Civil Service, Alpha or Partnership

sociable7

Hi,

I've read some of the other posts in relation to the Alpha and Partnership schemes but I'm still confused on which option is better for me.

I am currently 26 years old and been working for CS for 1.9 years, Dec will be my 2 years. My ultimate aim is to get the biggest return when I retire. I plan to work till 65 at least.




When I started in Dec 2014, I was on the Nuvos scheme and was put on Alpha in Apr 2015. The £280 I paid in is now banked and I think increased according to inflation every year. Now that I’ve been promoted and earn £27K, I pay in £110 per month to my pension.

My understanding is, as part of Alpha, I’m supposed to pay 2.32*Salary every year, then I continue this every year and the pension scheme increases it according to inflation. But based on my monthly rate, I pay £1230 per year? Where they are expecting about £600. Am I right?
If I transfer to Partnership, and pay the £110, my employer pays in about £60, this means £170p/m and £2040 p/a. If my circs are the same till 65, then im looking to save £79K. This to me sounds like a good deal, as I would have only paid £51K out of my pocket.



However so many people are bigging up Alpha, why? When its only your money accrued and a poxy 1% inflation? Imp of the belief the economy will be stronger by the time I’m 65.
Do any of these also pay towards a spousal pension?

Also what is so good about civil service pensions in comparison to private companies? Should I consider them too?

hugheskevi

My understanding is, as part of Alpha, I’m supposed to pay 2.32*Salary every year, then I continue this every year and the pension scheme increases it according to inflation. But based on my monthly rate, I pay £1230 per year? Where they are expecting about £600. Am I right?

What you contribute and what you accrue are two separate things.

You contribute a % of your salary, based on the level of your salary. The contribution rates are set out at this link.

You accrue an amount of alpha pension which is 2.32% of your pensionable earnings in that year. That amount is then increased each year in line with change in prices (currently based on CPI).

However so many people are bigging up Alpha, why?

Don't underestimate the value of a Govt. backed scheme with no investment risk that is guaranteed to increase in line with prices. That is a valuable set of guarantees.

I've seen people incorrectly use annuity rates at 65 with the annual accrual to value the pension. In your case, this would ignore 40 years of growth, so produces figures which wildly overestimate the value of alpha.

The employer contribution rate is also featured prominently - that includes things such as admin cost, tiered employer contributions and past service deficit cost which are irrelevant to you, and also averages the cost across the whole scheme. The scheme is much more generous to older members than to younger members, so your employer may be putting in something like 22% of your salary, but that does not mean the pension you are accruing is worth that.

A lot of people still just recite the old chestnut that public service pension schemes are amazing, and overlook the increase in contribution rates, change from RPI to CPI and scheme reforms. Alpha is a lot less valuable than the previous schemes, especially for younger people.

Nonetheless, it may be less valuable than previous schemes, but alpha is still a good pension scheme. The same applies to Partnership too though, and for younger members and higher earners in particular Partnership can be a good choice.

Do any of these also pay towards a spousal pension?

Alpha has a spouse's pension of 37.5% of accrued pension, with a 2*salary lump sum for death in service.

Also what is so good about civil service pensions in comparison to private companies? Should I consider them too?

Private companies will mostly be offering Defined Contribution pensions - your employer agrees what they put in, then it is your money to invest as you wish, for better or worse. That is the same as Partnership, although the Partnership contribution rates are a bit higher than you would get in most (but not all) private companies.

Alpha is completely different. The guarantees above differentiate it. But they also mean that there is no scope for amazing growth - you know exactly what you will get in real terms, and roughly (State Pension age) when you will get it. If stock-markets have a great 40 years then you would not benefit from that, whereas in a Defined Contribution scheme you would.

What matters is the overall remuneration package, not individual elements.

If by private scheme you mean taking out a personal pension, then there is nothing wrong with that, but the lack of an employer contribution makes them a lot less valuable. But they do work well in conjunction with a Defined Benefit scheme for those wanting to retire early.

sociable7

Thanks for clearing that up. I have been looking in to this further, I have made some calculations.

Alpha

I pay £1200 annually in to the wider pension pot and CS put £515 in to my pension pot per annum. This continues till I wish to retire, lets say 67 and my circs are the same.

I would have paid, £1200 x 41 years = £49200 in to the wider pot.
and received £515 x 41 years = £21215 as part of my final annual pension salary. the scehem means, I will get this amount up until death. So £1759 paid to me every month. (Is this without tax?)

This means, although im currently paying out more than they are putting towards my pension pot, it will only take 2.5 years to break evern. If I contiune to live then im getting paid for 'free' in a sense.

Partnership

I pay 5% of my monthly salary - come to £1200 per annum, my employer pays % depending on my age and a further 3%. So:

£1200 + £1776 + £666 = £3642 for 5 years
£1200 + £1998 + £666 = £3864 for 4 years
£1200 + £2442 + £666 = 4308 for 5 years
£1200 + £2997 + £666 = £4863 for 4 years
£1200 + £3323 + £666 = £6521 for 22 years

This makes a total of £143462. So will be paid to me. This means, to match what Alpha can give me, It covers me for the next 7 years, when Im 74, and tbh, £1759 p/m is a bit much, so Im sure i can extend it to a another 2 years.
If I live after 76, alpha will continue to pay me a healthy amount, or do I plan better at that stage of life, be a bit tight, and also use state pension money.

Can you confirm my logic is correc, or have i overestimated. The circs may change ofcourse, but based on today and the asumption this continues. I mean, what if I start Alpha at 50 and pay £1000 per year, then I accrue, £17000, thats still £1400 income per month. with the addition of my partnership scheme for 24 years.

p00hsticks

sociable7 wrote: »

So £1759 paid to me every month. (Is this without tax?)

