Alpha CS Scheme - EPA vs AVC vs SIPP

twotonealex

Evening All,

I've posted about my pension queries previously but have some other queries. This is about what I should pay into to help facilitate retiring at 55.

I'm 28 and work for the Civil Service, I'm on the Alpha Defined Benefit Scheme (Average Salary) which accrues at 2.32% per year.
This is payable from 68 years old currently, most likely to continue increasing in age as it's linked to NPA. I also have a HL SIPP which I plan on using to bridge the gap from 55 to the lowest (and most financially sensible) age possible to draw my Alpha Pension from, most likely 60, or the longest I can leave my Alpha alone based on how much I can save in my SIPP to tide me over.

I want to retire from 55 or shortly after, and I'm trying to work out the best route or combination of options to retire at 55.

I can:

- Pay into the EPA add on to my Alpha Scheme and bring forward the age I can claim my full Alpha pension from by a max of 3 years, to 65 (currently but subject to change).

or

- Max out my AVC on my Alpha Scheme to build up an extra pot of money, which I would then use to act as a compensator for acturial reduction (5% per year reduction) so pretty much the same thing? But more flexible.

Either way, I will also be contributing to my HL SIPP & ISAs to be able to draw on from 55.

The dilemma I'm struggling with is choosing between EPA and AVC, or leave both and chuck all my disposable income into the SIPP.

Is there any easy answer to my questions?

Any help would be appreciated :beer:

Thanks!

hugheskevi

This is about what I should pay into to help facilitate retiring at 55.

Be aware that HM Treasury has announced plans (albeit some time ago) to increase minimum pension age to State Pension age minus 10 years, so age 58 for you and subject to further increases to State Pension age.

Hence to retire at age 55 you may well need some non-pension income/capital.

- Max out my AVC on my Alpha Scheme to build up an extra pot of money, which I would then use to act as a compensator for acturial reduction (5% per year reduction) so pretty much the same thing? But more flexible.

I think you mean Added Pension rather than AVC.

5% per year is just a rule of thumb, eg, taking an alpha NPA 68 pension at age 55 would result in a 48.4% reduction despite being take 13 years early. Drawing it at age 58 would see a reduction of 41.1%

You are correct that EPA and Added Pension are essentially the same thing - if all the actuarial assumptions used to price them were correct, then they would add up to the same thing for pension drawn at any given age. It is equally flexible as EPA, as EPA drawn late gets an actuarial enhancement so is the same as Added Pension drawn early.

The dilemma I'm struggling with is choosing between EPA and AVC, or leave both and chuck all my disposable income into the SIPP.

Is there any easy answer to my questions?

The discount rate, which is essentially the assumed rate of return, used to price EPA and Added Pension is CPI+2.4%. That is a good return for risk-free investments, but pretty poor for return-seeking investments.

So EPA/Added Pension is great for the 'core' part of your pension income you would want to rely on in retirement, and SIPP is excellent for flexibility pre-State Pension age.

You could plan to build up a SIPP pot, use that first, only drawing alpha when the SIPP is exhausted - if that is after Normal Pension age (NPA) it is not a problem, as alpha is enhanced if drawn after NPA.

You could also consider your risk tolerance and how that affects your preferred allocation of investment. Then use added pension/EPA for your lower risk allocation, rather than gilts/bonds, etc. Or decide to invest in SIPP earlier in life, and then Added Pension/EPA later in life as the shorter horizon to retirement would typically lead you to reduce investment risk levels.

But, the pension scheme you are in now may be one of the few you will be able to buy Defined Benefit pension income, whereas you will always be able to contribute to a SIPP, so there is an argument for taking advantage of what is on offer now.

twotonealex

hugheskevi wrote: »

Be aware that HM Treasury has announced plans (albeit some time ago) to increase minimum pension age to State Pension age minus 10 years, so age 58 for you and subject to further increases to State Pension age.

Hence to retire at age 55 you may well need some non-pension income/capital.

I think you mean Added Pension rather than AVC.

