Civil Service Alpha or SIPP - which is best for me

NedS

Thank you everyone. Based upon the above discussions I think the purchase of additional alpha pension represents good value considering it is guaranteed income. I'm in good health and both my parents are approaching 90 so no reason to believe I won't benefit from the additional fixed income.

NedS

I thought I'd update my decision on this following some great advice, with some numbers I ran to help convince myself.

I'm going to contribute £975/month for one year (£11,700) which will buy me an additional £950 of DB pension at SRA of 67.

Lets compare that to how it may reasonably perform if I were to put that £11,700 into my SIPP.

I'm 52, so we have 15 years before SRA. Lets assume 2% CPI per year for the next 15 years. My £950 DB pension would be worth £1282 at age 67, so that's what I would need to match.

If we assume the same £11,700 in my SIPP grows at a compound rate of 5% per year (3% above inflation), then at age 67 I'd have a pot of £24,730. To achieve £1282 income for life I'd need to achieve a 5.2% yield on that pot of £24,730. So that may be achievable if I achieved 5% or more growth over 15 years, and/or could achieve a yield of ~5% in retirement but the DB pension option is (1) guaranteed, and (2) index-linked. For those reasons this year I'm going to buy and extra £950 of guaranteed retirement income, which is broadly equivalent to the benefits I'd accrue from working 18 months - so that's one year earlier I can retire :j

Tom99

NedS wrote: »

I thought I'd update my decision on this following some great advice, with some numbers I ran to help convince myself.

I'm going to contribute £975/month for one year (£11,700) which will buy me an additional £950 of DB pension at SRA of 67.

Lets compare that to how it may reasonably perform if I were to put that £11,700 into my SIPP.

I'm 52, so we have 15 years before SRA. Lets assume 2% CPI per year for the next 15 years. My £950 DB pension would be worth £1282 at age 67, so that's what I would need to match.

If we assume the same £11,700 in my SIPP grows at a compound rate of 5% per year (3% above inflation), then at age 67 I'd have a pot of £24,730. To achieve £1282 income for life I'd need to achieve a 5.2% yield on that pot of £24,730. So that may be achievable if I achieved 5% or more growth over 15 years, and/or could achieve a yield of ~5% in retirement but the DB pension option is (1) guaranteed, and (2) index-linked. For those reasons this year I'm going to buy and extra £950 of guaranteed retirement income, which is broadly equivalent to the benefits I'd accrue from working 18 months - so that's one year earlier I can retire :j

Thanks for the update.

I think the maximum Added Pension you can buy this tax year is £7000 and for the tax year 2020/21 £7,200 so if you wanted to contribute £11,700 in the next year you will need buy £4,500 of added by 5th April leaving you the max of £7,200 for the year from 6th April, either as a lump sum or monthly.
The £7,000/£7,200 max assumed you have not bought any EPA pension as well which will reduce the Added Pension upper limit.

https://www.civilservicepensionscheme.org.uk/members/buying-added-pensions-and-epa/limitations-and-allowances/

When comparing the pensions in retirement remember 25% of your SIPP will be tax free so to get the same net income you would from the SIPP as the Added Pension you would require a yield on the SIPP of 4.5% if you are then a 20% taxpayer and 3.7% if you are then a 40% taxpayer, not 5.2%.

Assuming your SIPP pot of £24,730 growing at 5%pa, a pension drawdown to give you the equivalent of £1,282 taxed at 20% growing at 2%pa, the SIPP will last about 30yrs before it is exhausted.

I think your decision to go with the Added Pension is right for the certainty it provides and maybe use the excess you have available over the Added Pension limit for a SIPP.

hugheskevi

I think the maximum Added Pension you can buy this tax year is £7000 and for the tax year 2020/21 £7,200 so if you wanted to contribute £11,700 in the next year you will need buy £4,500 of added by 5th April leaving you the max of £7,200 for the year from 6th April, either as a lump sum or monthly.

The limit is in relation to the amount of annual amount of Added Pension that will be purchased, not the cost of purchasing that pension.

Buying £7,000 of Added Pension is likely to cost at least £83,000 based on OPs age so the limit won't bite for a long time.