LTA and Defined Benefit Pensions

throwaway1234

Hi,

(Throwaway account due to the amount of financial information I'm disclosing).

I'm a member of the Civil Service Alpha scheme (CARE - currently 2.32% accrual) and have some preserved final salary benefits from Premium. Currently 33, married, just started a family.

Depending on my career trajectory, it's plausible (even likely) that I will get close to / exceed a combined DB pension of £50k in current money, ie breaching the LTA, even if it does increase with inflation as promised.

My understanding is that if I retire and take benefits at, say, 60 (SPA is currently 68, suspect it will be 69/70 by the time I retire, so that's the earliest I think I'll be able to take my Alpha benefits) it would very significantly reduce my annual income and hence the proportion of the LTA I use. But the reduction, based on actuarial factors, would essentially be 'fair' and so, on average, I won't reduce the total value of my pension by taking a lower annual pension earlier. Is this correct?

If so, I may start paying into AVCs - my current salary has a high marginal rate thanks to HICBC, so I think it's probably worth it for the next few years before prioritising S&S ISAs (which, depending on performance, may then allow even earlier retirement, which further ameliorates the LTA issue by reducing my DB accruals). That would allow me to plan to take my DB pension at 60 and supplement income with drawdown from the AVC pot as required. Does this seem reasonable? The fact that the LTA calculation for DB is so blunt feels like a real loophole.

Many thanks.

Brynsam

throwaway1234 wrote: »

My understanding is that if I retire and take benefits at, say, 60 (SPA is currently 68, suspect it will be 69/70 by the time I retire, so that's the earliest I think I'll be able to take my Alpha benefits) it would very significantly reduce my annual income and hence the proportion of the LTA I use. But the reduction, based on actuarial factors, would essentially be 'fair' and so, on average, I won't reduce the total value of my pension by taking a lower annual pension earlier. Is this correct? Actuarial reduction factors aren't an exact science and you'll see a lot of whinging on this board about 'penalties' and 'losses'. The intention - which is rarely met! - is to ensure that someone who draws their pension early ends up with the same overall 'value' as if they'd retired at a scheme's normal retirement date. Some people live longer and do better, others don't.

The fact that the LTA calculation for DB is so blunt feels like a real loophole.More generous than the calculation for DC pensions.

Who knows what the LTA will be by the time you retire? If you exceed it, you pay some extra tax - but only on the amount by which you exceed it. People get far too excited about the tax issue and forget that they'll still be getting more in terms of pension benefits.

hugheskevi

Currently 33, married, just started a family.

It is likely the pension tax landscape won't look anything like it does now when you reach retirement. Not much you can do about that, but don't let it drive your planning too much.

My understanding is that if I retire and take benefits at, say, 60 (SPA is currently 68, suspect it will be 69/70 by the time I retire, so that's the earliest I think I'll be able to take my Alpha benefits) it would very significantly reduce my annual income and hence the proportion of the LTA I use. But the reduction, based on actuarial factors, would essentially be 'fair' and so, on average, I won't reduce the total value of my pension by taking a lower annual pension earlier. Is this correct?

Yes, noting that 'actuarially fair' depends on assumptions, and some may not agree the assumptions are fair. However, 30 years out, you can have no idea of how the assumptions will look at that future time.

That would allow me to plan to take my DB pension at 60 and supplement income with drawdown from the AVC pot as required. Does this seem reasonable?

Yes, but make sure you aren't getting too close to the Annual Allowance, particularly with final salary linked benefits - even if you do not exceed the annual allowance you would be reducing future availability of carry-forward of unused allowance which you may need if you get a decent salary increase.

Buying EPA in alpha may be attractive if you are at risk of Annual Allowance, as purchasing EPA doesn't produce any pension input.

The fact that the LTA calculation for DB is so blunt feels like a real loophole.

The whole pension tax landscape has been made a very crude area, with lots of loopholes and cliff-edges.