SIPP & Alpha CS Pension Plan - Talk to me!

twotonealex

Good Morning All!

I apologise if this a long one!

I'm 26 and am starting a role with the civil service this coming week, and like every other person who has posted the fabled 'Alpha VS Partnership thread' I am just looking for clarification on whether I have made the right decisions and understood correctly.

So to explain:

I'm 26, and would like to retire at 55, or as close as possible. I am disregarding any state pension as I feel this will be an 'added bonus' if I live to see it as no doubt you'll be have to be 90 before you will entitled to it by the time I am of retirement age!

I have approx. £5000 in a SIPP with Hargreaves Lansdown, that is diversified across individual stocks and some funds. This is from previous employers and a £10 per month pension I started several years ago all put into this SIPP which I fund with £25 per month. This will remain a SIPP and be used for either some form of lump sum or to help bridge any gap between pension drawdown ages. On £25 contributions, over 28 years (26, nearly 27YO, means 28 years till 55) the pot would grow by £8400, not taking into account tax relief or any growth on this or previous investments in the SIPP.

My starting salary with the CS is £34K, I have been given the well known two options of a partnership scheme to buy an annuity at retirement and an Alpha Defined Benefit scheme.

After reading MSE other forums over the past few days I am heavily drawn towards Alpha, taking into account the calculations (please can someone confirm these are correct below?) of my annual pension I will receive on retirement and the fact that it is guaranteed which as I'm sure everyone will agree is very valuable in itself. I know the Alpha drawdown age is linked to the state pension age, or at least higher than when I want to retire but I will address that in a moment!

I am paying 5.45% salary sacrifice for the Alpha scheme, 2.32% of my pensionable pay will build up each year, and will have adjustments in line with inflation as standard, this total amount at the end will be what I will receive each year until my departure from the living world? So basing the below on my salary never changing (to keep it simple):

34000 X 0.0232 = £788.80 (2.32% of pensionable salary) will buy a 'block', each year this buys another, so say the national retirement age is 68, I will have 42 years of contributions:

788.80 X 42 (years) = £33129.60 (not taking into account adjustments for inflation) per year for the rest of my life.

Is that correct?

I am mindful that if you are planning on retiring earlier than the state pension age/whatever age Alpha have specified, then you will pay a penalty, am I correct in saying you can pay to offset this penalty through an EPA? If so, is there a max amount of years you can reduce your alpha pension age by? (eg. from 68 to 55ish)

I am prepared to take a pre-inflation adjusted annual pension of £22K or more or somewhere around that.

The reasons for all this is I'm still getting the badgering thought of a partnership pension however my concern is the vulnerability/performance of funds etc by a provider, nor would I feel confident enough to manage my whole retirement pot in a SIPP. In addition, it is unclear as to what contribution the CS would make to my partnership pot, and the realistic annuity I could buy
at the end (keeping in mind my target retirement age of 55) I feel would be substantially smaller than the DB amount through Alpha.

I would really appreciate some guidance on whether it makes financial sense to go with Alpha, whether my calculations are correct, and whether an EPA is possible to facilitate my earlier retirement.

Thanks so much for reading! :beer:
Alex

Joey_Soap

Well, both my grown up children are in CS jobs and both are in Alpha which I think in the modern day is an excellent scheme particularly the pretty generous accrual rates. Like you, they aspire to not retire at state retirement age. So, they both have SIPPs running alongside their Alpha scheme. As parents we realised early on that our kids weren't going to benefit from the same pension provisions we enjoy so we started their SIPPs for them when they were quite small. I think a combination of Alpha and SIPP alongside it is going to be pretty much as good as it gets. HTH.

NoMore

For your planned retirement age of 55, you are likely to need savings/investments outside of pensions. Sipp minimum age for withdrawal is likely to move to being 10 years less than SPA, which is also likely to move out considering your current young age.

At best you are likely to need 3 years worth of savings/investments outside of a Pension (earliest access to SIPP will be 58).

hugheskevi

I have approx. £5000 in a SIPP with Hargreaves Lansdown, that is diversified across individual stocks and some funds. This is from previous employers and a £10 per month pension I started several years ago all put into this SIPP which I fund with £25 per month.

