Civil service pension & want to retire early?

SweetPie

Hi,

I am in my late 20s and recently joined civil service. I have the options between two schemes, alpha (defined benefit scheme) and partnership (defined contribution scheme). The retirement age on alpha is currently 65 and may increase. The retirement age on partnership is age 55. I definitely want to retire by 55, so which scheme would I better off on? I can also see myself reducing my hours from age 45 or so. You can switch between the schemes currently once a year.

Further details about the schemes are as follows:

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 earn 35K)
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. (For alpha it is around 20% and for Partnership it is 9% (increases with age) and 3% on top of what you put it in. So at a minimum 12%.

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.

JoeCrystal

Go for Alpha. It is the best way to build up the pension at minimal cost to yourself.

Partnership is just a DC option. If I want to have a DC option that is similar to Alpha, assuming you have 40 years service with pension increasing at the same rate as payrise and so on. You would be expecting £32,480 pension by 68. You would expect to contribute about £2,000 a month for the next forty years. 12% or £350 per month contribution into a DC only yield £5,670 per year by 68 in comparison. You really can't compare it.

Better to make use of a DB pension scheme while it is still available.

Bravepants

Alpha accrues at a rate of 2.32% of your gross salary per year, plus uplift of pension accrued for prices each year (recently been about 1% per year). So neglecting salary increases you could work out how much you will get at 68.



Actuarial reduction from 68 to 55 according to the Civil Service calculators is: 0.513. So multiply your age 68 pension by 0.513 to see what you could get at 55.



You could also buy Added Pension to a maximum of (from next April) £6800 per annum once you have been in the scheme for a year.



You could also consider a SIPP to run alongside once you earn enough to take you into the 40% tax bracket.



FInally, you could also save into a Stocks and Shares ISA as an additional pot for use in retirement.



Of course all of this neglects to take into account the amount of money left over from paying your mortgage and raising kids.


But definitely go for Alpha!

p00hsticks

Alpha, and look at saving into a S&S ISA, SIPP etc to plug the gap between when you want to retire and when you can draw your pension.

note - as you are only in your 20's it's highly possible that the age at which you can access any DC pension (such as Partnership) may have risen by the time you wish to claim it - a minimum line of twenty years below state pension age has been suggested

hyubh

SweetPie wrote: »

I have the options between two schemes, alpha (defined benefit scheme) and partnership (defined contribution scheme). The retirement age on alpha is currently 65 and may increase. The retirement age on partnership is age 55.

Not quite - the Normal Pension Age in Alpha is your state pension age, but you can draw your benefits from 55 (= the statutory minimum pension age) with an actuarial reduction. Partnership, being DC rather than DB, doesn't have a 'normal pension age' as such, so only the statutory minimum (currently 55) applies.

Happier_Me

As a long standing member of the LGPS, another public sector DB scheme, I would go for Alpha. The peace of mind of knowing I have a guaranteed pension is really important to me now I'm in my 40's. Even more so because my husband has a far less lucrative company DC scheme.

I too want to have the choice to retire at 55. A DB scheme won't get me there on its own. You're younger than me but it's worth working out what your number is... The amount you want to live on when you retire. Don't forget tax and the need for lump sums to replace kitchens, cars and to fund any other big purchases once retired. From there you can calculate any gaps in your retirement income.

You can save alongside your alpha to fund you retirement from 55 to a point where you want to access your DB, minimising actuarial reduction.

kidmugsy

SweetPie wrote: »

I am in my late 20s and recently joined civil service. I have the options between two schemes, alpha (defined benefit scheme) and partnership (defined contribution scheme).

Your career may never again offer you the option of a DB pension. So there's a lot to be said for joining one now.