Employer guide
Leaving the scheme before retirement
Introduction
This section of the guide covers what happens to the pension benefits accrued when a member leaves the pension scheme before retirement.
Opting out
Regulation 5 (2) of the Local Government Pension Scheme Regulations 2013 covers opting out of the pension scheme.
Most employees will be brought into the LGPS automatically at the start of their employment, or later under Auto Enrolment rules.
A member has the right to opt out of the Scheme at any time after they have joined and received joining information by completing an opt out form, Member – Opt out. This form should be returned by the employee to the employer.
An employer must never encourage an employee to opt out, for this reason you must not issue opt out forms directly to the employee. Instead, the employer must give the employee information about the pension scheme when they join, and that information can include a link to the LPPA website where an opt out form can be downloaded.
For the opt out form to be valid, the member must not sign it before the later of –
- The date they become a member; or
- The date they receive pension scheme information from the employer.
If the opt out form is invalid, you will need to write to the employee to explain why.
If an employee opts out:
Within 3 months of joining – the employer refunds any pension contributions the employee has paid and makes any adjustments for PAYE and National Insurance through payroll. The employee is treated as never having been a member.
After 3 months and before 2 years – the employee can have a refund of the pension contributions they have paid including any adjustments for re-instating them back into the State Pension scheme and the deduction of tax. This will be arranged by LPPA.
After 2 years – the employee is entitled to preserved benefits which can be transferred to another Scheme; added to any new periods of membership or otherwise become payable at normal retirement age or earlier in certain circumstances subject to them having left the employment through which they opted out.
Notification to LPPA
You must notify LPPA of all new starters EVEN IF THEY OPT OUT WITHIN 3 MONTHS AND ARE REFUNDED THROUGH PAYROLL. The monthly data file that is submitted to LPPA should therefore include all employments where the member could potentially join the LGPS, including casuals, even if they have opted out (or not opted in). For further information regarding the monthly data file requirements please see the ‘Data Provision’ section within the employer guide.
In addition to sending the monthly data file if the member has more than 3 months service the Leaver form must be completed by the employer and forwarded to LPPA no later than 10 working days after the payment of salary following termination from the Scheme. The reason for leaving should be shown as ‘Opted out of the Scheme’.
If a member does elect to opt out they should contact LPPA to discuss the implications of opting out. It is a fact that when the benefits and alternatives are explained, members often change their minds and stay in the Scheme.
If you have already made payment of employee and employer contributions over to LPPA in a previous month, you can adjust the total amount of employee and employer contributions paid over in the month the refund is made and put the adjusted figure on form Payment of Monthly Pension Contributions.
If the member opts out of the main section & into the 50/50 section or vice versa
If a member decides to leave the main section of the Scheme in favour of the 50/50 section you are required to notify the member of the effect to their benefits. A factsheet is available on our website.
Members changing their contribution rate/section of the Scheme will be identified from the monthly data file.
Keeping Records
You do not need to send the original Member – Opt Out form (that the employee has signed) to LPPA. However, under Auto Enrolment rules you do need to keep a copy of the Member – Opt Out form for at least 4 years. You may want to increase this period in line with your own records retention policy.
There are other records that you need to keep as you may need to produce them for The Pensions Regulator. More details regarding your obligations can be found on the Pension Regulator website: www.tpr.gov.uk. See the section on Auto Enrolment.
Refunds from LPPA
Regulation 18 of the Local Government Pension Scheme Regulations 2013 covers refunds.
LPPA can only arrange payment of a refund where the member has left their employment within 3 months of joining. If the member has opted out of the scheme then the employer must arrange the payment through payroll, and the calculation described below does not apply.
If a member leaves the Scheme with less than 2 years membership, and has not transferred benefits from a previous scheme, the member can opt to have contributions refunded.
If a refund is payable by LPPA it is based on the total contributions paid by the member alone,
LESS:
a) The amount saved by paying a lower rate of N.I contributions through being contracted-out of the State Second Pension (S2P), if full rate contributions are normally paid and;
b) Tax at 20% of the balance
EXAMPLE
Mr Jones leaves local government employment to take up employment with a private company. He has 2 months membership and elects for a refund of his contributions.
Gross contributions £120.00
Less
Amount to reinstate in SERPS £26.40
Tax @ 20% of £93.60 £18.72 £ 45.12
Net refund £ 74.88
When a refund is not paid within 12 months of the date the member ceases employment, interest is payable on the net amount.
If the member normally pays full rate National Insurance contributions they are re-instated into the State Pension as though they had never been contracted-out for the period concerned.
