Which civil service pension for early retirement?

[Deleted User]

I recently joined the civil service and need to choose between the Alpha and Partnerships options.

Everything I've read implies that the Alpha (DB) pension is better, but I want to be able to work less or not at all from age 55 and am not sure which pension is better for that.

Some questions:

- The Alpha pension takes just over 5% of my salary each month but only 2.23% goes into my pension pot, is that right? If I choose the Partnership option does everything deducted from my salary go into my pension pot? Is it a toss up between having a guarantee of how much your end pension will be, but it builds up more slowly, vs building up the pot more quickly with a risk that market volatility reduces the value of the fund?

- Both schemes have the option of retiring from 55 with reductions due to drawing early. But I'm wondering if the Partnerships option allows me to build a bigger pot/entitlement by the time I'm 55?

- Alpha has a partial retirement option from age 55, which could be a good compromise.

- Alpha has an AVC option which I think is equivalent to having both options (I would be a member of the DB Alpha scheme and would also be paying into a DC scheme similar to the Partnerships model)? The problem is that I would be paying a large % of my salary in pensions each month: 5% for Alpha and whatever I decide to pay into the AVC scheme.

- Alpha has an EPA option which allows retirement 3yrs before NPA, but that's not early enough.

Grateful for any advice!

hugheskevi

Everything I've read implies that the Alpha (DB) pension is better,

They are completely different pension arrangements, so comparisons are difficult. Alpha is almost certainly better for older workers, but it depends on individual circumstances which is better for those below about age 50.

The Partnership contribution rates are set based on a discount rate of CPI+3%, enhanced for those aged under 31 and reduced for those aged above 45.

The Alpha pension takes just over 5% of my salary each month but only 2.23% goes into my pension pot, is that right?

The contribution rate is 5.45%, the accrual rate is 2.32% (not 2.23%). The contribution rate and accrual rate are completely different things, so you shouldn't be comparing them against each other.

If I choose the Partnership option does everything deducted from my salary go into my pension pot?

Yes. Although as Partnership is non-contributory you do not have to put anything in if you do not want to (but anything up to 3% is matched by employer, so most would be best off contributing at least 3%, unless pension tax is an issue).

Is it a toss up between having a guarantee of how much your end pension will be, but it builds up more slowly, vs building up the pot more quickly with a risk that market volatility reduces the value of the fund?

That is part of the consideration, but there are other factors too and in particular age. The discount rate used to calculate alpha benefits is based on CPI+3%. In practice, it will be slightly different for individuals, as things such as partner status, ill-health, life expectancy, etc, change the value of the pension at individual level. But as a first approximation, if you think that a guaranteed rate of return of CPI+3% is not very good, then that increases the attraction of Partnership. If you think that rate of return for certainty (no investment risk, no inflation risk) is a good deal then alpha is more attractive.

- Both schemes have the option of retiring from 55 with reductions due to drawing early. But I'm wondering if the Partnerships option allows me to build a bigger pot/entitlement by the time I'm 55?

There would not be a reduction to Partnership from early commencement, it is just a normal Defined Contribution pension so the only loss would be loss of returns due to having withdrawn from the pension. Alpha would have an actuarial reduction applied for early commencement.

Partnership is unlikely to build up a higher annual income entitlement (ie annuity amount). If you want certainty of income, alpha is likely to be better. Partnership will build up a higher pot of money, simply as there is no pot with alpha. Comparing income against a capital amount is difficult, and the results vary considerably depending on how you make the comparison - basing the results on index-linked annuity rates (closest approximation to certainty) would give a very different answer to using drawdown with 4% annual withdrawals for example (less certainty, more of a 'best estimate' basis).

- Alpha has a partial retirement option from age 55, which could be a good compromise.

Possibly, but I think that using Defined Contribution pensions for early retirement is preferable than actuarial reduction, unless you have excess pension income that you won't be needing in retirement.

- Alpha has an AVC option which I think is equivalent to having both options (I would be a member of the DB Alpha scheme and would also be paying into a DC scheme similar to the Partnerships model)? The problem is that I would be paying a large % of my salary in pensions each month: 5% for Alpha and whatever I decide to pay into the AVC scheme.