You may wish to consider transferring this into alpha, Partnership or a Civil Service AVC pension.

I have been given the well known two options of a partnership scheme to buy an annuity at retirement

Why do you think you have to buy an annuity at retirement? Why not drawdown or UFPLS?

I know the Alpha drawdown age is linked to the state pension age

The technically correct wording is alpha normal pension age.

I am paying 5.45% salary sacrifice for the Alpha scheme

I very much doubt you are paying salary sacrifice - the scheme does not permit it. You will just be paying normal member contributions, which are subject to National Insurance.

34000 X 0.0232 = £788.80 (2.32% of pensionable salary) will buy a 'block', each year this buys another, so say the national retirement age is 68, I will have 42 years of contributions:

788.80 X 42 (years) = £33129.60 (not taking into account adjustments for inflation) per year for the rest of my life.

Is that correct?

Correct.

I am mindful that if you are planning on retiring earlier than the state pension age/whatever age Alpha have specified, then you will pay a penalty, am I correct in saying you can pay to offset this penalty through an EPA?

The technically correct wording is actuarial reduction, rather than penalty. You can reduce the age at which an alpha pension is payable without reduction by purchasing EPA.

If so, is there a max amount of years you can reduce your alpha pension age by? (eg. from 68 to 55ish)

3 years, subject to a minimum of age 65.

You could also purchase alpha Added Pension, enhancing the amount of pension you have built up, such that when it is reduced for early payment you have the same amount of pension you would have had if you simply contributed to alpha and worked to age 68.

I am prepared to take a pre-inflation adjusted annual pension of £22K or more or somewhere around that.

The figure will probably change many times in the future, it is rather early in life to be setting such specific targets. You need to keep flexibility in mind, as plans change. Also consider the difference between price and earnings increases, and which you should be targetting.

For example, at the moment, £22,000 per year is about 135% of annual minimum wage. If price growth averages 2% and earnings 4.3% in the next 42 years, a price-increased £22,000 would be just slightly over half of annual minimum wage (assuming minimum wage increases in line with earnings). Would you be happy living on half of annual minimum wage?

In addition, it is unclear as to what contribution the CS would make to my partnership pot

They are clearly set out in the Partnership Scheme Guide? 8% plus matching of up to 3 percentage points of any contributions you choose to make. As you get older the employer contribution rates increase.

and the realistic annuity I could buy at the end (keeping in mind my target retirement age of 55)

It would be questionable to buy an annuity in general, but to buy one at age 55 would be an extremely dubious decision compared to the alternative ways of accessing pension.

PeacefulWaters

Considerations:

Funding ages 55-57 should be non-pension. Stocks and shares ISA probably the current best option.

Age 58-Unknown it may well be SIPP time. £25 a month will be woefully insufficient so should be accelerated.

Age Unknown-67 may well need your main scheme. How big will your actuarial reduction be, as it might immediately hamstring your whole plan.

Age 68 onwards enjoy. Unless the next few decades see further reductions to value accrual.

twotonealex

You may wish to consider transferring this into alpha, Partnership or a Civil Service AVC pension.

A valid point, do you mean now or closer to retirement?
Does adding it to Alpha mean that if I transferred £5K it would be an extra £5K per year? (surely not?) or £5K divided across the X amount of years worth of contributions?

Why do you think you have to buy an annuity at retirement? Why not drawdown or UFPLS?

In all honesty my knowledge isn't great on drawdown VS annuity however, matching the same contribution of 5.45% (with Alpha) but adding it to the 11% total CS contribution in a partnership:
34K X 0.1645 = 5593 X 28 (age being 55) = £156604 (not taking into account inflation etc).

I don't see that 'pot' being able to replicate Alpha? (I realise I've not allowed for growth but how do I predict that! :beer: )

The technically correct wording is alpha normal pension age.