5% per year is just a rule of thumb, eg, taking an alpha NPA 68 pension at age 55 would result in a 48.4% reduction despite being take 13 years early. Drawing it at age 58 would see a reduction of 41.1%

You are correct that EPA and Added Pension are essentially the same thing - if all the actuarial assumptions used to price them were correct, then they would add up to the same thing for pension drawn at any given age. It is equally flexible as EPA, as EPA drawn late gets an actuarial enhancement so is the same as Added Pension drawn early.

The discount rate, which is essentially the assumed rate of return, used to price EPA and Added Pension is CPI+2.4%. That is a good return for risk-free investments, but pretty poor for return-seeking investments.

So EPA/Added Pension is great for the 'core' part of your pension income you would want to rely on in retirement, and SIPP is excellent for flexibility pre-State Pension age.

You could plan to build up a SIPP pot, use that first, only drawing alpha when the SIPP is exhausted - if that is after Normal Pension age (NPA) it is not a problem, as alpha is enhanced if drawn after NPA.

You could also consider your risk tolerance and how that affects your preferred allocation of investment. Then use added pension/EPA for your lower risk allocation, rather than gilts/bonds, etc. Or decide to invest in SIPP earlier in life, and then Added Pension/EPA later in life as the shorter horizon to retirement would typically lead you to reduce investment risk levels.

But, the pension scheme you are in now may be one of the few you will be able to buy Defined Benefit pension income, whereas you will always be able to contribute to a SIPP, so there is an argument for taking advantage of what is on offer now.

Thanks for this!

I was aware of some mention of increasing minimum pension age, however all I will do is diversify and have ISAs/Savings/Other income to bridge from 55.

As you seem knowledgable on Alpha - I inputted details into the Added Pension calculator (you were correct, I referred to it wrongly as AVC), and for the max £7000 (per year extra from NPA?) it suggested that I would have to pay £4208 PER MONTH(!) from next April, surely this would not be correct?

If the max added pension is at a suitable cost per month then I would do this but also make as big a contribution to my SIPP with the left overs.

I've not taken into account state pension, inheritance, increased income, bonuses, buy to lets etc in this just to be cut throat!

Thanks

hugheskevi

I inputted details into the Added Pension calculator (you were correct, I referred to it wrongly as AVC), and for the max £7000 (per year extra from NPA?) it suggested that I would have to pay £4208 PER MONTH(!) from next April, surely this would not be correct?

I think that is the cost over just 1 year - there used to be an option to choose the period over which the Added Pension is purchased but there doesn't seem any option now.

If you choose to pay by lump sum the cost would be around £54,000 which is roughly equivalent to 12 monthly payments of £4,200.

TheShape

I'm 40, work in the Civil Service and a member of the Alpha Scheme (with a few years in the earlier Nuvos scheme).

I currently pay for EPA - 3. I also pay into a SIPP and a LISA. I'm hoping that by having some certainty in the DB pension from approx 65 years old, I'll be able to use the SIPP and LISA to fund retirement from some point pre-65.

twotonealex

hugheskevi wrote: »

I think that is the cost over just 1 year - there used to be an option to choose the period over which the Added Pension is purchased but there doesn't seem any option now.

If you choose to pay by lump sum the cost would be around £54,000 which is roughly equivalent to 12 monthly payments of £4,200.

Thanks! I will enquire with CS Pensions as to whether this is just a glitch as I doubt (and would hope not) that they would only allow it the entire £7000 added pension to be paid over 1 year amounting to those figures quoted above!

Am I correct in saying this £7000 (current max) would be paid every year from the date I receive my Alpha?

Also, forgetting this current suggestion that it will only now allow you to pay the full amount over 1 year, how long did it previously allow you to pay over?

Thanks!

hugheskevi

Am I correct in saying this £7000 (current max) would be paid every year from the date I receive my Alpha?

Yes.

If you take your pension before or after normal pension age then the Added pension is reduced/increased in the same way main scheme pension is adjusted.

Also note that the £7,000 cap excludes pension increases, so you would be able to purchase more through annual contributions.

