Clueless on Pensions - Civil Service Alpha or Partnership?

CEliz

Hello!

I am about to begin a job with the Civil Service and have been asked to choose a pension scheme. The options I have been given are either the Alpha or the Partnership.

I am 27 years old and honestly quite clueless when it comes to pensions. I have never been taught anything about them and when I research myself online to try to come to grips with them, I am left in a confused, stressed out state.

I have heard that the Civil Service pension is one of the very best so I want to ensure I choose the very best available scheme. Of course I want to retire with the best pension pot possible and ideally retire before the state pension age if possible. With this currently being at 67 years old, who knows what it will be by the time I come to retirement.

After choosing my pension scheme, I am allowed to switch to the other ONCE in my lifetime.

WHAT KIND OF SCHEME IS IT?
ALPHA - Defined benefit scheme. Offers a pension income based on your earnings over your career and your years of membership in the scheme.
PARTNERSHIP - Defined contribution scheme. A type of pension where benefits are dependent on contributions and the growth of the pension fund.

HOW MUCH WILL I PAY?
ALPHA - You will contribute between 4.6% and 8.05% of your pensionable earnings, depending on how much you earn. (I will be earning £20,246).
PARTNERSHIP - You do not have to pay anything. You can pay as much as you like up to 100% of your pensionable earnings. Your employer will match your contributions, up to 3%.

HOW MUCH WILL MY EMPLOYER PAY?
FOR BOTH - Your employer will make a contribution as a percentage of your pensionable earnings.
When clicking on the website for more information on this, it informs me that 'Employer Contributions 2017/18' for my salary band - £23,000 and under - ASLC rate from 1 April 2017 = 20.0%.
However it also says that 'Employer partnership contributions' from 1 October 2015 which are ahe related contributions - for under 31 it is 8%.
This confuses me - does this mean I am receiving 20% of contributions or 8%??

WILL I GET TAX RELIEF ON MY CONTRIBUTIONS?
FOR BOTH - You get tax relief on contributions, subject to HM Revenue & Customs rules.

HOW DOES MY PENSION BUILD UP?
ALPHA - You build up alpha pension at a rate of 2.32% of your pensionable pay each year.
PARTNERSHIP - Contributions are invested in a fund of your choice by your partnership pension provider.

RETIREMENT PENSION
ALPHA - This will be made up of the 2.32% of your pensionable earnings each year, adjusted in line with prices.
PARTNERSHIP - Contributions are invested to build up a pension pot that can be used to fund your retirement.

LUMP SUM
ALPHA - You can choose to exchange 25% of the total value of your pension benefits for a tax-free lump sum, subject to limits set by HM Revenue & Customs.
PARTNERSHIP - You can choose to exchange some, or all of your pension pot for a lump sum, subject to limits set by HM Revenue & Customs.

WHEN CAN I TAKE MY PENSION?
ALPHA - In alpha, you have a Normal Pension Age (NPA), which is the same as your state pension age. You can take your pension before your NPA, although your benefits will be reduced to take account of early payment. The minimum pension age in alpha is 55.
PARTNERSHIP - You can take your pension at any time from age 55. You don't have to retire to take your pension.

ILL-HEALTH BENEFITS
ALPHA - You can apply for ill-health retirement. If the scheme medical adviser confirms your health will permanently prevent you from being able to do your job, you can have your alpha pension paid early. Your pension can be increased if you are unlikely to be able to return to any sort of employment.
PARTNERSHIP - You can apply for an ill-health payment. If the scheme medical adviser confirms your health will permanently prevent you from being able to do your current job, you could receive a lump sum when you leave. You can draw your pension before age 55 if you retire because of ill-health.

WHAT BENEFITS ARE THERE FOR MY FAMILY?
ALPHA - If you die with at least one year's service, alpha provides pensions for your spouse, civil partner, or nominated partner and any dependent children. If you die in service, alpha also provides a lump sum that can be paid to people or an organisation that you nominate.
PARTNERSHIP - If you die before you take your pension, your provider will pay the value of your pension to the named person on the pension application form. If you die in service a lump sum can be paid to people or organisations that you nominate. On retirement, you can choose whether or not to provide a pension for your dependents as well as for yourself.