The AVC scheme is effectively the same as any personal pension, so yes, that is a reasonable way of viewing it. I wouldn't be concerned about paying in a large % as long as it is part of a clear strategy - I'm contributing 18% to pensions in addition to employer contributions, and that is considerably lower than previous years when it has been more like 35%. All I am doing is moving resources from now to the future, and benefitting from tax relief and investment returns in the process.

- Alpha has an EPA option which allows retirement 3yrs before NPA, but that's not early enough.

It may well be something you do in addition to other things, especially as EPA contributions do not count toward the Annual Allowance if that becomes a consideration. There is also Added Pension to consider, which is pretty much the same as EPA mathematically, as you could make Added Pension contributions and take the pension early (or make EPA contributions, and take the pension late, with actuarial enhancement).

You can combine options, it isn't necessary to commit to a single strategy. One possibility is to join Partnership initially, moving to alpha later as you age. But that is taking a very long view and change of employment may well interrupt your plans.

Also consider what future tax status is likely to be - a 5.45% contribution rate suggests you are not a higher rate taxpayer, and pension contributions are most attractive for 40/45% tax payers. If you think you are likely to be a higher rate taxpayer in future, you may want to skew additional pension contributions toward the period when you are paying higher rate tax.

Personally, I would say that a Defined Benefit foundation for retirement income is extremely valuable, especially as it is only really available in the public sector now. But Defined Contribution is also extremely valuable due to its flexibility. Having both is very attractive, as alpha offers very poor value lump sum, so you would be planning to only take income from that. That is where Defined Contribution is very good, for generating a lot of resources for early retirement, before Defined Benefit and State Pensions commence.

marlot

Geepers1 wrote: »

...The Alpha pension takes just over 5% of my salary each month but only 2.23% goes into my pension pot, is that right? ...

NO!

Each year of contribution buys 2.32% of your salary as pension.

Let's say you're on £10,000 (to make the maths simple).

If you contribute for the coming year, you pay 5% of £10k = £500.

Your pension is £232 per year, each year of retirement.

If you then contribute for a second year, you get a further £232 per year, each year of retirement.

[The pension you've built up is also index linked]

If you take it early, it'll be reduced. 5% a year for the first 5 years you take it early, 3% for each additional year. So if you take it ten years early, you'll get 60% of what you would have got. (Losing 5 x 5% = 25%, plus 5 x 3% = 15%, totalling 40% reduction).

Kynthia

As has been said above there is no pot with Alpha but there's a promise. They promise to pay you 2.32% of your salary for each year you are a member for each year of retirement. This is risk free, goes up each year with CPI, pays a spousal pension should you pass away and a dependants pension. If you live much longer than you expect then it won't run out but it's not a pot you can leave to someone as an inheritance.

Partnership is a DC pot of money and therefore is riskier but more flexible. I don't know enough about it to say whether it could be better than Alpha or not. Perhaps your age and any other pensions you already have would be a factor in deciding which best meets your needs?

In some ways having Alpha and a DC pension gives you the best of both worlds. Perhaps you could have an AVC or seperate private pension/SIPP alongside the Alpha pension. You could use the DC pot you build to fund the gap between when you want to retire and when Alpha starts payment. This depends on whether you can afford additional contributions at some point, as has been said the tax benefits are greater if you become a higher rate tax payer, or whether you already have pension pots you can use.

[Deleted User]

Thank you both!

By the way, I'm 33 and so all being well I'll be working f/t for at least another 20yrs, but no idea if I'll stay in the civil service - does that doubt affect which pension option is better?

"Partnership is unlikely to build up a higher annual income entitlement (ie annuity amount)." Even after the early withdrawal reductions have been applied to alpha?


"If you want certainty of income, alpha is likely to be better. Partnership will build up a higher pot of money, simply as there is no pot with alpha. Comparing income against a capital amount is difficult, and the results vary considerably depending on how you make the comparison - basing the results on index-linked annuity rates (closest approximation to certainty) would give a very different answer to using drawdown with 4% annual withdrawals for example (less certainty, more of a 'best estimate' basis)."
I don't really understand this, but is it to do with mixing annual pension incomes with options to withdraw tax-free lump sums each year?

