Types of retirement
Under the Local Government Pension Scheme (LGPS) 2014, the normal retirement age for members is their state pension age or age 65, whichever is later.
The LGPS offers six types of retirement, which can be described as either ‘employee driven’ or ‘employer driven’ (where the employer must give consent):
- Flexible retirement
- Ill health retirement
- Normal age retirement
- Late retirement
- Early voluntary retirement *
* If the employer is intending to waive any actuarial reduction or switch on the 85-year rule protection, then it becomes employer driven.
In any case of potential employer driven retirement, the employer is advised to obtain an estimate of benefits from Staffordshire Pension Fund to determine any ‘strain cost’ that the employer would need to pay to the fund.
Under the regulations and subject to the employers’ consent, once an employee reaches age 55, they may remain in employment and draw their retirement benefits. However, there are certain conditions that must be met:
- The employer must agree to the release of the pension.
- The employee must reduce either their hours, and/or their grade. The specific reduction required is not set out in the regulations, but instead must be determined by the employer, whom must specify the requirements within their published flexible retirement policy.
Most employees take flexible retirement before their normal retirement age, so the benefits to be paid will be actuarially reduced. The employer has the option of waiving this reduction, but this would result in a ‘strain cost’.
It is advisable for employers to obtain an estimate of benefits from the Staffordshire Pension Fund to determine any ‘strain cost’ that would be payable by the employer before flexible retirement is agreed.
Employers should make sure that they have a policy in place to cover flexible retirement. We are unable to process flexible retirements where no policy exists.
If an employee’s employment ceases due to redundancy or efficiency, or the employment is terminated by mutual consent on grounds of business efficiency, and the employee is age 55 or over, and they have at least 2 years’ service, the member is entitled to and must take their pension benefits immediately without any actuarial reduction, although this position is likely to change very soon, please see the exit cap information below.
In most cases of redundancy or efficiency, there will be a 'strain cost' to the employer. Therefore, the employer should always ask for an estimate in any cases where the member would be age 55 or over at the date of employment ceasing.
Who does the exit payment cap apply to?
The cap will apply to all public sector workers including employees of councils (whether metropolitan, county, district, borough or parish), police and fire authorities and academies.
When will the exit payment cap come into force?
On 30 September 2020 the House of Commons approved the Restriction of Public Sector Exit Payment Regulations 2020. The effective date for implementation of the new regulations is not known at present but be introduced at any time now on 21 days' notice. A further update will be made to this page once the exact date is known.
What is the value of the exit payment cap and what payments does the cap include?
The exit payment cap is set at a total of £95,000. Exit payments include redundancy payments (including statutory redundancy payments), severance payments, pension strain costs - which arise when a Local Government Pension Scheme (LGPS) benefit is paid unreduced before a member's normal pension age - and other payments made as a consequence of termination of employment.
The cap applies to all exit payments that arise within a 28-day period and the regulations cover the process to follow if an individual has multiple exits from public sector employment within 28 days.
The cap will only apply to those individuals where the combined total value of their exit payments (including pension strain costs) is greater than the £95,000 limit. Where it does apply then the value of the exit payments will have to be reduced to the point where the total value of all exit payments is no greater than £95,000.
What is the pension strain cost and who pays the pension strain cost?
Under the rules of the LGPS, if you choose to receive your local government pension before your normal retirement date, then your pension would normally be reduced, to take into account the fact that you are receiving your pension earlier than your normal retirement date.
However, if you are over age 55 and your employer terminates your contract of employment on grounds of redundancy or efficiency, you are entitled to receive an immediate payment of your pension benefits relating to that employment. This will mean that your employer will need to pay an amount of money into the Staffordshire Pension Fund, so that you can receive your full pension, up to the date of leaving, without any reduction in your pension because it has been paid early. The amount of money your employer pays into the Pension Fund, so that you can receive an unreduced pension is called the pension strain cost.
To qualify for LGPS pension benefits, you must pay into the LGPS for at least two years, or transfer pension benefits from another scheme into the LGPS. If you leave the scheme with less than two years' membership, you may not qualify for LGPS pension benefits and will usually be able to choose to have a refund of your contribution.
How can I find out if my exit payments exceed the £95,000 cap?
If you are currently 55 or over and serving a notice period under redundancy, or you and your employer have entered into a redundancy consultation period, your employer should already have (or will be in the process of obtaining) the amount of the pension strain cost. When they have this, they will be able to establish if the pension strain cost when added to other termination payments you are entitled to receive, exceed the £95,000 cap.
What happens next? – subject to the government approval
Further to the government introducing the Restriction of Public Sector Exit Payments regulations and subject to LGPS regulations being amended we understand that other possible options could be that:
- receive payment of a reduced pension and lump sum, but keep the redundancy or other exit payments (limited to the £95,000 cap)
- give up some or all of their redundancy payment or other exit payments to receive an unreduced pension, or limit the amount of the reduction to the retirement benefits
- choose a mixture of the two options above, which will mean giving up some of their redundancy pay to remove some (but not all) of the reduction on their pension and lump sum
- receive a deferred pension benefit rather that a partially reduced pensions, but keep the redundancy or other exit payments (limited to the £95,000 cap)
As we understand it currently, there will be no transitional period and pension scheme members will be subject to Local Government Pension Scheme rules that apply on the date of leaving.
If you do have any further questions about how the £95,000 exit payment cap may affect you, then please speak directly to your employer.
A member can be retired on ill-health grounds if they’re medically certified as being ‘permanently incapable of discharging efficiently the duties of his or her current employment’.
The LGPS provides three levels of ill-health retirement benefits depending on how likely it is that the member will be able to find work again before retirement age. These three levels are known as tier 1, tier 2 and tier 3.
The employer decides if a member qualifies for ill-health retirement and which tier applies. In doing so, the employer must have regard to the advice of a doctor qualified in occupational health medicine.
Ill health retirements do not incur a ‘strain cost’, as the cost is built into the employer's contribution rate as part of the triennial valuation.
An ex-employee, with an entitlement to preserved benefits can ask their previous employer to release their pension on the grounds of a permanent breakdown in health.
The process is very much the same as an active member.
The benefits and conditions for eligibility, along with the correct certificate, will depend on the date at which the member became entitled to the preserved benefits (leaving date).
Full details and further guidance on the ill-health retirement process is on our ill-health retirement pages.
Once an employee reaches age 55, they can simply resign from their employment and start drawing their pension benefits.
If they have not reached their normal retirement age under the scheme, then the benefits would be actuarially reduced.
There is not normally any strain cost associated with this type of retirement. Should the employer decide to waive the actuarial reduction there would be a 'strain cost' payable to the fund.
Once an employee reaches their state pension age, or age 65 if later, they can simply resign from their employment and start drawing their pension benefits.
This is called ‘normal age retirement’, as the member is retiring at their normal retirement age under the pension scheme regulations.
If a member retires later than their normal retirement, the pension benefits are increased for taking them late.
Once an ex-employee who has a preserved benefit within the LGPS reaches age 55 they can apply to the Staffordshire Pension Fund for their pension benefits to be paid early. However, if they have not reached their normal retirement age under the scheme, then the benefits would be actuarially reduced.
There is not normally any strain cost associated with this type of retirement. However, should the employer decide to waive the actuarial reduction there would be a strain cost payable to the fund.
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