I would SO much appreciate some advice on which scheme is the best!!

Thank you for any help you can provide!

Lokolo

Basically you have the choice of a defined benefit scheme (Alpha) or a defined contribution scheme (Partnership).

Defined benefit schemes are usually the best winners as they guarantee income based on years services and salary. The defined contribution scheme will depend on performance of your investments.

If you see yourself working there longterm you would benefit more from the Alpha scheme.

hugheskevi

I am 27 years old and honestly quite clueless when it comes to pensions.

This points toward alpha, as you need more involvement with Defined Contribution pensions. Partnership is a very good scheme, and may be the better scheme is a variety of situations, but it is best to view alpha as the best default choice and only choose Partnership if you have a convincing reason to do so.

ideally retire before the state pension age if possible. With this currently being at 67 years old

It is already 68 for you

After choosing my pension scheme, I am allowed to switch to the other ONCE in my lifetime.

That all changes from April, when you can switch as many times you like, but only once in any 12 month period.

When clicking on the website for more information on this, it informs me that 'Employer Contributions 2017/18' for my salary band - £23,000 and under - ASLC rate from 1 April 2017 = 20.0%.
However it also says that 'Employer partnership contributions' from 1 October 2015 which are ahe related contributions - for under 31 it is 8%.
This confuses me - does this mean I am receiving 20% of contributions or 8%??

The employer contribution rate should you be in alpha is 20% of pensionable pay. But that is a meaningless figure - all that matters to you is the benefits you accrue (2.32% of pensionable earnings).

The employer contribution if you go to Partnership is 8%. That is very important, as that is what is going into your pension fund.

Don't make the mistake of comparing 20% with 8% and concluding alpha is superior - the employer contribution rate is calculated across the scheme as a whole, and includes past service deficit contributions (which are of no value to you).

If you see yourself working there longterm you would benefit more from the Alpha scheme.

To clarify, by long-term you presumably mean 2+ years, which is the vesting period for alpha. Anything beyond 2 years doesn't make much difference.

CEliz

"The employer contribution rate should you be in alpha is 20% of pensionable pay. But that is a meaningless figure - all that matters to you is the benefits you accrue (2.32% of pensionable earnings).

The employer contribution if you go to Partnership is 8%. That is very important, as that is what is going into your pension fund."

Does this mean that my employer will contribute more if I were on Partnership? Which scheme will lead me to the largest pension pot?

hugheskevi

Does this mean that my employer will contribute more if I were on Partnership? Which scheme will lead me to the largest pension pot?

If you are in alpha, the employer contribution rate is irrelevant. Whether they pay 2% or 80% of your salary to the pension scheme, you still get the pension promised, which is 2.32% of your pensionable pay. It is the value of that pension which is important, not the employer contribution rate. Valuing a pension is very difficult.

It is impossible to say which will lead to the largest pension pot, as they work in completely different ways. Alpha provides you with an annual pension for life, Partnership provides you with a pot of money to do as you wish.

But in general, you won't go far wrong choosing alpha, unless you have a clear reason to choose Partnership. Clear reasons are usually (i) can't afford alpha member contribution rates, (ii) high-earners affected by pension tax restrictions and (iii) those who are only going to be in the job a short time, under 2 years.

p00hsticks

CEliz wrote: »

Does this mean that my employer will contribute more if I were on Partnership?

No, not necessarily.

CEliz wrote: »

Which scheme will lead me to the largest pension pot?

You only get a 'pot' with the Partnership scheme - both you and your employer put money into the pot, which is invested, and how much it's worth will depend on how the investments perform. When you retire you can either use your pot to buy an annuity (which will guarantee an income for life) or withdraw money from it gradually as and when you want until it's gone (or if you die before then you can pass what remains on to your beneficiaries).

