HM Forces Pension - Added Pension

Silvertabby

“
768 / 54.40 = 14.11 years to break even.
Originally posted by Silvertabby ”

I think it's a mistake to calculate a payback period on an inflation-linked pension by ignoring the inflation linking Posted by kidsmugsy

In the absence of a CPI crystal ball, this is as good as any other calculation.

Silvertabby

Bah, it is still one of the very best pension schemes in the country and still non-contributory. Perfectly justified for the military. Posted by JoeCrystal

Joe - absolutely. However, it's wrong to say that the Armed Forces pension scheme is non-contributory as the Armed Forces salary is reduced at source instead. In my day the reduction was 9%.

kidmugsy

Silvertabby wrote: »

In the absence of a CPI crystal ball, this is as good as any other calculation.

No it isn't. The assumption of decades of zero inflation is entirely implausible.

Silvertabby

“ In the absence of a CPI crystal ball, this is as good as any other calculation.
Originally posted by Silvertabby ”

No it isn't. The assumption of decades of zero inflation is entirely implausible. Posted by kidmugsy

But we're not talking about 'decades' of inflation - we're talking about the break even point - ie, the time it takes to get your money back. Yes, CPI will reduce the 14.11 years I quoted but, in the absence of aforesaid crystal ball, I can only give that worst case scenario.

One of the first things I was taught when I started working for the LGPS was 'only ever quote in 'today's money - never try to add on the unknown quantity inflation as it will only ever be a best guess and could come back and bite you on the bum if you get it wrong'.

However, if it makes you happy, I've done a quick calc based on CPI averaging 2% over the next 14 years and make the 'maybe' break even point between 11 and 12 years. Less if OP finishes the payments well before he retires - but then we're back into the unknown.

kidmugsy

Silvertabby wrote: »

But we're not talking about 'decades' of inflation - we're talking about the break even point - ie, the time it takes to get your money back. Yes, CPI will reduce the 14.11 years I quoted ...

The bloke is only 44 so we are talking about decades of potential inflation from the point he makes his contributions. The inflation-linking constitutes much of the attraction of the scheme: suppressing the effect biases the whole discussion.

Silvertabby wrote: »

but, in the absence of aforesaid crystal ball, I can only give that worst case scenario.

Then you really should have pointed out that it was a worst case. In fact it's a very worst case: inflation-linking is even an advantage when there are years with negative inflation because your index-linked pension does not decline in those years, so it's still getting bigger in purchasing terms. It's a ratchet, a valuable asset that you can't buy in any other way.

Silvertabby wrote: »

One of the first things I was taught when I started working for the LGPS was 'only ever quote in 'today's money - never try to add on the unknown quantity inflation as it will only ever be a best guess and could come back and bite you on the bum if you get it wrong'.

Yes but you're not in a cover-your-!!!! LG job now.

hugheskevi

You'll get tax relief on your contributions, but will pay tax on the pension purchased.

So, £80 x 12 - 20% = £768.

£68 - 20% = £54.40

768 / 54.40 = 14.11 years to break even.

The OP said

The Added Pension runs from Apr - Apr, if you were to make monthly payments from 1 Sep 17 - 31 Mar 18:

£80 per month contribution adds £38.99 per year payable at SPA.

So gross contribution would be only 7 months at £80, a total of £560.

But you also cannot ignore lost return on contributions (you could very pessimistically assume CPI for simplicity, but it would be an extremely conservative assumption).

Assuming a 5% return (including inflation, and still conservative) £560 would increase to £1720 by SPA. The Added Pension (assuming CPI of 2%) would increase to £61. That is a 28:1 ratio for an indexed amount from age 67/68 and isn't too different to what an indexed annuity on open market would cost.

Putting similar figures into the Civil Service alpha Added Pension calculator suggests £560 lump sum contribution would purchase around £58 per year of Added Pension, so I wonder if the quoted figures are accurate.

Ivrytwr3

So each year, i apply and the figures will be different - so looking at it b&w, does anyone recommend/not recommend Added Pension?

Thanks to all.

Silvertabby

“ But we're not talking about 'decades' of inflation - we're talking about the break even point - ie, the time it takes to get your money back. Yes, CPI will reduce the 14.11 years I quoted ...
Originally posted by Silvertabby ”

The bloke is only 44 so we are talking about decades of potential inflation from the point he makes his contributions. The inflation-linking constitutes much of the attraction of the scheme: suppressing the effect biases the whole discussion.

He is looking to retire and take his pension from 50, so just 6 years rather than decades.

Yes, he can take his pension from 50 (or even now, if he wants to).

Ivrytwr3

One thing to note about Added Pension is this cannot be taken until SPA or if having served until aged 60 then can be taken immediately (or so i believe is the case).

It was so much easier to understand AFPS75!

hugheskevi

so looking at it b&w, does anyone recommend/not recommend Added Pension? ... One thing to note about Added Pension is this cannot be taken until SPA or if having served until aged 60 then can be taken immediately (or so i believe is the case).

The letter doesn't make clear what the Normal Pension age (NPA) of the Added Pension is. Given you state earlier in the thread that you intend to leave around age 50 that presumably means your expectation is that you will leave before commencing your pension and your NPA for both your post 2015 pension and any post 2015 Added Pension you purchase is your State Pension age (67 or 68).

If the NPA is equal to State Pension age, I think the figures for Added Pension are not attractive, especially as there is effectively no cash free lump sum, given the 12:1 commutation rate is prohibitive in normal circumstances and no dependents benefits either.

I think a private pension would be expected to work out better, even if you ended up purchasing an annuity, but of course there is investment uncertainty there.

I am quite surprised at this quote, usually Added Pension is very good for income (ie compared to using a private pension and purchasing an annuity). Perhaps the oddity of paying it unreduced from age 60 if you are still in service but only from age 67/68 if you are a deferred member means the pricing is heavily based on it being payable from 60, which you do not benefit from. But that is just a guess, I'm not very familiar with Armed Forces pension.