LTA - 32% at age 32

Qwerty789

Hi everyone,

I'm a long time lurker on the forum but pop in the odd question every now and then, usually after a pension statement arrives as is the case now. These have tended to look into the future as does this one. As ever, I'm grateful for any views on the below.

In short, the question is:

I'm currently a Civil Servant in Alpha (Nuvos before that) and my most recent pension statement said that I'd "used" 32% of my LTA on the scheme benefits accrued to date. At the age of 32 this got me thinking. Currently I contribute both added pension and EPA-3 on top of the core Alpha provision. This is my only pension scheme. This seems to be using the LTA up quite quickly, which whilst a nice problem to have leaves me asking - should I be planning ahead and doing something different?

Brief background:
Married, no kids. I'm an HRT, she isn't. Her pension maximises employer contribution. Homeowners w/mortgage which we overpay a little each month to make the 30yr term act like a 25yr term. Happy with our amount of cash savings & S&S ISA. All of the above and other similar things are "fine" (that is to say I'm happy but you might not necessary think they are 100% optimised).


Happy to provide more detail if it helps, but I'm not clear what impacts upon, or how to deal with, LTA planning. Is there anything different that I can/should do now, or just carry on as-is?

Thanks in advance for any thoughts.

System

When do you intend to retire? In my view, when you reach the LTA limit then it is time to retire!

Alexland

If that's correct then you have done really well but are you absolutely sure it's not a projection of how much LTA you will have used if you continue contributing at your current rate?

I am late 30s and have so far used 26% of LTA but have a DC scheme and SIPP so my investments will hopefully grow by at least 50% above inflation in the next 20 years so my existing contributions will have used 39% of an inflation adjusted LTA at the point of early retirement. Which would draw down at more than we both currently spend each month with my wifes pensions and state pensions to cover occasional capital expenses and holidays.

At least on a DB scheme your existing benefits should not consume an increasing proportion of LTA.

I guess you might want to think about the age you can access your pension and maybe make alternative provision if you want to retire earlier?

Alex.

hugheskevi

my most recent pension statement said that I'd "used" 32% of my LTA on the scheme benefits accrued to date.

Presumably you have accrued about £16,000 p/a of alpha and nuvos pension.

The 32% figure is assuming you commence your nuvos pension at age 65 and your alpha pension at age 68.

If you commence either or both pensions early your LTA usage would be lower, as the LTA usage is based on the actuarially reduced value of the pension that is put into payment.

Currently I contribute both added pension and EPA-3 on top of the core Alpha provision.

Do you know your Annual Allowance position? Buying added pension at an early age can push you surprisingly close to the Annual Allowance limit. If you breach, you should get a letter each year from the scheme administrator informing you, but your scheme administrator does not have a good reputation for accuracy so it is best to double-check everything.

If you are buying quite a lot of Added Pension you may reach the £6,800 maximum limit of Added Pension well before retirement.

Is there anything different that I can/should do now, or just carry on as-is?

With regards to pension, your options are:

• Remain in alpha with no additional payments
• Switch to Partnership
• Make additional contributions
  • Make personal or AVC pension contributions
  • EPA contributions
  • Added Pension contributions

If you expect your income to increase in the next 3-4 years to over £108,000, Annual Allowance will become an issue. In which case, your Added Pension contributions may be reducing the amount of carry-forward you will have available in the future. Even if your salary does not increase by this amount, you may find in future your available Annual Allowance limits your ability to purchase Added Pension (which may well be an argument to take as much advantage of it whilst you can).

A helpful feature of Defined Benefit schemes is that taking them early significantly reduces LTA usage. You can commence them at age 55 and HMRC still only values them at 20 x annual income. So by having a lot of alpha pension you could have an income of about £50,000 from age 55 (in today's price terms) and still be below LTA.

If you think you are going to breach the Lifetime Allowance, the Added Pension and EPA contributions become less attractive. It is pretty easy to do some basic calculations on a spreadsheet working out your pension accrual and future LTA usage, which I'd suggest you do to see how close to LTA you are likely to come.

It would be worth considering all the above to ensure you are making fully informed choices.

