Civil Service Alpha or SIPP - which is best for me

NedS

Still trying to decide which represents the best value for my invest-able pension buck.

Looking at it another way, kind of in reverse... if I had £10,000 of alpha DB pension, would I give up a portion of this fixed income for a tax free lump sum at the current commutation factor of 12:1 - i.e, would I give up £1000 of annual pension in return for £12,000 cash lump sum? No I wouldn't as that's generally considered bad value for money. So, by the reverse logic, if I can buy an extra £1000 of DB pension per year for a one-off cost of £12,000 (£1000/month for 1 year), then that must represent good value for money (12:1 commutation factor in reverse)?

Or is my logic totally screwed?

The reason I'm still playing with this is that I want to retire as early as possible (don't we all), and on current predictions we only just have enough DB/fixed income to cover daily living costs / be comfortable based upon the extra alpha pension I will build between now and retirement at 58-60. I currently add around £632pa DB pension (at current rates), so working 2 years longer (or retiring 2 years earlier) will equate to around £1250pa of lost/gained DB pension income. Hence if I were to buy that extra £1250 DB pension now I could go 2 years earlier (assuming the SIPP bridging numbers allow) whilst still keeping the same level of DB/fixed income post 67.

german_keeper

Not sure exactly where you are going with your thinking on reversal of the 12:1 ratio. Inverse commutation is not available in Alpha as there is no guaranteed lump sum; it is an option with the old schemes but I think the ratio is 18:1. If you want to know how much extra pension you can buy and at what cost the calculators on the MyCSP website will tell you. I have never looked into it but unless I am missing something the amount you contribute will depend on how old you are or more specifically how many years you are going to pay the extra contribution.

Are you taking into account the Actuarial Reduction applicable to an Alpha pension if you retire before SPA?. The £632 pa figure is presumably 2.32% of your salary but unless it is taken at SPA you wouldn't get the full amount, the EPA arrangement excepted.

Did you consider Partnership? I am in Partnership and it suits my situation. I have also recently become aware of a few other colleagues who have switched. The common factor is decent provision in existing Civil Service DB schemes, full State Pension entitlement at 66/67 and a desire to retire at 60 as they always assumed they would do before the recent changes.

Tom99

NedS wrote: »

Still trying to decide which represents the best value for my invest-able pension buck.

Looking at it another way, kind of in reverse... if I had £10,000 of alpha DB pension, would I give up a portion of this fixed income for a tax free lump sum at the current commutation factor of 12:1 - i.e, would I give up £1000 of annual pension in return for £12,000 cash lump sum? No I wouldn't as that's generally considered bad value for money. So, by the reverse logic, if I can buy an extra £1000 of DB pension per year for a one-off cost of £12,000 (£1000/month for 1 year), then that must represent good value for money (12:1 commutation factor in reverse)?
Or is my logic totally screwed?

If, at the date you took your pension, you could buy an additional £1,000pa for £12,000 that would be excellent value.
The trouble is I don't think that is an option. If I am looking at the added pension calculator correctly then £12,000 for £1,000pa is only an option if you pay the £12,000 age 52 and take the £1,000pa age 67.

NedS

Tom99 wrote: »

If, at the date you took your pension, you could buy an additional £1,000pa for £12,000 that would be excellent value.
The trouble is I don't think that is an option. If I am looking at the added pension calculator correctly then £12,000 for £1,000pa is only an option if you pay the £12,000 age 52 and take the £1,000pa age 67.

Yes, that's correct. It will cost me around £12K now (aged 51) to purchase an additional £1K pension at 67 (plus CPI increases).

NedS

german_keeper wrote: »

Not sure exactly where you are going with your thinking on reversal of the 12:1 ratio. Inverse commutation is not available in Alpha as there is no guaranteed lump sum; it is an option with the old schemes but I think the ratio is 18:1. If you want to know how much extra pension you can buy and at what cost the calculators on the MyCSP website will tell you. I have never looked into it but unless I am missing something the amount you contribute will depend on how old you are or more specifically how many years you are going to pay the extra contribution.

As you state, alpha does not include a TFLS by default, but you can select to have a TFLS at a cost of £1 pension for every £12 lump sum you take, hence the commutation factor of 12:1.

