Civil Service EPA query

tintin00

Hello,


I am soon to start a Civil Service pension and am struggling to understand the EPA. Hopefully someone will be able to shed some light on what is probably a simple question?


Lets assume I am 38 and accrue a Alpha pension benefit of £1,000 a year for 30 years. At 68 I will be entitled to a pension of £30,000. Easy.


Now if I want to retire early with no EPA at 65 I would take a reduction factor (0.842) and because I have only build 27 years of contributions my pension would be 1,000 x 27 x 0.842 = £22,734.


So am I correct in understanding that all the EPA does is remove the reduction factor. So if I retire at 65 with a -3 EPA, I would have a pension of £27,000 (27 years x £1,000)?


Is this correct, or will the pension with - 3 EPA be the same as retiring at 68, ie £30,000?


Thanks for taking the time read.
tintin

FIRSTTIMER

I think it is 100% the first thing you have said. You can take everything you have built up until age 65 without reduction, as you have paid extra for the 27 years to warrant it compared to other people.
So £27000.

Tom99

tintin00 wrote: »

So am I correct in understanding that all the EPA does is remove the reduction factor. So if I retire at 65 with a -3 EPA, I would have a pension of £27,000 (27 years x £1,000)?

Yes that is what would happen. You can also or alternatively pay for 'Added Pension' whereby you buy an additional pension to be paid at age 68. Mathematically they should give you exactly the same result. I find Added Pension easier to understand.
Say in your case you might buy an added pension of £1,000 making your pension at age £31,000. You can always take this early by applying the reduction factor.

tintin00

Tom99 wrote: »

Yes that is what would happen. You can also or alternatively pay for 'Added Pension' whereby you buy an additional pension to be paid at age 68. Mathematically they should give you exactly the same result. I find Added Pension easier to understand.
Say in your case you might buy an added pension of £1,000 making your pension at age £31,000. You can always take this early by applying the reduction factor.

Excellent, thanks you very much. TBH I had not even considered the 'added pension' but it certainly looks a bit more simple. I guess the easiest method may be to pile a good amount into added pension and then take the reduction if early retirement is a priority when I get there.

tintin00

Tom99 wrote: »

Yes that is what would happen. You can also or alternatively pay for 'Added Pension' whereby you buy an additional pension to be paid at age 68. Mathematically they should give you exactly the same result. I find Added Pension easier to understand.
Say in your case you might buy an added pension of £1,000 making your pension at age £31,000. You can always take this early by applying the reduction factor.

Tom,


Thanks again for the information. I am trying to build a picture in my head of just how good all these different options are and what the best strategy forward is.


The actual Alpha scheme appears to be excellent value with the 2.32% accrual rate for the sake of a 5% odd contribution. However the EPA / AVC options appear to be somewhat 'okay' with a return rate that would be similar to a cautious investment if make in a SIPP. Would that be a fair appraisal? Obviously there are many variables such as expected life expectancy etc, but the EPA / AVC certainly don't appear to be anywhere near as good as the initial Alpha accrual.


I currently have a very healthy SIPP and am considering continuing to pay into that with the view of using the SIPP to fund the gap between retirement and claiming Alpha. That would be instead of doing the EPA / AVC. Again, many variables, such as investment return in the SIPP. But would a fair summary be that using a SIPP to bridge the gap could be a wise option instead of going down the EPA / AVC route?


Thanks again

Tom99

tintin00 wrote: »

Tom,

Thanks again for the information. I am trying to build a picture in my head of just how good all these different options are and what the best strategy forward is.

The actual Alpha scheme appears to be excellent value with the 2.32% accrual rate for the sake of a 5% odd contribution. However the EPA / AVC options appear to be somewhat 'okay' with a return rate that would be similar to a cautious investment if make in a SIPP. Would that be a fair appraisal? Obviously there are many variables such as expected life expectancy etc, but the EPA / AVC certainly don't appear to be anywhere near as good as the initial Alpha accrual.

I currently have a very healthy SIPP and am considering continuing to pay into that with the view of using the SIPP to fund the gap between retirement and claiming Alpha. That would be instead of doing the EPA / AVC. Again, many variables, such as investment return in the SIPP. But would a fair summary be that using a SIPP to bridge the gap could be a wise option instead of going down the EPA / AVC route?

Thanks again

Not sure what the current 'Added Pension' cost looks like but at the time its seemed to me to be a fair bit better than you could buy an annuity for in the open market.
The big downside is that it is an old fashioned annuity and if you don't survive to collect it all the extra contributions will be lost.
The SIPP is far more flexible, particularly since you have so long to go to retirement age, and you don't lose it when you die.

hugheskevi

I am soon to start a Civil Service pension...I currently have a very healthy SIPP

You may wish to explore transferring the SIPP into alpha, and seeing how much alpha pension it would purchase and whether that is attractive.

The actual Alpha scheme appears to be excellent value with the 2.32% accrual rate for the sake of a 5% odd contribution.

This reflects that the employer funds the vast majority of the cost of the pension.

However the EPA / AVC options appear to be somewhat 'okay' with a return rate that would be similar to a cautious investment if make in a SIPP. Would that be a fair appraisal?

This reflects the absence of an employer contribution.

The return is effectively the discount rate, which from April will be CPI+2.4%, and noting there are no charges to deduct from that. That is a lot better than the return you would get on risk-free investments, but could get a higher return from risk-seeking investments, even after including charges.

But would a fair summary be that using a SIPP to bridge the gap could be a wise option instead of going down the EPA / AVC route?

It isn't unreasonable, the best course being dependent upon individual circumstances and risk tolerance.

In particular, note that it would usually be terrible value to take a lump sum from an alpha pension commenced very early.

tintin00

Thank you very much, excellent information.


I think I am pretty set on mixing the DB and DC systems. It will be nice having the guaranteed excellent income that Alpha provides, but equally good having a nice flexible pot in my SIPP to fund the early years of retirement that I imagine will be the most expensive.

Isaac_:)

Jumping on this thread with a related query...

I'm currently opted into a -3 EPA, paying an additional 1.8% per year. As per the Alpha EPA factors (https://www.civilservicepensionscheme.org.uk/members/actuarial-factors - I assume these are for Apr 18-Mar 19) I'd assumed that my contribution would go up to 1.9% in April. However, I checked on the EPA Estimator member calculator today, which now calculates my additional contribution as 2.6%. This is quite a difference - does anyone know why the additional contributions seem to be about to jump so much in the space of a single year? Might it be to do with the change in the discount rate in April?