If that's correct then you have done really well but are you absolutely sure it's not a projection of how much LTA you will have used if you continue contributing at your current rate?

The Civil Service Annual Benefit statements don't do projections of LTA usage, so it will be current value.

Qwerty789

Thanks all - knew this would be both thought provoking and helpful.

When do you intend to retire? In my view, when you reach the LTA limit then it is time to retire!

I guess you might want to think about the age you can access your pension and maybe make alternative provision if you want to retire earlier?

No idea at the moment - could trot out a canned line of "as soon as we could do so comfortably" but there's 25+ years of uncertainty. We have children, we might not etc. With the Nuvos element payable at 65 but Alpha at State Pension Age I'm assuming I'd need something else to draw upon sooner than these dates to avoid having to reduce them by accessing early, but if I don't stay in the Civil Service forever I figured there would be time to build up a more flexible DC pot later on?

Presumably you have accrued about £16,000 p/a of alpha and nuvos pension.

Yes, thereabouts.

Do you know your Annual Allowance position?

I've no idea, and to your other points I relied on the assurance put in the statement of a letter coming through to alert me if something was causing a problem. Sounds like this is false comfort - what would be the easiest way to check?

If I stay put, which isn't unlikely, salary might creep up to £70k pa but it isn't going to get near £108k that I can foresee.

A helpful feature of Defined Benefit schemes is that taking them early significantly reduces LTA usage.

This bit I understand, I think. As above, I seem to read on here that the calculations for doing so with a Civil Service pension aren't particularly generous - but that may still be the better option if the LTA problem will arise?

If you think you are going to breach the Lifetime Allowance, the Added Pension and EPA contributions become less attractive. It is pretty easy to do some basic calculations on a spreadsheet working out your pension accrual and future LTA usage, which I'd suggest you do to see how close to LTA you are likely to come.

This bit I'm less clear on, but I suppose I knew it was an issue when I came to ask the original question. I could model salary increasing by 1%, with Alpha accruing by 2.32% pa and existing pension increasing by, say, 2% for CPI and the LTA increasing by the same? Would that give me most of the answer? Apologies of I'm missing something.

Make additional contribution - EPA contributions - Added Pension contributions

I suppose this is the do-nothing option as it carries on with things I am already signed up to, and it doesn't sound like the worst option either?

Thanks again for the help.

hugheskevi

No idea at the moment - could trot out a canned line of "as soon as we could do so comfortably" but there's 25+ years of uncertainty.

Pretty normal then. I think there are broadly two approaches:

(1) Who knows how your own personal future will be, and how the pension system will change. If there is a good offer on the table, take it.

(2) Plan everything as much as possible assuming no change in the system, and optimise as best you can.

Personally I think good planning is a combination of both, probably with a greater weight on (1) than (2).

With the Nuvos element payable at 65 but Alpha at State Pension Age I'm assuming I'd need something else to draw upon sooner than these dates to avoid having to reduce them by accessing early, but if I don't stay in the Civil Service forever I figured there would be time to build up a more flexible DC pot later on?

Reasonable enough. A key risk is change to tax relief system, which is an incentive to make as many contributions as early in life as possible to mitigate any future change to tax relief.

I've no idea, and to your other points I relied on the assurance put in the statement of a letter coming through to alert me if something was causing a problem. Sounds like this is false comfort - what would be the easiest way to check?

From your Annual Benefit Statement, add up the new accrual in 2017/18 for your alpha pension (both normal accrual and Added Pension, ignore EPA). Multiply this figure by 16. If the answer is comfortably below £40,000 you are fine. Note, this methodology isn't quite precise, but it will be close enough for a simple check.

As above, I seem to read on here that the calculations for doing so with a Civil Service pension aren't particularly generous - but that may still be the better option if the LTA problem will arise?

I think the actuarial reduction is rather harshly judged - taking your alpha pension 12 years early would currently reduce the pension by 45.7%, or 3.8 percentage points per year. Compared to many pension schemes that is not bad.

There are two key considerations for most people - first is a value perspective, and which option gives greatest overall value. Second is the loss of Defined Benefit pension - most people won't have a lot of Defined Benefit pension, and it is a very useful asset so not something that should be reduced unless essential. But if you have a lot of Defined Benefit pension, the second consideration is not an issue.

