Police pension or SIPP

Jamesl1391

Hello,
I was wondering if you could clarify whether it would be better to invest in a SIPP or to make additional contributions to my police pension.

I intend to continue my police pension, but I have about £200 spare each month that I could utilise.

I am 37 years old and have been in the police 13 years, with a minimum of 18 years to go. I appreciate that circumstances vary for each individual, but is it possible to outline the pros and cons.

Many thanks.

ewaste

Your lucky to be in probably one of the best pension schemes around especially as the normal retirement age is 60 rather than tied with the state pension age of 68.

The usual questions would be, are you a Higher Rate Taxpayer and when would you like to retire? these make it much easier to work out the pro's and con's of different tax wrappers.

david78

There are different Police schemes (1987, 2005, 2015), which one are you in? (probably not the last one). There may be different terms for additional contributions.

Superscrooge

Despite the changes in 2015 The police pension scheme is still one of the best pension schemes around. A SIPP is inherently more risky. You are reliant on the performance of whatever funds you choose to invest in. There are no guarantees. Unlike the police scheme which will have guaranteed benefits including ill health pension

captainreckless

I'm in the teacher's pension scheme, which isn't exactly the same... but I looked into this a few years back.

The additional pension has the advantage of being guaranteed. You know pretty much exactly what you'll get when you retire. With investments into a SIPP, you take on investment risk and it's not possible to know with certainty how much you'll end up with in 20 years time. However, for fun I'm going to guess...

I don't know how much additional pension you could buy for £200 a month in the police pension, but for comparison I looked up what you'd pay if you wanted to buy an index linked annuity at age 55. If somebody today wanted to buy an annuity at age 55 that increased with inflation it might cost something like £100k to get £1900 a year. Invested in a SIPP (and assuming that you pay basic rate tax that is refunded on your contributions) I guess you might end up with about £85k after 18 years of putting in £200 each month (assuming %5 pa growth, which might not be a good assumption). Also, I think by the time you get to retirement you'll have to wait until you're 57 before you can access the SIPP.

If I knew I could take my full pension at age 55 then I'd buy additional pension. As it is, I have to wait until age 67 to receive my pension without any reductions.

So that's my take on it. Hopefully a real expert will come along and point out why I'm wrong!

david78

It is likely the Police Pension will be the better option. But people will be able to give better guidance if they know which one it is.

Sometimes, additional contributions to a defined benefit scheme go in a separate defined contributions section. This "money purchase" section can then be taken as all or part of the tax free lump sum. E.g., you can take all the money tax free if its value is less than 6.66*defined benefit pension.

Calculation: defined benefit pension = £20k (for example). Additional contribution = 6.66*£20k = £133.2k. Max tax free cash = 25%*(20*£20k + 133.2k) = £133.3., therefore all additional contributions can be taken tax free.

You won't get this benefit if you use a separate personal pension/SIPP as the two pensions would then be not linked.

Jamesl1391

Thank you for your responses. I have been part of all three schemes, but the pension has now transfered entirely to the new 2015 CARE scheme. I am a basic rate tax payer (although close to higher rate) and my aim is to retire as early as possible, which I believe will be 56 (after 30 years service).

I like the idea of being able to manage my own investments through a SIPP (running alongside my police pension). Although I appreciate that police officers can still retire earlier than most, this only applies if you stay in the police until retirement (60 years for a full pension). Although I enjoy the police now, I still have 18 years to go, and if I was to leave the police in the future then my pension would be delayed until the state retirement age -and suddenly the police pension doesn't that great after all!

Also, worst case scenario, if I was to die then I think I'm right in understanding that my wife would only receive half my police pension, but alternatively could receive everything that I place in a SIPP.

I am fortunate in having a comfortable amount of savings and have paid off my mortgage. My thoughts are that a SIPP would effectively act as a good long term investment, that I would have full control over, and could access at 55.

The main thing I'm trying to work out is what the effective rate of return would be on a £200 monthly additional contribution to my police pension, over the next 18 years. Once I can work out the rate of return then it would allow me to have a more informed decision over whether this outweighs the benefits of a SIPP. It just seems almost impossible to do this unless your a mathematical genius!

Jamesl1391

Also, I might be wrong, but I don't think it makes any difference whether I start putting in additional contributions now, or whether I just pay in larger lump sums right near the end of my service. This is because I think the contributions attract the same rate of accrural.

I believe that it might work out far better to save/invest my money (and gain interest on it) for the next 16/17 years and then pay large lump sums into my police pension in the final few years of my service.

david78

I still cannot tell if these additional payments would be buying defined benefits or going into a fund.

Don't underestimate the benefit of a guaranteed income.

ewaste

Apparently the Police Pension scheme 2015 doesn't have an option of Additional Voluntary Contributions only the option of added pension up to £6500, please correct me if I'm incorrect. Death depends on whether it's death in service or not but a widows pension is based on the defined benefit portion including any added pension if you opt to pay for dependants benefits.

If your aim is to retire as soon as possible then I would probably suggest your best to utilise S&S or IF ISA's because the other tax wrappers e.g. LISA and SIPP both have age related withdrawal restrictions. The current minimum pension age for a SIPP is 55 which will probably rise to 57 by 2028, I can't remember if that has actually been passed into law yet, and will probably rise further in due course.

GunJack

^^^ the main issue with the ISA route is the lack of tax relief added to your fund