Pensions are taxed on the way out rather than on the way in - that is, you get tax relief (don't pay tax) on money you put into a pension scheme, but your pensions when paid is treated a taxable income.

How much tax you actually pay will depend on your tax free allowance and what other income you have (the state pension is taxable but paid gross so uses up a good part of the standard tax allowance)

hugheskevi

I pay £1200 annually in to the wider pension pot and CS put £515 in to my pension pot per annum.

You earn £27,000. You contribute £1,472. You accrue £626.40 of annual alpha pension payable from your State Pension age (currently 68 but will almost certainly increase).

Why do you think CS put £515 into your pension pot? I suspect you have calculated 2.32% of an old salary - the 2.32% refers to the amount of pension accrued, it has nothing to do with contribution.

I would have paid, £1200 x 41 years = £49200 in to the wider pot and received £515 x 41 years = £21215 as part of my final annual pension salary. the scehem means, I will get this amount up until death. So £1759 paid to me every month. (Is this without tax?)

You are getting everything confused.

Disregarding salary increases, you would have paid £1,472*41=£60,352.

You would accrue £626.40*41=£25,682 of annual alpha pension payable from State Pension age (currently 68). This is prior to tax.

Partnership

I pay 5% of my monthly salary

There is no particular reason to pay more than 3%, as that is all that gets matched. Without being a higher rate taxpayer or having no salary sacrifice extra pension contributions are of little value.

This makes a total of £143462.

Ignoring returns, net of charges. Investment returns over a 41 year period will be higher than inflation so this cannot be assumed away.

Can you confirm my logic is correc, or have i overestimated.

I'm afraid I'd say that you have completely misunderstood how it all works, and as a result the calculations are meaningless.

I mean, what if I start Alpha at 50 and pay £1000 per year, then I accrue, £17000, thats still £1400 income per month. with the addition of my partnership scheme for 24 years.

As alpha is better for older people, if you pursue a hybrid strategy then it is likely to be best to start with Partnership and later switch to alpha.

But that assumes a lifetime in Civil Service and is probably a step too far in planning.

Kynthia

I'm not sure it matters what the employer contribution is for Alpha as it's the result that matters. The result is you pay your contributions and they guarantee to give you an annual pension of 2.32% of your pensionable earnings each year you work there. This increases by CPI each year. You will get this every year from state retirement age until death, along with a death in service amount, a beneficiary pension for their lifetime should you die before them, and a dependant pension should you pass away with dependant age children.

You need to decide whether you can get a better result with Partnership, which is obviously riskier as the outcome isn't guaranteed. So what value pot do you think you'll need to match the result Alpha will give you? How much will you need to contribute to get that? Plus what advantages does Partnership give you that Alpha doesn't? You might be too young but some who are older may know that they won't have a long retirement, don't have a partner and don't have dependant children so may prefer a pot of money they can spend at what rate they like and then have their adult child or someone else who wouldn't qualify to inherit the Alpha pension to inherit the rest.

I know some people who were able to get an ill health pension when they became too ill to work, either due to an accident or illness. Is that option open to you in Partnership as it is in Alpha?

You should have received your first Alpha annual benefit statement by now? How much annual pension does it say you've accrued in one year?

sociable7

Thanks for the replies all,

p00hsticks wrote: »

Pensions are taxed on the way out rather than on the way in - that is, you get tax relief (don't pay tax) on money you put into a pension scheme, but your pensions when paid is treated a taxable income.

How much tax you actually pay will depend on your tax free allowance and what other income you have (the state pension is taxable but paid gross so uses up a good part of the standard tax allowance)

You're always told to pay more in to a pension to save on tax, I guess you're just delaying it.

hugheskevi wrote: »

You earn £27,000. You contribute £1,472. You accrue £626.40 of annual alpha pension payable from your State Pension age (currently 68 but will almost certainly increase).

Disregarding salary increases, you would have paid £1,472*41=£60,352.

You would accrue £626.40*41=£25,682 of annual alpha pension payable from State Pension age (currently 68). This is prior to tax.

Sorry my maths may be slightly wrong, I based my maths on an annual salary of £22k, which is the lowest I can be in.

hugheskevi wrote: »

There is no particular reason to pay more than 3%, as that is all that gets matched. Without being a higher rate taxpayer or having no salary sacrifice extra pension contributions are of little value.

I've never seen it like that, I thought if I spare a little more cash maybe there'll be a more worthwhile return.

hugheskevi wrote: »

I'm afraid I'd say that you have completely misunderstood how it all works, and as a result the calculations are meaningless.

Believe me the majority of people my age have no clue about how they work, especially when you have differnet schemes and have to 'plan' 50 years ahead.

hugheskevi wrote: »

As alpha is better for older people, if you pursue a hybrid strategy then it is likely to be best to start with Partnership and later switch to alpha.

Its something ill be considering now. Thanks.

Kynthia wrote: »

I'm not sure it matters what the employer contribution... So what value pot do you think you'll need to match the result Alpha will give you? How much will you need to contribute to get that? Plus what advantages does Partnership give you that Alpha doesn't?

As above, the partnership pot will last about 7-8 years and Alpha till death. I keen on going for partnership and switching later, as even a lower amount till death is still good. I have to consider working for the cs forever.

Kynthia wrote: »

I know some people who were able to get an ill health pension when they became too ill to work, either due to an accident or illness. Is that option open to you in Partnership as it is in Alpha?

Yes, I think ive read in both guides that its one way of cashing early without deduction.

Kynthia wrote: »

You should have received your first Alpha annual benefit statement by now? How much annual pension does it say you've accrued in one year?

Ill have to get back to you on this one.