"Possibly, but I think that using Defined Contribution pensions for early retirement is preferable than actuarial reduction, unless you have excess pension income that you won't be needing in retirement."
Is this because it's better to avoid having your DB pension reduced if at all possible, and there are no penalties for taking DC pensions early?

"You can combine options, it isn't necessary to commit to a single strategy. One possibility is to join Partnership initially, moving to alpha later as you age. But that is taking a very long view and change of employment may well interrupt your plans."
What would be the advantage of joining Partnerships first and alpha later on?

"Having both is very attractive, as alpha offers very poor value lump sum, so you would be planning to only take income from that. That is where Defined Contribution is very good, for generating a lot of resources for early retirement, before Defined Benefit and State Pensions commence."
So, I shouldn't expect to take any lump sums from alpha in my fifties and should start building up a DC pot now if I want lump sums for that age? If I needed a lump sum to clear my mortgage in my fifties, would taking it from a DC fund be a good option?

I'm not attracted to DC funds because I think they will grow what I've paid in, they just seem to penalise less when you start drawing early. But am I right in saying that I'd need a big DC pot to get a decent income from it? And even more difficult if I want to build that pot by my mid fifties? My idea of decent income is enough to supplement a low-wage job and/or part-time hours from my mid fifties onwards. I think I'll be happy to do some work into my mid sixities, I just want the option of not needing a well paid job at that age.

If I've understood the alpha pension properly (thanks to your comments), for each year I work in the CS, I guarantee myself an annual income of 2.32% of my salary in my retirement (reduced if I take it between 55 and NPA)? If I buy additional alpha pension will this build up a larger entitlement from which the early withdrawal reductions will be made? I'm conscious of the fact that if I wanted to start drawing at 55, I would have reductions applied for at least 13yrs, which is a big percentage, so I want to build as much entitlement as the rules allow before I reach 55.

If I pay into alpha and the AVC, does the CS still match my payments into the AVC (i.e. it's not just my contriburions that are building up the fund)?

Although Alpha has additonal options to increase entitlement, as my yearly entitlement is not based on a pot of money, it's not a case of me contributing a higher % and the CS matching that? I can choose to contribute more to buy the extras, but the CS doesn't make higher monthly contributions in response to that because a DB pension isn't built around the growth of a pot of money?

Under alpha, Added Pension is a way of making your DB pension bigger, but AVCs is a DC add-on if you want the flexibility of a DC pension alongside your DB pension?

After all that, I'm thinking that I'll stay in alpha because at least I'll get some guaranteed pension for whatever years I work in the CS. To get that I have to contribute at least 5% and can pay more if I want extras like Added Pension and EPA? I think I will also pay AVCs, which is a DC scheme like Partnerships and from which I can take lump sums from age 55 and possibly get an income from until I take my alpha pension? I think I'll take my alpha pension before my EPA but later than 55 so that the reduction is less.

Lastly, I have 3yrs of DC pension from SHPS which I assume I should transfer to the CS scheme. Any tips on the best way to do this - does it go into alpha or AVCs or both?

Sorry for the long post!

Thrugelmir

Only started to work under the umbrella of the Civil Service in the latter part of my career. So I've ended up in a situation where I intend using my SIPP at the time I hang up my boots. Before drawing down my State Pension , Civil Service and other old employer scheme at a later date. Better to leave the CS scheme to grow. The dependents element of the scheme shouldn't be undervalued.

Sambella

Isn't it the case that Early retirement at 55 is unlikely to be the case if you are some way from SPA age?

The plan is to increase it so that it is allowable 10 years begore SPA age so will become 56/57/58 etc depending on your SPA age.

hugheskevi

Even after the early withdrawal reductions have been applied to alpha?

Yes.

I don't really understand this, but is it to do with mixing annual pension incomes with options to withdraw tax-free lump sums each year?

Not really. Alpha gives you an annual amount of pension income, inflation-linked and payable until you die. Not very flexible, but nice guarantees, eg in the event of high inflation or unexpected long-life (eg live to 120). In contrast Partnership results in a pot of money you can do whatever you like with - extremely flexible, but no guarantees. Guarantees can be purchased with that pot of money, but they are currently extremely expensive. That may change in 20 years, but if you were planning to use the Partnership pot of money to buy guarantees, it is likely alpha would be better. You choose to save in DC for the flexibility, not to try to equal the income generated from alpha.