I very much doubt you are paying salary sacrifice - the scheme does not permit it. You will just be paying normal member contributions, which are subject to National Insurance.

Apologies, my incorrect wording!

Correct.

Great to know!

The technically correct wording is actuarial reduction, rather than penalty. You can reduce the age at which an alpha pension is payable without reduction by purchasing EPA.

3 years, subject to a minimum of age 65.

Okay, thanks for the clarification.

You could also purchase alpha Added Pension, enhancing the amount of pension you have built up, such that when it is reduced for early payment you have the same amount of pension you would have had if you simply contributed to alpha and worked to age 68.

I will look into this online, but if your time allows: how does the Added Pension work? is it a direct contribution to the alpha amount that increases your annual payments, and if so how is it calculated? Or is it like a partnership/other pension pot that you just draw from to offset the early payment of Alpha?

The figure will probably change many times in the future, it is rather early in life to be setting such specific targets. You need to keep flexibility in mind, as plans change. Also consider the difference between price and earnings increases, and which you should be targetting.

For example, at the moment, £22,000 per year is about 135% of annual minimum wage. If price growth averages 2% and earnings 4.3% in the next 42 years, a price-increased £22,000 would be just slightly over half of annual minimum wage (assuming minimum wage increases in line with earnings). Would you be happy living on half of annual minimum wage?

This is a fair point, I think it's integral that I mention I also plan on having some investment properties. So even though this will be a large part of my income, it won't be the entirety.

Thanks for the informative responses!
Alex

hugheskevi

A valid point, do you mean now or closer to retirement?
Does adding it to Alpha mean that if I transferred £5K it would be an extra £5K per year? (surely not?) or £5K divided across the X amount of years worth of contributions?

You can transfer funds into Partnership anytime you are a Partnership member, into AVCs anytime you are an alpha member, but only into alpha during the first twelve months you are a member of alpha.

There is a factor, set actuarially and variable according to age, to determine the alpha credit. So if the factor was 6:1 and you transferred in £5,000 you would get an alpha pension credit of £833.

In all honesty my knowledge isn't great on drawdown VS annuity however, matching the same contribution of 5.45% (with Alpha) but adding it to the 11% total CS contribution in a partnership:
34K X 0.1645 = 5593 X 28 (age being 55) = £156604 (not taking into account inflation etc).

That is fine for illustration, but in practice you aren't getting much incentive to contribute any more than the minimum required to maximise the employer contribution, as you are a basic rate taxpayer and there is no salary sacrifice available. Probably better to wait until you are a higher rate tax payer before making additional pension contributions.

I don't see that 'pot' being able to replicate Alpha?

The scheme discount rate when the Partnership rates were set was CPI+3%. So, if actuarial assumptions prove to be correct, if you could obtain a 5% (CPI being assumed to be 2%) growth after charges then Partnership would be expected to be the same value as alpha. However, you will not get 5% after charges (and remembering that these charges need to include cost of decumulation, ie drawdown, annuity, etc, so are higher than just the normal AMC/TER/OFC, etc, charges in a pension) without taking investment risk. But if your returns were significantly above inflation+3%, Partnership would end up winning.

how does the Added Pension work? is it a direct contribution to the alpha amount that increases your annual payments, and if so how is it calculated? Or is it like a partnership/other pension pot that you just draw from to offset the early payment of Alpha?

It is pretty simple. You pay an amount of money (which you determine) which purchases an amount of alpha pension. Again, an actuarial factor applies which is based on age. If the factor which applied to you was 6:1 and you chose to contribute £600 per year then you would build up £100 of Added Pension, which would be paid as part of your alpha pension. The Added Pension increases each year in line with CPI and is accessed at the same time you commence your alpha pension.

twotonealex

Hugheskevi - Thanks for all the info, I'm going to find out who the relevant union is when I start this week, and see if they have any deals with an IFA. It's the right time to get a clear understanding about all my options and what is required for my retirement goal of 55.

I appreciate the info from all contributors on this thread!
Feel free to add any more info you feel relevant.

Cheers!
Alex