I have used the added pension calculator on MyCSP, and for my age it works out at about £12K cost to purchase £1K added pension, either as a £12K lump sum or spread over 1 year at £1K/month (I would spread the payments over the year).

german_keeper wrote: »

Are you taking into account the Actuarial Reduction applicable to an Alpha pension if you retire before SPA?. The £632 pa figure is presumably 2.32% of your salary but unless it is taken at SPA you wouldn't get the full amount, the EPA arrangement excepted.

I do not intend to take my alpha DB pension early as I have a SIPP I will use to bridge the years between early retirement and SRA (67).

german_keeper wrote: »

Did you consider Partnership? I am in Partnership and it suits my situation. I have also recently become aware of a few other colleagues who have switched. The common factor is decent provision in existing Civil Service DB schemes, full State Pension entitlement at 66/67 and a desire to retire at 60 as they always assumed they would do before the recent changes.

I did consider Partnership but it is not for me as I want the defined benefits of alpha to meet my basic living costs.

thebrexitunicorn

Hi,
It's just occurred to me that we still don't know what remedy the government proposes following the age discrimination ruling (in relation to fire fighters but applies to civil service too) regarding changes to public sector pensions. If you were made to change to alpha in 2015 from a more favourable scheme then normal pension age may not be 67 after all, at least for now. (That thought is what keeps me going!)

Tom99

NedS wrote: »

Yes, that's correct. It will cost me around £12K now (aged 51) to purchase an additional £1K pension at 67 (plus CPI increases).

It's not quite like for like to compare £12,000 now with £12,000 in 16yrs time.
Looks like to buy an extra £1,000 from 67 on your 67th birthday would be about £17,000.
Looked at another way you could split the added pension contribution into separate transactions:
1 - Is £17,000 at age 67 for £1,000pa of immediate pension worthwhile? It certainly appears very good value when compared to trying to buy the same £1,000pa in the open market.
2 - Is the return on £12,000 growing to £17,000 over 16yrs a good investment? That's a growth rate of about 2.2%pa, but in addition the £1,000pa is indexed linked to CPI, ie it's CPI+2.2% tax free, guaranteed. I don't think there is a cash product giving anywhere near that return, I think NS&I offer CPI+0.01%.

hugheskevi

2 - Is the return on £12,000 growing to £17,000 over 16yrs a good investment? That's a growth rate of about 2.2%pa, but in addition the £1,000pa is indexed linked to CPI, ie it's CPI+2.2% tax free, guaranteed. I don't think there is a cash product giving anywhere near that return, I think NS&I offer CPI+0.01%.

This is essentially trying to calculate the discount rate used in the actuarial calculations of the price of Added Pension.

That the SCAPE discount rate, currently CPI+2.4%. It is reasonable to view this as the guaranteed, risk-free rate of return offered by Added Pension and EPA.

Bravepants

In my mind it's quite simple...




Take the lump sum you intend to invest in either your own investments (ISA or DC pension) and then calculate how much you could draw each year based on the Standard Withdrawal Rate, which some say is 4%, but others say is closer to 3.5% for the UK.



So will any lump invested and drawndown at 3.5% per annum provide more income than the same lump sum invested in buying Added Pension, taking into account that Added Pension is index linked and guaranteed for life?

Tom99

Bravepants wrote: »

In my mind it's quite simple...
Take the lump sum you intend to invest in either your own investments (ISA or DC pension) and then calculate how much you could draw each year based on the Standard Withdrawal Rate, which some say is 4%, but others say is closer to 3.5% for the UK.
So will any lump invested and drawndown at 3.5% per annum provide more income than the same lump sum invested in buying Added Pension, taking into account that Added Pension is index linked and guaranteed for life?

I would have thought to compare the two you need to drawdown the same pension from the SIPP as the Added Pension will give you. If say £1,000 Added Pension at 67 costs £17,000 then you need to drawdown 5.9% from the SIPP in year 1 and so on.
If you then say assume CPI at 2.5%pa and total investment return on the SIPP of say 5%pa the SIPP will run out at about age 88.