Is this because it's better to avoid having your DB pension reduced if at all possible, and there are no penalties for taking DC pensions early?

Sort of, but more because it makes managing retirement easier and more efficient. Think about what your retirement needs are, and how best to fund them. Almost everyone will end deciding they would like something (subject to cost, of course) that paid them a guaranteed amount of money, not at risk of inflation or asset value change, payable to death without any need to constantly manage it, especially as they got older. That is a Defined Benefit pension. A DC pot that can be entirely exhausted in the early part of retirement doesn't have the same investment volatility concerns or risk of running out if you live too long. These are very serious concerns if you are going to fund your retirement entirely from a DC pot.

What would be the advantage of joining Partnerships first and alpha later on?

Alpha is more valuable the older you are (as accrued amounts only increase by CPI, which is likely to be lower than investment returns/discount rate). Partnership is more valuable as you get older, but to a much lesser extent. The Partnership employer contribution rates are capped once you reach age 46, so progressively fall behind the value of alpha.

So, I shouldn't expect to take any lump sums from alpha in my fifties and should start building up a DC pot now if I want lump sums for that age? If I needed a lump sum to clear my mortgage in my fifties, would taking it from a DC fund be a good option?

You shouldn't be planning on any alpha lump sums at all, at any age.

Using a DC pension lump sum to clear mortgage is what a pension mortgage is all about. It is extremely tax efficient, but increases investment risk so requires a good understanding of risk. With lower Lifetime Allowance though there may not be much headroom to have a pension performing the role of both funding retirement and paying off a mortgage. This is one of the situations where commencing a Defined Benefit pension early can be optimal though, as the reduced pension means HMRC value it at a lesser amount for Lifetime Allowance purposes.

I'm not attracted to DC funds because I think they will grow what I've paid in, they just seem to penalise less when you start drawing early.

This is a key point to understand fully. The actuarial reduction isn't really a 'penalty' although many consider it as such, It is simply to reflect the fact that as the pension is being paid for longer it has to be paid at a lower level to be worth the same amount overall.

If that deduction is set fairly, then it is an adjustment rather than a penalty. However, as a Defined Benefit pension is a valuable resource, and something very few have excessive amounts of, it is generally not a good idea to take early if there are alternative options, such as using a DC pot.

The DC pot can also be considered to penalise you by taking it early. If you take it at age 55 it will obviously be a lower value at age 60 than it otherwise would have been, same as the DB pension.

But am I right in saying that I'd need a big DC pot to get a decent income from it?

Depends how you intend to use the pot. A decent rule of thumb would be that a 4% withdrawal is sustainable, so whatever annual income you want, aim for a pot about 25 times that amount.

And even more difficult if I want to build that pot by my mid fifties? My idea of decent income is enough to supplement a low-wage job and/or part-time hours from my mid fifties onwards. I think I'll be happy to do some work into my mid sixities, I just want the option of not needing a well paid job at that age.

Every additional year of early retirement is more difficult, simply because you have a number of working years to support a number of years in retirement. Each year not spent working is an extra year needing to be supported from earlier work.

Your State pension age will be a minimum of 68, and probably higher. So retiring in mid 50s needs a lot of extra resources, and some of those will need to be outside of a pension, as the earliest you are likely to be able to access pensions is 10 years before State Pension age, ie, minimum age 58. That means you need to be considering S+S ISAs too (or other investment).

If I've understood the alpha pension properly (thanks to your comments), for each year I work in the CS, I guarantee myself an annual income of 2.32% of my salary in my retirement (reduced if I take it between 55 and NPA)?

Correct, and the accrued pension will increase in line with CPI.

If I buy additional alpha pension will this build up a larger entitlement from which the early withdrawal reductions will be made?

Yes, the additional pension would be reduced for early payment in the same way as the core pension.

If I pay into alpha and the AVC, does the CS still match my payments into the AVC (i.e. it's not just my contriburions that are building up the fund)?

No, any AVC payments would just be your own contributions.

Although Alpha has additonal options to increase entitlement, as my yearly entitlement is not based on a pot of money, it's not a case of me contributing a higher % and the CS matching that? I can choose to contribute more to buy the extras, but the CS doesn't make higher monthly contributions in response to that because a DB pension isn't built around the growth of a pot of money?