A refund cannot be made if an employee re-enters the Scheme within 1 month and 1 day.
A member is also not entitled to a refund of contributions if they have returned to any local government employment (this does not mean just pensionable employment) before they receive payment of the refund.
As a result of Finance Act 2006, a refund of contributions extinguishes all pension rights in the LGPS in England and Wales, therefore a refund cannot be made if the member has previous rights in the LGPS.
In addition, a member is not entitled to a refund of contributions if they left employment because of an offence of a fraudulent character, or grave misconduct. However, the scheme employer may direct a payment of a sum equal to all or part of the member’s contributions to the member, member’s spouse, civil partner, cohabiting partner, or any of the member’s dependents.
By taking a refund, a member loses all the benefits of being a Scheme member and therefore should only be taken as a last resort. Alternatively, a member can defer their decision and leave their built-up contributions in the Scheme. This gives the additional option to transfer the full value of accrued pension rights to another pension arrangement in the future or, if they return to work with a Scheme employer at any time in the future, they can add to their existing membership. However, the refund must be paid within 5 years from the date of leaving or age 75 if sooner.
If the member also has a concurrent employment the service will be automatically aggregated with the continuing employment.
What employers need to do
Complete the Leaver form which then should be forwarded promptly.
Once LPPA receives the completed Leaver form the employee is notified by letter of the net amount of the refund that is now payable. An option form is enclosed with the letter outlining the choices the member now has, which are:
- to receive a refund.
- to transfer accrued benefit to a new pension scheme.
- to leave their accrued benefit in the fund for the time being
Leavers with more than 2 years membership
Regulation 6 of the Local Government Pension Scheme Regulations 2013 covers deferred pensions.
A member, with at least 3 months membership or a transfer from another scheme, who leaves employment before State Retirement Age and who is not entitled to receive immediate benefits, is entitled to deferred benefits. All deferred benefits attract pension increases under the Pensions (Increase) Acts from the date of deferment.
What employers need to do
A deferred benefit is processed in the same way as any leaver from the Scheme.
Once the employer establishes the member’s leaving date, the Finance Section should be notified. It is vital that Personnel Officers stress to the employee that they must keep LPPA informed of any change of address. When the deferred benefits are due to be paid, it can prove very difficult to trace deferred members if LPPA has not been kept up to date with any changes of address. The employer should complete the Leaver form, and forward it to LPPA promptly.
Once the documentation has been received by LPPA, a statement of accrued benefits is sent to the deferred member together with information regarding the member’s options. The benefits remain preserved in the Fund unless the member elects to transfer them to another scheme or pension arrangement.
Transferring Benefits out of Scheme
Regulation 96 – 99 of the Local Government Pension Scheme Regulations 2013 covers transfers out.
If a member leaves the Scheme but remains in local government employment, or starts work for any other scheme employer, pension rights can be transferred. When taking up new employment the member must forward details to their new employer.
If a member leaves to take up employment with a non-local government employer, the value of membership may be transferred to the new employer’s scheme. The member should notify their new employer of their accrued rights in the Local Government Scheme and ask their new employer to request details of a transfer. The member can then decide whether to transfer their accrued benefits to their new employer’s scheme or leave them preserved in the Local Government Pension Scheme.
If the new employer does not have a pension scheme, members have the option of transferring the value of pension rights in the LGPS into an annuity contract with an insurance company or to transfer into a personal pension.
Members now also have the option of transferring their pension benefits to a defined contribution pension scheme in order to access them from age 55. In order to mitigate the risk that members may choose to transfer their benefits when it is not in their best financial interest, if there transfer value is £30,000 or more, they must first get appropriate independent advice. This advice must be from an FCA registered adviser.
Is the member’s decision whether or not to transfer membership because it may not always count at a similar length in another pension scheme or provide the same benefits.
Once LPPA has received all the leaving documentation from the previous employer, the member is notified of the various options available.
Death in Service
If a member dies in service then the following benefits are payable:
- A lump sum death grant of 3 times the members assumed pensionable pay.
- Pensions for eligible children.
- A widow’s, widower’s, civil partner’s or, subject to certain qualifying conditions, a co-habiting partner’s pension, built up at the rate of 1/160th rather then 1/49th and based on a tier 1 enhanced pension. However, a co-habiting partner’s pension will be less than this if the member has membership in the scheme before 6 April 1988.
In these circumstances the employer should complete the Leaver form and provide contacts for any next of kin, and forward it to LPPA promptly.