Civil Service pension decision

jimi_man

Hello

I have a small dilemma, a bit of background first.

I currently work as a consultant/contractor - call it what you will. I retired from my previous job about two years ago and I receive a pension from that, around £30K. My wife has DB pensions totalling around £10K which pay out at 65 and 67 (earlier with Actuarial reduction but I’d like to avoid that). We both will achieve maximum state pensions at 57 and 58 respectively, which also pay out at 67 (at the moment). She is also accruing a DC pot in her current job but it’s likely to be quite small – at best around £20k total.

Our plan is to stop working around 57/58 (My wife and I are 53) so 4-5 years maximum. Consequently to fund that period from 57 to 65 I have been saving hard into a SIPP. Using Salary Sacrifice I’m offsetting 40% tax and 12% NI (and also Employers NI as well) which is helping to build it up fairly rapidly.

However this is changing, because for various reasons, I’ve just accepted a permanent job. One of the effects of that is that I will be enrolled into the Civil Service pension. Having read all the literature it seems the choice is Alpha (DB - Career Average) or Partnership (DC). I’ve searched on here and it seems that the preferred choice, especially if you are older, is the Alpha scheme. I understand how it works and the likely benefits from it.

My dilemma, without being ungrateful, is that I don’t really want another DB pension paying out at 67 since at current levels, we’ll have around £56K without it. Even though Alpha is probably the better choice. Hence I’m leaning towards Partnership, as that will assist in the funding of years 57-65. With my 3% it’s 20.75% going into the fund which is a reasonable contribution. But then I start to think that I’m an idiot in throwing away a DB pension as it seems to offer much better value.

Irrespective of whichever scheme I go for I’ll still be contributing everything above the 40% tax band into my SIPP, but this will be less if I choose the Alpha scheme. Also I won’t benefit from the 52% Sal Sac saving from Tax/NI, which again points me towards the Partnership scheme to bulk out the fund.

Am I making a big mistake in going for the Partnership?

Dazed_and_confused

You don't have to wait until 67 to get the Alpha pension, it's 55 I think.

Although you obviously won't have built up much then and the reduction for early payment would be significant.

Have you compared what 4-5 years of partnership contributions will result in (ignoring investment growth potential) against what Alpha will generate after 4-5 years (after taking into account the reduction).

Remember Alpha will be paid for life, so even if it is less at first glance it may well be more in the long term as it will continue until death (and then there may be a spouses pension).

Brynsam

jimi_man wrote: »

Am I making a big mistake in going for the Partnership?

Usually the answer would be 'almost certainly yes' - but in this case it sounds as if you have thought through the options and concluded that being able to access cash from a DC pension is a higher priority than the security of a DB pension. Who knows how long you'll stay in your new job? You may find the constraints of being an employee in the CS are far too irksome after years of contracting/consulting.

You have good solid DB pension provision, so your have that rare thing: the luxury of a genuine choice.

Do remember if you 'flexibly access' any part of a DC pension other than the tax free 25%, you will automatically become subject to the £4,000 Money Purchase Annual Allowance in respect of future contributions to the Partnership Pension. If that happens, join the DB scheme, where the £4K limit doesn't apply.

jimi_man

Dazed_and_confused wrote: »

Have you compared what 4-5 years of partnership contributions will result in (ignoring investment growth potential) against what Alpha will generate after 4-5 years (after taking into account the reduction).

Remember Alpha will be paid for life, so even if it is less at first glance it may well be more in the long term as it will continue until death (and then there may be a spouses pension).

The figures are quite small, but five years in Alpha and taking it at 58 (with Early reduction factors) and assuming 30 years collection (hopefully more) gives around £67k. Plus spousal benefits etc. Whereas the partnership will generate around £36k. A significant difference.

However would I rather have £67k over my lifetime (say £2300 a year) or £36k to find the bit from 58-65? Obviously only I can decide that but it’s a relevant consideration, thank you.

jimi_man

Brynsam, thank you for that. I hadn’t considered the £4K aspect. It shouldn’t be a problem as I won’t start taking it till I stop working, by which time I won’t be paying in anyway, but it’s as well to know.

Dazed_and_confused

Don't forget the £2,300 will, based on current rates, only actually be worth £1,840 in a few years once it is all going to be taxed (due to your other pensions).