Starting in Civil Service - alpha

jimbo84

Hello there everyone, I've been lurking here a while trying to understand the alpha pension scheme I'll soon be joining.

I think I've got my head around some of it and hoping most of my questions can be answered when I start, I just want to make sure I'm as prepared as possible.

I'm 34 and on Monday I will start work in the Civil Service, the starting salary will be £24,320. It's a complete new direction for me, for many years my career and future planning bordered on the criminally negligent but for some reason in the past year I've woken up, and I'm now keen to make an effort towards a career and make sure I plan properly for the future.

From my readings here, it seems like alpha is usually the scheme to go for.

As I understand it for the normal pension, I will contribute 5.45% of salary and accrue 2.32%. This means that when I reach state retirement age (which I appreciate may change) I should've accrued £19,183. This will then be my annual pension? Obviously this will be adjusted inline with inflation and hopefully I will get some pay rises along the way.

I should also be on target for a full state pension on top, which would give me a total of about £27k? Seems like a pretty amazing deal to me, much cheaper than any contribution based scheme and should be a perfectly adequate income in retirement, better than expected to be honest considering I'm starting a bit late.

I would also very much like to retire earlier so I've been looking at the EPA, but not 100% sure how it works.

The calculator says an EPA of -3 will cost 3.2% of pensionable earnings and take up 66.32% of the added pension limit. I'm guessing this means I will pay an extra £777.6 pa (pre-tax, so it would only really cost me £622pa?) so over 31 years I would build up about £24k. Then what happens? Does this portion buy out the actuarial reduction and contributions I would've had to make for those three years, and allow me to get a £19,183 pension 3 years early, or does it work some other way?

The further implication of the above seems to suggest that I'd have 33.68% of the added pension limit left.

This is where I start to get confused, does this mean I can contribute an extra £394 pa? Not sure if this is good value or how it affects the final pension if I did this for 31 years, does it accrue at the same rate as the normal pension?


Thanks in advance for any help.

JoeCrystal

jimbo84 wrote: »

This means that when I reach state retirement age (which I appreciate may change) I should've accrued £19,183. This will then be my annual pension? Obviously this will be adjusted inline with inflation and hopefully I will get some pay rises along the way.

Yes, it is a fantastic deal. Too amazing in my opinion. Regarding your annual pension, not precisely, basically, it is 1/43 of the salary in that year which then gets uprated every year. I hope that makes sense. But yes, assuming that you stayed at the same salary in real term, you would be expecting that amount.

hugheskevi

Everything accurate except for the following.

The calculator says an EPA of -3 will cost 3.2% of pensionable earnings and take up 66.32% of the added pension limit. I'm guessing this means I will pay an extra £777.6 pa (pre-tax, so it would only really cost me £622pa?) so over 31 years I would build up about £24k. Then what happens? Does this portion buy out the actuarial reduction and contributions I would've had to make for those three years, and allow me to get a £19,183 pension 3 years early, or does it work some other way?

You do not build up a pot of £24K. The £777.60 annual contribution reduces the normal pension age associated with the pension you built up in the year (and only this pension, not your entire pension) by 3 years. So the £564 of alpha pension you accrue in a year whilst paying EPA contribution of £777.60 would be payable unreduced from State Pension age -3 years (ie 65 if State Pension age is 68).

Note the cost of EPA (currently 3.2%) will increase as you get older.

The further implication of the above seems to suggest that I'd have 33.68% of the added pension limit left.

This is where I start to get confused, does this mean I can contribute an extra £394 pa? Not sure if this is good value or how it affects the final pension if I did this for 31 years, does it accrue at the same rate as the normal pension?

The Added Pension limit is £7,000 from 2019/20 so you could purchase up to £2,357.60 (33.68%) of annual Added Pension.

Added Pension does not affect the alpha pension you accrue. You simply purchase extra pension, but there is no employer funding for this, so the cost is much higher as you have to fund it all yourself.

You can choose how much Added Pension you wish to purchase, and whether to pay monthly through payroll or as a lump sum.

If you start to purchase Added Pension before taking out EPA the limit is higher, as you can purchase EPA as long as you have not hit the limit. So you could enter into a contract to purchase £6,999 of Added Pension and then take out an EPA-3 contract.

jimbo84

Thanks very much for your explanation, much easier to understand than the scheme guide!

Have been doing a little more thinking and re-reading of earlier posts, including some by yourself on the same subject - it seems to me that EPA and Added Pension are good, but not particularly amazing.

I am in the fortunate position of not having a mortgage to pay, I own my home and car outright and already have adequate cash savings, therefore I should now be able to put away a decent extra amount for retirement.

I'm not entirely sure how much that will be, but I'm trying to get a good idea in advance of what the best thing to do with that money would be. I do have my parents' habit of stashing everything in cash savings, but I understand that cash will get heavily eroded by inflation over the decades, so should probably look at investment products, but I have no experience with this.

I did read up a bit on SIPPs, but it seems these are more for people who are experienced in investing, not sure there would be any advantage for me. S&S LISA seems like a good option and I would probably prefer something I don't have to tinker with all the time. I am probably more concerned with beating cash and inflation rather than making stunning returns.

Thanks again for your help, these forums are very enlightening.

Dazed_and_confused

You could look at a Lifetime ISA.

This has the benefit of a government top up and being tax free when you eventually take money out.

If you don't fancy a SIPP how about a stakeholder pension? You would still have to choose where to invest the money but don't have to make it complicated, read a few threads on here about BlackRock or Vanguard Lifestyle type funds.

MrLeek

Been lurking for ages now (new year resolution is to stop lurking - ok, it's March! :rotfl:)

I agree that EPA is good but not great. As already explained (but in case something was missed):

- Each year you earn 2.32% of your salary. Those individual 'lumps' build up over years to form your pension.
- They also do an annual adjustment (up or down). Last year it was a 3% bump. I see that as bonus money
- I've done 2 years of Alpha and i'm finishing the 2nd year of EPA-2. I basically have 2 pensions - one that pays out at state pension age, the other pays out 2 years early.

I can take both pensions early, but it'll get reduced by 5% (ish) each year. As a VERY rough calculation the £600 extra cost of this years EPA-2 means that I can retire 2 years earlier than SPA with no loss, or retire 4 years before SPA, and it balances out after about 8 years of retirement.

As the cost of EPA rises each year (I think it goes up by 0.1% each year. So my back-of-envelope calculations would suggest that EPA becomes less valuable each year....but the advantage is that you do know what you're getting. I'm probably going to keep EPA-2 going for a few years, then drop to EPA-1 for another 5-7 years. Something like that.

To help with the planning: £30,000 salary over 20 years (no increases) means an annual pension of nearly £14,000 and £21,000 after 30 years. But you only get it in full at SPA - if you retire early and take your Alpha pension than that amount will reduce for each year you retire.

Something else to consider: you can also put money into the CS Additional Voluntary Contribution Scheme (link below). For what I've read it's a fairly low-cost way to invest in global markets (the platform cost is 0.17%). But there's only a handful of different funds to invest in - that may make it easier for some to manage but I'm bothered by the lack of information about the funds (other than what Legal & General provide - they run the AVC scheme). Morningstar only seems to know about a couple of the funds so it's hard to judge how good/bad the funds available in the AVC are.

AVC could be a good way to boost the core of a CS pension, but a SIPP may be better? it's something that I need to make a decent decision on really soon!

Hope this helps!


https://www.legalandgeneral.com/workplacebenefitsResp/csp/csavc/first-step/