I could model salary increasing by 1%, with Alpha accruing by 2.32% pa and existing pension increasing by, say, 2% for CPI and the LTA increasing by the same? Would that give me most of the answer? Apologies of I'm missing something.

Salaries are not going to increase below inflation forever. Regardless of the political rhetoric, large parts of the public sector are struggling to recruit and retain skilled staff due to pay restraint. Using something closer to 4% in the longer term is more likely. The scheme assumed 4.75% salary escalation in the longer term at the last Valuation.

Aside from that, yes, that is all that is needed to see how likely it is that you exceed the LTA.

I suppose this is the do-nothing option as it carries on with things I am already signed up to, and it doesn't sound like the worst option either?

On the plus side, you are definitely benefiting from higher rate relief and you are purchasing a certain benefit. On the negative side you are risking having the benefits you are purchasing being reduced by 25% due to exceeding the LTA.

You are a long way from retirement, have a lot of LTA headroom and (based on current policy) have ways to mitigate the LTA breach should the risk actually become an issue.

I wouldn't be worrying too much about it now, but I would be keeping an eye on things, and seeing how likely I was to breach the LTA. Even if you conclude you are quite likely to breach, it is still possible that the best course of action would be to continue as you are, but perhaps cease the Added Pension and/or EPA contracts earlier than you otherwise would have done at some point in the future.

Plu2370

I am in a similar position and aim to use as close to 5% of my LTA each year without going over the AA.

My view is to make hay whilst the sun shines and worry about the AA now but leave the LTA till another day. So although I’m on track to breach the LTA just after my 40th birthday who knows what the next few years will bring. I certainly wouldn’t reduce any contributions, that attract 40% relief, now on the chance of potentially breaching the LTA later. Even if this may leave you in the position of breaching the LTA well before you can even take a reduced pension.

Qwerty789

Thanks again for the help - it really is appreciated.

From your Annual Benefit Statement, add up the new accrual in 2017/18 for your alpha pension (both normal accrual and Added Pension, ignore EPA). Multiply this figure by 16. If the answer is comfortably below £40,000 you are fine.

I've now done so but included the annual adjustment to existing benefits as well as, and the answer came out at £33,680. Was I right to include these alongside the new benefits accumulated in year?

When including the annual adjustments to Nuvos as well (giving the total in year accrual across both schemes?), the answer was £38,608.

Nothing extraordinary happened during that year and it was just another year's contributions + uplifts on all fronts, although the annual adjustment of 3% looks high compared to the year before at 1%.

Should I look at reducing my Added Pension contribution a little (currently 3.5%), to give some headroom? I'll take the other points on board and monitor/adjust vs the LTA but this issue might affect things sooner?

hugheskevi

I've now done so but included the annual adjustment to existing benefits as well as, and the answer came out at £33,680. Was I right to include these alongside the new benefits accumulated in year?

No, as your existing benefits are increasing in line with inflation, and you are allowed growth of up to inflation by HMRC before any pension input is generated, hence the increase in the past benefits can be ignored. However, as you are reasonably below £40,000 it is a moot point - you don't have annual allowance issues currently.

Note however that you are not going to be building up much unused Annual Allowance which could be used in the event that you breach the Annual Allowance in future, but that doesn't sound like it will be an issue for you, at least not anytime soon.

When including the annual adjustments to Nuvos as well (giving the total in year accrual across both schemes?), the answer was £38,608.

Same as above, you can ignore increases to nuvos.

Although the increases are not quite strictly neutral, as pension in input is measured 6th April - 5th April which does not align with the scheme year which runs 1st April - 31st March, the difference will be so trivial it is not worth taking into account.

although the annual adjustment of 3% looks high compared to the year before at 1%.

Just uplifting by CPI, which is the same as the starting amount of your pension is increased by when calculating pension input.

Should I look at reducing my Added Pension contribution a little (currently 3.5%), to give some headroom? I'll take the other points on board and monitor/adjust vs the LTA but this issue might affect things sooner?

From what you have said above, there doesn't appear any need at present to take any actions due to Annual Allowance issues.