Rather than a pot, the alpha scheme gives you a commitment to pay you a certain amount of money, linked to your salary and increasing linked to inflation, from when you reach retirement age for the whole of your remaining life, however old you may live to.

JoeCrystal

CEliz wrote: »

"The employer contribution rate should you be in alpha is 20% of pensionable pay. But that is a meaningless figure - all that matters to you is the benefits you accrue (2.32% of pensionable earnings).

The employer contribution if you go to Partnership is 8%. That is very important, as that is what is going into your pension fund."

Does this mean that my employer will contribute more if I were on Partnership? Which scheme will lead me to the largest pension pot?

No, for Civil Service Alpha, there is no pension pot. Instead, you got taxpayer backed promise to pay you an index-linked pension scheme once you retire with bells and whistles and it is an very expensive promise. Civil Service Partnership on the other hand will give you an actual pension pot although it is totally uncertainly what is your income as it is entirely rest on your realistic contribution and it is entirely up to you to make sure that you are on track.

With Civil Service Alpha, you get very good deal and don't have to worry slightly about what retirement income you will from Civil Service Alpha as you know exactly what they will pay you in the future in real term.

With Civil Service Partnership, what if your pension pot suffers 40% crash before you are due to retire...

You point out that you are 27 and assuming you want to retire at 68. Let say you work for 41 years for the Civil Service and assuming your wage goes up at CPI (I know that is extremely unlikely but it does make it easier to work out what you will get by 68).And your salary is £20,246.

Civil Service Alpha: You contribute 4.6% or £77 per month and assuming nothing change and you work for 41 years and at the accrual rate of 1/43.1, you will get £19,259 pension,

If you want to aim for £19,259 by 68 with 41 years of contribution and assuming that Civil Service contribute 8%, then you will need to contribute £1653.42 or 98% of your salary per month personally. (It does results in £1,050,000 pension pot but it assume you want to buy an index-linked annuity)

p00hsticks

hugheskevi wrote: »

But in general, you won't go far wrong choosing alpha, unless you have a clear reason to choose Partnership. Clear reasons are usually (i) can't afford alpha member contribution rates, (ii) high-earners affected by pension tax restrictions and (iii) those who are only going to be in the job a short time, under 2 years.

Re (iii) - unless they've changed the rules recently I'm not sure this is a reason for avoiding alpha, as if you leave within two years they will let you transfer your accumulated pension built up so far (including effective employer contribution) into a subsequent employer or personal private pension.

hugheskevi

Re (iii) - unless they've changed the rules recently I'm not sure this is a reason for avoiding alpha, as if you leave within two years they will let you transfer your accumulated pension built up so far (including effective employer contribution) into a subsequent employer or personal private pension.

Agreed (and you can still transfer), but some find difficulties in transferring a DB pot, even though it is short-service. Not a convincing reason, but I can see why some might think that if they don't plan on being there a long-time then it might be best to avoid the trouble and go directly into a DC scheme. The problem is that even those on fixed term contracts can easily end up staying many years, and if they went into Partnership at first may just end up staying there when it isn't in their best interests.

CEliz

JoeCrystal wrote: »

Civil Service Alpha: You contribute 4.6% or £77 per month and assuming nothing change and you work for 41 years and at the accrual rate of 1/43.1, you will get £19,259 pension,

How does this work? I want to ask as in will I be paid £19,259 per year but that feels far too optimistic?

JoeCrystal

CEliz wrote: »

How does this work? I want to ask as in will I be paid £19,259 per year but that feels far too optimistic?

Because that's how the Civil Service Alpha work atm??? For every year of service, you will get 2.32% of your salary for that year. 2.32% of £20,246 is £469.70 per year. Assuming your pension for each year get adjusted in line with prices at the same rate as your pay, then 41/43.1 works out as 95% so therefore, it is £19,259 in real money but that is most straightforward version. You will get pay rise and get promotions and so on and you may not stay for 41 years.

Each year, you build up 2.32% of the salary in that year and these years get revalued. Lot of years added up to a lot of pension. And don't forget that you can apply for added pension for up to £6,500 with a lump sum payment or monthly payment.