Yes, any extra you take in addition to alpha (Added Pension, EPA or AVCs) are entirely funded by your own contributions, the employer or the scheme does not contribute anything. The contributions do get tax relief though.

Under alpha, Added Pension is a way of making your DB pension bigger, but AVCs is a DC add-on if you want the flexibility of a DC pension alongside your DB pension?

Correct.

After all that, I'm thinking that I'll stay in alpha because at least I'll get some guaranteed pension for whatever years I work in the CS. To get that I have to contribute at least 5% and can pay more if I want extras like Added Pension and EPA?

Correct.

I think I will also pay AVCs, which is a DC scheme like Partnerships and from which I can take lump sums from age 55 and possibly get an income from until I take my alpha pension?

Correct, but minimum pension age is very likely to increase, so only plan on being able to access any type of pension from age 58, and maybe higher (plan on 60 until policy around minimum pension age and state pension age increases is clearer, both should see announcements and legislation in the coming years).

Lastly, I have 3yrs of DC pension from SHPS which I assume I should transfer to the CS scheme. Any tips on the best way to do this - does it go into alpha or AVCs or both?

You don't have to transfer it, but it is an option. It can be put into either alpha or AVC (or left where it is or put into another DC scheme entirely if you wish). The decision is essentially whether you want additional DC pension or more DB pension.

Sorry for the long post!

Don't be. The decision of Partnership or alpha is very hard to evaluate, and something most don't consider and at best just reach for old chestnuts such as public service DB pensions are amazing and DC is terrible to 'inform' their decision.

Your conclusions sound sensible, and you are on a good path to planning the future and managing your retirement which is something most fail to do until much later in life, if at all.

One thing to remember at your age is that a lot of unforeseen things will happen. Don't worry too much about planning the entire route to State Pension age, just make sure you are on a decent course and doing sensible things. In particular, don't overcommit in any particular direction too early.

[Deleted User]

Thanks so much, I understand pensions so much more than I did before (admittedly I was starting from a low base)!

So, if I have my heart set on 55, but I probably won't have access to pensions until 58-60, I'll need savings/investments to cover 5 years when I reach 55?

The increasing SPA is depressing. People's health and life expectancy varies so much. Early withdrawal reductions should be an option for the state pension too, or an option to pay more NI in exchange for an earlier SPA.

Kynthia

I think it would be worth you giving done thought as to what size DC pot you would need to fund the retirement you want. You would need it to start paying out at 55 or 58 and last until you think your life expectancy is. Do you think you can build tgat much in 20-25 years? Alternatively what amount of Alpha pension do you think you could get in the same amount of time (ignore inflation for a simplified rough calculation).

If you stay with Alpha then consider not transferring across your existing pension but using it to fund your retirement lump sum or funding the years before Alpha pay out. Not transferring it to Alpha gives you more flexibility but it depends how much you want that. I view additional pension the same way as it's more expensive without the employer contribution and i'd rather the money went to a more flexible retirement option to accompany my DB pension. I would perhaps feel differently if it paid out from 60 but I find 68 quite late to ensure I got value for money.

jamesd

You can't get Alpha in the private market. The guaranteed income with no investment risk has significant value and there is also very substantial diversification value.

Partnership-type defined contribution schemes are readily available in the private market with hundreds of suppliers. It's also likely that in any future job outside the public sector you''d have this type as your only option in the workplace scheme.

If you were asking about taking Alpha benefits early we'd tell you not to because of the actuarial reduction but instead to use either non-pension money or defined contribution pension money.

And that's what I suggest you start planning for now:

1. Alpha as your long term core pension income without investment risk, so join Alpha and pay in what extra you are allowed to.
2. Defined contribution pension from one of the huge range of providers of those to cover pre-Alpha age but after the age for taking benefits from this type of pension, currently 55 but plan on it being 60 by the time you get there.
3. Non-pension for the pre-pension years.

Because Alpha will provide the long term income need you'll need that much less in the DC and non-pension pots because those will only have to last for a few years, unless you decide you want to top up what Alpha would pay long term.

This sort of thing is also what those in the private sector can end up doing except in the private sector case state pension deferral can be used to provide he guaranteed for life inflation-linked income. Doing some of that yourself may also be useful.