Buying added pension

penwise

I am thinking of buying 1000 added pension.

For an extra 1000 per year (raises in line with CPI), lump sum of 3000 and my spouse paid half this if I die it looks like it will cost 18,500 lump sum or 223 per mth for @the next 8 years.

This is the gross cost and I would get tax relief on it - at lower tax bracket

Is this a good deal? I lump sum better than per mth? Any Thoughts and opinions would be appreciated

Thanks

hugheskevi

Is this a good deal?

The purchase factor of £18.5 per £ of Added Pension suggests you are older, probably in your 50s. From previous posts from others of a similar age, you probably won't get a better deal from an annuity unless ill-health is a factor.

It is a fairly certain deal, whether or not it is good depends on your risk tolerance, what investment products you prefer and what type of end-payment you want.

The discount rate used in the calculations is CPI+3%. That means by purchasing Added Pension you are choosing an investment return of CPI+3% on the money contributed. That is quite good for a low risk product, quite poor for something with higher investment risk.

Given the new Defined Contribution regime from April 2015, you are also choosing income in preference to capital you could get if you used a personal pension instead (particularly as the commutation rate of pension to capital at 12:1 is very poor). You may have a strong desire for more income, you may not.

I lump sum better than per mth?

They are set actuarially, so it adds up to the same thing. One difference is how tax relief is awarded - pay by lump sum and you have to reclaim the tax relief from HMRC, and several folk on this forum have had a lot of difficulty getting HMRC to understand the rules. Pay out of your income and the tax relief is sorted automatically and you avoid a few long calls with HMRC (if you do self-assessment it is much easier - at least HMRC's computers tend to understand the tax relief system).

If you purchased by lump sum you would use £16,000 of your Annual Allowance immediately, whereas paying per month spreads that across different tax years. That may or may not be relevant depending on how much of your Annual Allowance your other pensions are taking up.

Any Thoughts and opinions would be appreciated

You may wish to confirm with the scheme administrator that you can still purchase this by monthly payments, as in at least some of the public service schemes you can only purchase Added Pension via monthly payments under the post 2015 scheme (as contracts start from next Scheme Year, at which point the new scheme will be in place). I'm not sure whether this is true for all the schemes though. Paying by lump sum is fine regardless.

quotememiserable

What age will you be when you start to collect, and is the amount payable gauranteed or estimated?

penwise

Thanks for the replies.

I used the scheme calculator and it would be starting April 2015 so
Mthly or lump sum allowed.

It is a gauranteed amount ie buying 1000 and I will be 60 when it start.
Half of it will also go to my spouse if I died.

Also What does raises with CPI actually mean?

Does it mean if I bought 1000 of added pension with 18500 today that when I retire in 8 years it will be worth the equivalent of 1000 today whatever that is e.g. 1100? And continue to raise each year?

'particularly as the commutation rate of pension to capital at 12:1 is very poor'
What does this mean in my case?

Thanks

hugheskevi

I used the scheme calculator and it would be starting April 2015 so Mthly or lump sum allowed.

Promising, but I wouldn't rely on that. Sadly some of the calculators still in use imply you can do something which when you try to actually do it will not be permitted.

Also What does raises with CPI actually mean?

The amount of pension you purchase will increase in line with the change in prices. The increase is applied each April (currently prices means the change in the CPI index between September-September of the previous year).

The lump sum will be 3 times the rate of pension, so that also increases with CPI.

Does it mean if I bought 1000 of added pension with 18500 today that when I retire in 8 years it will be worth the equivalent of 1000 today whatever that is e.g. 1100? And continue to raise each year?

Yes, although there is no guarantee it will be CPI - it is whatever the Govt of the day considers reflects the change in prices.

'particularly as the commutation rate of pension to capital at 12:1 is very poor' What does this mean in my case?

You may be able to choose to take more of a lump sum in exchange for a lower income. The rate used to calculate the extra lump sum is 12 times the amount of income exchanged. That is a lousy rate, and generally a bad deal. So if you are wanting capital (ie lump sum) rather than income, using personal pensions may be more appropriate.

penwise

Thanks very much for this reply
Your response has been most helpful.