Also, forgetting this current suggestion that it will only now allow you to pay the full amount over 1 year, how long did it previously allow you to pay over?

Any period you like, although starting from 1 April of a year.

The period doesn't really matter, as you just buy an amount of pension with each individual contribution, so if you stop contributing at any time you just keep what you have purchased.

Alternatively you can choose to contribute a fixed sum, which similarly buys an amount of pension with each contribution and continues until you either cancel or reach the limit.

pathsofdarkness

twotonealex wrote: »

Am I correct in saying this £7000 (current max) would be paid every year from the date I receive my Alpha?

Yes, at NRA. You can take it earlier if you take a reduction or later and get an increase.

twotonealex wrote: »

how long did it previously allow you to pay over?

I bought Alpha Added Pension in April 2015 at age 35. I chose to buy the maximum amount (which was £6,500 at the time) over a nine year period. This costs me a fixed amount of £443.37 per month.

At some point I need to ask them if I can purchase more Added Pension in year 10 if I'm below the new maximum or if I can switch to EPA-3 (though I don't know if that's allowed or how much EPA they would allow me to buy -- e.g. could I buy 99% max added pension and then switch to EPA-3 for the rest of my time in the civil service?).

thg

While added pension and EPA are essentially the same as they are based on the same actuarial assumptions I recall someone on these boards saying that EPA is slightly preferable as it works out more favourable if the pension age increases. From a quick check I can't find the post - perhaps someone who knows more can explain!

hugheskevi

At some point I need to ask them if I can purchase more Added Pension in year 10 if I'm below the new maximum or if I can switch to EPA-3 (though I don't know if that's allowed or how much EPA they would allow me to buy -- e.g. could I buy 99% max added pension and then switch to EPA-3 for the rest of my time in the civil service?).

Added Pension and EPA share the same limit (currently £7,000 p/a of Added Pension, with EPA being converted into a comparable value to assess how much it contributes toward the cap).

Although you can only purchase Added Pension up to the limit, as long as you are not at the limit when you purchase EPA you can enter into an EPA contract for a 1,2 or 3 year reduction to the age at which alpha pension is payable without reduction for early commencement. So, if you had purchased £6,999 of Added Pension, you could cancel all Added Pension purchases and start an EPA contract for -3 despite this clearly breaching the limit.

EPA is slightly preferable as it works out more favourable if the pension age increases.

The price of EPA and Added Pension is calculated based on an individual's current Normal Pension age, which in alpha is equal to an individual's State Pension age.

The best example is someone who has a State Pension age of 67 under current legislation, but who is part of the group the DWP announced they expect to have their State Pension age increased to 68 once the next review of State Pension age is undertaken in 2023.

This individual can either purchase EPA-2 or Added Pension. If they purchase EPA -2 and their State Pension age increases to 68 they receive their alpha pension unreduced from age 66 and so get what they paid for. If they purchase Added Pension, the Added Pension becomes payable from age 68 after State Pension age increases despite the cost having been calculated assuming it would be paid from age 67.

pathsofdarkness

hugheskevi wrote: »

Added Pension and EPA share the same limit (currently £7,000 p/a of Added Pension, with EPA being converted into a comparable value to assess how much it contributes toward the cap).

Although you can only purchase Added Pension up to the limit, as long as you are not at the limit when you purchase EPA you can enter into an EPA contract for a 1,2 or 3 year reduction to the age at which alpha pension is payable without reduction for early commencement. So, if you had purchased £6,999 of Added Pension, you could cancel all Added Pension purchases and start an EPA contract for -3 despite this clearly breaching the limit.

Thank you, that's really interesting to know. I imagine this also means that if I buy EPA-3 but still retire at age 68 then not only do I get the Added Pension I've already bought but I also get an increased main Alpha pension from the delay. I'll have to think about this because it seems a nice way to get some extra guaranteed money, if they allow it. :j

I have to say, I've learnt more about EPA from this board than I have from the official website which I found very confusing. Thanks again.