NEST or LGPS?

[PennyUK]

I have an zero hours contract in a school. In total, I earn about £300 - £800 over the course of the year, depending on the number of hours.

I've been there long enough that I could join the pension scheme, and the options are NEST (National Employment Savings Trust) or the Local Government Pension Scheme. I think the better scheme is the LGPS, although it will be a lot longer before I can take it - but just wanted to check there wasn't anything else I hadn't considered.

The bulk of my retirement income will come elsewhere, so this is just an extra.

LGPS is a defined benefit scheme: on my salary, I'd pay in 5.5%, which is made up by employers' contributions, and at retirement age (15 years time) I would be able to get 1/49 of my income per year, index linked from when I pay it in.

So if I earned £400 this year, I'd pay in £22 and get (inflation adjusted) 400/49 = £8.16 per year from about 2033 onwards. Next year, if I earned a further £500, I'd pay in £27.50 and get back £10.20 + 8.16 = £18.36 (+inflation) per year.

NEST is a defined contribution scheme, which invests in stocks and shares etc: I'd pay in 5%, employer would pay in 3% and there's also tax relief. I could access it from 55 (ie three years), and would have the normal options of drawdown etc. But the amount would be not very much.

If I earned £400, I'd pay in £20, made up to £25 with tax relief. The employer would pay in a further £12, but there would be a fee of 1.8% on my contribution (about 45p) and an ongoing charge of 0.3% on the whole pot. So the pot would start off at £36.55 and grow with the stock market. The second year at £500, I'd pay £25, with £6.25 tax relief and £15 employer contrib = £46.25 + 36.55. If I used a 4% withdrawal rate that would be £1.46 after one year in the scheme and £3.12 after two.

My gut feeling is that the LGPS is the better option: I have to wait 15 years, but the income is guaranteed and inflation adjusted from now on. I have a lot of shares, but relatively few bonds, and this would be in the bond part of my portfolio. The NEST scheme is effectively a much shorter term investment linked to the stock market, but I have plenty of other shares. It might do better over time, but it will be a 'cautiously' invested fund. There may be other options for a £20 investment, but I'm already using ISAs and regular savers.

Anyway, is there anything I haven't considered?

Websites: https://www.nestpensions.org.uk/schemew ... nsion.html and https://www.lgpsmember.org/arm/already-member-how.php.

PS I haven't been here for a while, but if anyone knows what they are talking about, its a Fool.

[OLTB]

Hi PennyUK

In my opinion, with your other assets that you allude to, then a LGPS could be a sensible balancing income without the associated risks inherent with your other share investments. My other thought though is would this be a meaningful income to you when taking into account your share values/income? I don't know the value or income generating potential of these shares (if all are indeed shares), but if I take an extreme example and suggest that your shares generate £50,000 of income each year and your LGPS would generate (eventually) £500 p.a. (just an example, I haven't worked out what it would do) then the LGPS, or 'bond' income element of your income portfolio, would be in the region of 0.99% of the overall income (so not that significant to make a difference perhaps?).

An index-linked guaranteed income is a valuable option, but perhaps the State Pension could be thought of as your 'bond' element (assuming you have made the necessary NI contributions and with an income of £800 p.a., you may need to make Class 3 voluntary contributions to top-up to the 35 years for a full State Pension - you need 10 years of contribution to get any State Pension) https://www.gov.uk/pay-voluntary-class- ... -insurance

If you paid into the NEST scheme, there should be a wide range of investment options for you. When you choose to access the funds, if the pot is valued at less than £10,000, you could take it all out under the 'small pots' legislation (25% tax-free, 75% taxable) and this might give you the freedom to use a lump sum in a more meaningful way than a relatively low income each year https://www.pensionsadvisoryservice.org ... h-lump-sum .

You should definitely pay into a scheme in my view - LGPS or NEST - as you would be getting a contribution from your employer.

As I say, just my quick thoughts - good luck!

Cheers, OLTB.

[Alaric]

When you choose to access the funds, if the pot is valued at less than £10,000, you could take it all out under the 'small pots' legislation (25% tax-free, 75% taxable) and this might give you the freedom to use a lump sum in a more meaningful way than a relatively low income each year

Would that be available under LGPS as well?

If so, it's a simple comparison as to which scheme gives the higher lump sum at some future retirement date.

[OLTB]

When you choose to access the funds, if the pot is valued at less than £10,000, you could take it all out under the 'small pots' legislation (25% tax-free, 75% taxable) and this might give you the freedom to use a lump sum in a more meaningful way than a relatively low income each year

Would that be available under LGPS as well?

If so, it's a simple comparison as to which scheme gives the higher lump sum at some future retirement date.

Yes, that should be allowed as well as long as the value is <£10,000 (PennyUK - you will need to multiply the pension you will receive from the LGPS by a factor of 20 to get the capital value of the pension scheme to see if it comes under £10,000 - if the pension is less than £500 p.a. you should be ok). If the value is more than £10,000 when you choose to encash then you still may be able to take it as a lump sum as long as the total of all your other pension schemes are valued at less than £30,000, under the trivial commutation rules.

Cheers, OLTB.