Buying added pension worth it?

Sumarokov

Hello

I am part of the Civil Service alpha pension scheme. My pension pot is low and needs to be built up a bit. I was toying with the idea of buying added pension by monthly contributions through payroll.

But is it worth it? As I understand, the employer does not up its contributions, this is just 100% my own contributions?

Thank you for any input!

hugheskevi

But is it worth it?

Worth it compared to what? A personal pension, a S+S ISA? Property? Spending money now?

If you think you need more (guaranteed) income in retirement there probably isn't a better way to do it.

The discount rate used to price Added Pension is CPI+2.8%. You won't beat that with low investment risk products, but you may outperform it with riskier assets. Similarly at retirement an annuity won't get close, but if you used drawdown you could do better (but could also do worse).

The rubbish 12:1 commutation rate effectively means that it doesn't have a tax free lump sum option, as taking the income will usually be far better, whereas with a personal pension you would almost always take the 25% tax free lump sum.

As I understand, the employer does not up its contributions, this is just 100% my own contributions?

Yes, although the employer (ie the State) underwrites the guaranteed income so you know exactly what you will get (subject to policy change risk, eg RPI to CPI change but that is rare). Once you have made your contribution you know what you will get from the time the pension starts until such time as you die. If you die young you don't do so well, but live a long time and your pension has to carry on paying out and you don't have to worry about where the funding for that is coming from.

That is very different to a personal pension, where you have to manage your pension pot yourself and are subject to increases and falls in value and the risk of the money running out - all of which can be managed and you may do very well, but Added Pension is very much the easy option.

You also get 20/40/60/45 per cent income tax relief on the cost.

Bravepants

I have just signed up for Added Pension in Alpha, having ended my AVC contributions ready to transfer the AVC to a SIPP so I can control how much I keep in cash. I may drawdown the AVC to the annual tax free allowance for 5 years from 55, before my Premium Pension kicks in at 60.

The Alpha pension I may decide to also draw from 55 taking actuarial reduction. At 55 the reduction would be to 0.54 of the amount I would get at 67 (NRA for Alpha), and my Added Pension would also be so reduced. BUT the annual income would still be equivalent to about 4% annual drawdown of the total amount added if I had saved the same amount of money in a S&S ISA and drawdown from that at 55 at 4% per year (the standard figure used to give a good chance that funds don't run out before death); it's just that being a pension that percentage would be guaranteed, and increase with CPI each year.

It's even better to contribute to Added Pension if you are in the 40% or higher tax band.