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This question relates to the UK LGPS.

On the surface, this seems less flexible and potentially gives less return than a private pension.

Yes, private pension pay-outs fluctuate depending on the market state when you come to retire, but unless there has been a recent crash, you will likely get more than a local government one provides.

If I might only be at a local government employer for 5 years or so, is it worth opting into the LGPS, or better to go with a private pension?

I am 30 years old but want to retire around 55. Another problem with LGPS is that you have to retire at 'normal retirement age'. This is 65 now but could be 70, 75 or more by the time I reach that age, whereas private is only 55.

  • This is fairly broad; what other savings / investments do you have right now? What are your intermediary financial goals? – Grade 'Eh' Bacon Dec 4 '17 at 14:58
  • @Grade'Eh'Bacon not sure it matters. I am just interested in what the best pension option is. Private or local government. It terms of goals. It is to retire by 55. – Cloud Dec 4 '17 at 15:00
  • It is relevant because of what you mentioned - if you feel there is a risk that a government pension wouldn't be released until you are 70+, and if you don't have any other savings/investments (and don't plan on building any apart from your pension), then you are taking a bigger risk by putting all your financial eggs in a basket you don't fully believe in. Worst case scenario - your pension isn't receivable until you are 75, and you become unable to work at 65, leaving you a 10 year gap to 'fend for yourself'. The more you have in other investments, the less this risk is. – Grade 'Eh' Bacon Dec 4 '17 at 15:11
  • @Grade'Eh'Bacon I understand. I don't have any right now, what would you advise? Could you leave an answer please? Thanks in advance, I hope! – Cloud Dec 4 '17 at 15:25
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The local government pension scheme is a "defined benefit" scheme, with the final pension being based on your earnings in each year of service (after 2014), with the benefit being "index linked" so it keeps up with inflation. For each year of service, you'll get a pension of 1/49th of your salary for that year, uprated for inflation ("Cost of Living").

Although a bit less generous than a "final salary" scheme where the final pension would be based on your final salary with the employer, these are still generally considered to be very good pensions and much better than "defined contribution" schemes where your pension ends up dependent on investment returns.

As a member of the LGPS, a substantial part of your pension will be funded directly by your employer: their contribution varies, but is typically 2/3rds of the cost. If you instead contributed to a private pension, you wouldn't get that employer contribution, so you'd need some really amazing returns to beat the LGPS pension.

You mention wanting to retire at age 55. The LGPS does allow you to take early retirement. Currently this is stated as being from age 55 in exchange for them reducing your pension because it'd be in payment for more years.

However, it's quite likely that by the time you retire, the minimum age will have gone up, as the government limit the minimum age you can draw benefits from any pension scheme to 10 years before the state pension age. As you're 30 now, your state pension age is currently expected to be 68 and so your minimum pension age will probably be 58. This will apply to any pension scheme, not just the LGPS.

Another answer mentions it's backed by the UK government. I can't find any specific evidence of this online, though the website does say that the Treasury has input into the cost of the scheme which may imply that they are backing it.

That said, even if it is the case, public sector pensions are a very large unreported liability of the government, and I think that if there were a really major crisis the government might choose to partially default on those obligations and reduce public sector pensions. Although the government can print money, there's a limit to how much they could do this in practice without wrecking the rest of the economy. But if we were in that kind of scenario, your private pension would also probably be in a lot of doubt, whether from the stock market collapsing or from government confiscation.

Overall, the LGPS is the clear winner given the employer contribution and the guaranteed pension, and I think you'd need a really good reason not join it.

  • What if you are intending to move abroad and will only be in the scheme for 2 - 3 years? Is it worth it then or not really... – Cloud Nov 14 '18 at 10:38
  • I'd say it's still worth it, given the guaranteed level of the payout (unless they actually default) and the fact that 2/3rds of it is being funded by the employer. No matter how long you're there, that's a significant part of your salary you'd be throwing away. – Ganesh Sittampalam Nov 14 '18 at 14:18
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It is very unlikely that a private pension will give you a better pension for the same contributions as the local government pension scheme, which is one of the biggest perks of working for local government. Even for five years, it's well worth it. If you want to retire early, put the extra money that you would have to pay into a private pension to have any chance of getting the same benefits into ISAs instead.

  • Hi Mike thanks for the answer. So are you saying to enrol in the local government scheme for now and save additional money into stocks and shares isas or something? What if the local government scheme disappears between now and retirement? I heard stories of some of these schemes being stolen from. – Cloud Dec 4 '17 at 15:23
  • @Cloud No one is going to steal from the local government pension scheme. If it closes before you retire (which is unlikely), you will still be entitled to the benefits you have already accrued. And it's backed by the UK government, which can print its own money, so there's no risk of a default. – Mike Scott Dec 4 '17 at 15:35
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    Do you have a reference or knowledge about it being UK government backed? Local authorities are legally distinct so it feels like a grey area, and I couldn't find any clear evidence either way online. – Ganesh Sittampalam Dec 5 '17 at 7:14
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    That's what I mean about the government legislating to let them. Realistically, local authorities have to keep operating even if they are insolvent from past debts. One scenario is that the government would take over the LGPS formally, or transfer it in to the PPF, and drastically cut benefits at the same time. This is all extreme stuff, but who knows where government finances will be in 20-50 years time. – Ganesh Sittampalam Dec 8 '17 at 8:52
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    @Cloud: I've already left an answer that mentions this point that you accepted :-) I think it's a risk that you shouldn't be oblivious to, but not one you can easily protect yourself against, and the benefits far outweigh that risk. – Ganesh Sittampalam Dec 8 '17 at 9:51
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Its more like - here are some gold bars lying on the road as I walk pass, should I pick them up?

Joking apart the LGPS offers guaranteed returns backed by a state guarantee index linked and based on a % of average lifetime earnings. It is therefore a gold plated pension and is far more attractive than any private sector alternative.

  • And how do you know the scheme will still be going in 40 years? What if you only work for the employer for a few years? In these cases, it's not really 'gold bars'. – Cloud Nov 14 '18 at 10:34
  • As they are Government sponsored it is very unlikely that they would disappear entirely, granted there are moves to towards super schemes, but they are not vulnerable in the private sector sense. – Adrian Lawrence Nov 18 '18 at 10:40

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