 3 months membership of the LGPS (or less than 3 months having previously accepted a transfer of former pension rights into the scheme) and who is made redundant or terminates employment in the interests of the efficient exercise of the service. The employer's consent would automatically be given as any such retirement is a decision of the employer and not of the employee. Benefits are calculated in the same way as normal retirement benefits and there are no actuarial reductions applied.
Ill health retirement
Regulation 20 of the LGPS (Benefits, Membership and Contributions) Regulations 2007 says that if an employing authority determines, in the case of a member who has at least three months' total membership to terminate his local government employment on the grounds that his ill health or infirmity of mind or body renders him permanently incapable of discharging efficiently the duties of his current employment and that he has a reduced likelihood of obtaining gainful employment (whether in local government or otherwise) before his normal retirement age, they shall pay him ill health benefits.
Before making a determination, an authority must obtain a certificate from an independent registered medical practitioner qualified in occupational medicine.
Gainful employment means paid employment for not less than 30 hours per week for a period of not less than 12 months.
Qualified in occupational health medicine means that the independent registered medical practitioner must hold a diploma in occupational medicine (D Occ Med) or an equivalent qualification issued by a competent authority in an EEA State (which has the meaning given by the European Specialist Medical Qualifications Order 1995 (S.I. 1995/3208) or be an Associate (AFOM), a Member (MFOM) or a Fellow (FFOM) of the Faculty of Occupational Medicine or an equivalent institution of an EEA State.
There are now three tiers of ill health retirement and each employing authority has to determine which band each case should fall into.
Tier 1 - the employer determines that there is no reasonable prospect of the member obtaining gainful employment before his normal retirement age and so his benefits will be enhanced by 100% of the prospective membership to age 65.
Tier 2 - the employer determines that, although the member cannot obtain gainful employment within a reasonable period of leaving local government employment, it is likely that he will be able to obtain gainful employment before his normal retirement age and so his benefits will be enhanced by 25% of the prospective membership to age 65.
Tier 3 - the employer determines that the member will obtain gainful employment within a reasonable period (defined as 3 years) and benefits built up to date can be released, unenhanced but have to be reviewed by the employer within 18 months and again after 3 years. The member will be held responsible for notifying his former employer of when he obtains further employment. If after 3 years the member is still incapable of gainful employment, his case can be reviewed by a qualified occupational health doctor who determines that he should be 'upgraded' to a tier 2 ill health case.
Further guidance on Ill-Health retirement can be found by following the links below:
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Document |
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Guidance on the application of the LGPS ill health regulations
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Supplementary Guidance for IRMPs qualified in occupational health medicine
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|
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Capital costs of early retirement (excluding ill-health retirement)
Where a scheme member retires early with the immediate entitlement to benefits, there is a cost implication to the pension fund and the employer. The cost of any augmented benefits is obvious but there is also a "hidden" cost to retiring a scheme member prior to normal retirement age.
A report by the Audit Commission in 1998, highlighted the fact that Pension Funds were being penalised for the cost of early retirements. This was due to the fact that benefits would be paid over a longer period of time to a retiring member as well as the effects of lost investments and income (employee and employer contributions). All of this has led to administering authorities being audited and procedures being adopted in order to ensure that pension funds are not disadvantaged by employing authorities policies regarding the early retirement of staff.
A national approach has now been adopted for calculating the capital cost of early retirement. The principal behind the calculation is to apply early retirement factors to the accrued pension and then capitalise the benefits by using augmentation factors in accordance with GAD guidance.
Where an employer grants additional augmented years under Regulation 12 of the LGPS (Benefits, Membership and Contributions) Regulations 2007, there are three elements to the cost:
i. The capital or hidden cost of releasing statutory benefits early;
ii. The augmentation cost of providing additional pension as a result of granting augmented years;
iii. The cost of any additional lump sum awarded as a result of the augmented years being granted.
Administrators should always seek the advice of the administering authority or the pension scheme administrators when determining the capital cost of early retirement.
We have produced a briefing note providing further information on early retirement costs which can be downloaded here
Ill Health Retirement Capital Costs
In all cases of ill-health retirement a capital cost is calculated. However this cost is not charged to the employer. It is instead assessed as part of the triennial actuarial valuation of the Fund and is taken into account when determining the contribution percentage that the employer will pay.
