Police pension or SIPP

ewaste

Indeed the loss of the 20% tax relief is a major downside although at least it's not 40% or salary sacrifice. It's the age old trade off between tax efficiency and accessibility, if the OP becomes a higher rate taxpayer then the SIPP route seems like a clearer choice. .

I think this is where a LISA might be good middle ground, you get the equivalent of tax relief on your (£200*12= £2400) contribution but could access the money should you absolutely need to albeit with penalty. It's not quite as locked in as a SIPP but still has the upside of added Government contribution.

stoozie1

I think the 2015 CARE part of the pension pays your spouse 33.75% in the unfortunate event of your death in service, not half. So the SIPP would be more attractive from that point of view.

AnotherJoe

captainreckless wrote: »

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!

Not wrong, but I'd say the issue is you whilst you are making a fair comparison, police pension to indexed linked annuity, is that a useful one? Very few people would go for an indexed linked annuity, and especially at age 55 or so, it would be be terrible value for money.

OTOH if the OP invested in a SIPP, it would give them flexibility, in particular the ability to retire at an earlier age without impacting their police pension, and they wouldn't need to run it for their lifetime, they might simply choose to use it to fill the gap between retirement and police pension, running it down to zero.

So, sticking with age 55 (though that might be 57 as you say) the OP could spend that £85k over 5 years at £17k a year or so, which when combined with a part time or less stressful job, should be ample and give him more options than whatever the police scheme insists he does.

I dont know what the TS&Cs are of additional contributions he can make to his police pension instead of SIPP and if he has the same flexibility with those.

And as said by others if he wishes to retire earlier than 55/7 then an ISA might be a better route.

hugheskevi

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.

This is rare in the public sector, only applies to AVCs started pre-2015 in the LGPS I believe.

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.

Your previous pensions remain in the schemes you accrued them in, with final salary links, etc, in place. It is only future accrual you for which you have moved into the 2015 scheme.

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.

It was announced that minimum pension age will increase to State Pension age (which for you is 68 and is subject to change) minus 10 years, although that was back in 2014 and it still hasn't been legislated for so there has to be doubt about whether the change will actually happen.

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!

The discount rate used in the calculations is CPI+2.8%, so 4.8% if CPI is 2%. That is about as close as you will get to a rate of return without more detailed calculations.

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.

That is not correct, the contribution required will be higher closer to retirement.

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).

This strongly suggests it would be preferable to save into a Stocks and Shares ISA and then make extra pension contributions when you are a higher rate taxpayer.

I think the 2015 CARE part of the pension pays your spouse 33.75% in the unfortunate event of your death in service, not half. So the SIPP would be more attractive from that point of view.

Added pension would provide 50%, if the OP were to choose spouse protection option.