Extra contributions - CS Alpha or SIPP?

NedS

Hi,

I'm currently 51 and planning to retire early, hopefully around 59. I'm currently in a position where I'm able to save an extra £1000/month into my pension. Assuming I continue in my current position until 59, I project I will have sufficient fixed income DB/state pension to more than cover my essential needs, and I also already have sufficient funds in my SIPP to bridge the gap between early retirement and DB/state pensions at 67, so there is no pressing requirement to build up one particular side of my retirement planning.

So the question is which is more cost effective for my current pension savings. I can continue to save £1000/month into my SIPP or I could purchase added pension in my current CS Alpha pension scheme, wherein £1000/month (£12k/pa) would buy me £976 of added (index linked) pension at 67.

So should I buy the guarantee of the added DB pension or continue saving into my SIPP which gives me more flexibility at the cost of the guarantee? Or if I can't decide, maybe I should do £500/month into each? I guess I'm struggling to see if the £12k/pa purchase price for £976 of index linked DB pension represents good value or not.

Bravepants

Have you used to Added Pension calculator to work that out?



You will get £976 per year of Added Pension for one year of payments of £1000 per month.


The calculator works on a one year basis, since the parameters change every year with age etc., so it will only show you what you get after one year's worth of payments. BUT approximately after 9 years of payments of £1000 per month, you will end up with roughly £11712 per year of Added Pension. This will be index linked. However, at the moment you can only buy a maximum of £7000 Added Pension, but this increases each year.

I buy a little Added Pension by monthly subscription, and I lump summed about £5k in ealier this year buying me £500 per annum extra. I'm aiming to retire early and I already have about 20 years in Premium banked.

Alpha Added Pension is good value for money. Many people suggest getting a good basic DB pension behind you that covers your basic needs, and then saving extra in SIPPs for bridging a period of early retirement say, and S&S ISAs for 3% drawdown to supplement your pension.

NedS

Thank you for your reply Bravepants

Bravepants wrote: »

Have you used to Added Pension calculator to work that out?

Yes

Bravepants wrote: »

You will get £976 per year of Added Pension for one year of payments of £1000 per month.

Correct.

Bravepants wrote: »

The calculator works on a one year basis, since the parameters change every year with age etc., so it will only show you what you get after one year's worth of payments. BUT approximately after 9 years of payments of £1000 per month, you will end up with roughly £11712 per year of Added Pension. This will be index linked. However, at the moment you can only buy a maximum of £7000 Added Pension, but this increases each year.

Yes. But let's start with one year and determine if it represents good value for me to do it next year, and if it does I will most likely do it the following year too...

Bravepants wrote: »

Alpha Added Pension is good value for money. Many people suggest getting a good basic DB pension behind you that covers your basic needs, and then saving extra in SIPPs for bridging a period of early retirement say, and S&S ISAs for 3% drawdown to supplement your pension.

I don't doubt you, but how do you arrive at that conclusion? And it is good value for money compared against what (buying an annuity, investing in a SIPP, buying a lotto ticket?)

I already have around £200K in my SIPP, and need around £90K of that to bridge from early retirement to when my DB/state pensions kick in. Assuming I stay in my current position until my early retirement age, we will have around £34.6K DB/state pensions and we estimate we need £25K/pa to be comfortable, so we are already over the threshold on both fronts. Hence the primary driver for the decision will be which represents best value/use of my investment pound.

At the moment I'm kind of leaning towards maybe purchasing another £1-2K per year of DB as our DB/pension income may be a little stretched for the survivor once one of us dies although they would have the full safety net of additional SIPP assets. It appears to be cheaper to buy the additional DB pension earlier rather than later (e.g, the tool says it will cost me more next year than this), and once purchased it's index linked.

From my back of an envelope calculations, paying £12K for £1000 of added pension would require 12 years to reach break even (67 -79), and as I figure I'm good for 85 years on this planet, that seems a reasonable investment, but it's the comparison to the SIPP that I'm struggling with. Say I put £12K in my SIPP (and assuming I match the CPI linked performance of Alpha, and we ignore both for convenience), I may achieve a 5% yield giving me £600/year from early retirement of 59 for 20 years, conveniently taking me to 79 and the same break even point as the Alpha DB (£600 x 20 years = £12K). Then from 79 Alpha DB wins as it pays £1000 vs £600, but I still have my £12K investment. At which point I still don't know which is the best route to take.

hugheskevi

At the moment I'm kind of leaning towards maybe purchasing another £1-2K per year of DB as our DB/pension income may be a little stretched for the survivor once one of us dies although they would have the full safety net of additional SIPP assets.

You might want to consider allocation, which is where you reduce your pension slightly at retirement in return for higher survivor benefits should you pre-decease your partner.

NedS

hugheskevi wrote: »

You might want to consider allocation, which is where you reduce your pension slightly at retirement in return for higher survivor benefits should you pre-decease your partner.

Or lean towards maxing out the SIPP which benefits us both equally regardless who goes first (+1 in the SIPP column).

Bravepants

Hello,


This is the key phrase...

NedS wrote: »

I may achieve a 5% yield giving me....

You "may" indeed, BUT your investments in the SIPP would be subject to the whims and fancies of the stock market. It is certainly not guaranteed to increase, even with inflation, each year.



I guess the question you have to ask yourself is: "How much DB pension do I need to be able to sleep at night and ensure that my partner is provided for following my demise?"


I think that is a higher priority question than getting "value", but it is a personal opinion based on your appetite to risk and your own comfort levels.



We are all different in that regard.



For example, in my case, at the moment, I plan to retire in about 4 years at 55, so ALL of my SIPP is in cash. I need it in cash NOW so that I can guarantee that I can retire at 55. If I was invested I might not have enough in there to carry me from 55 to 60 (when one of my DBs becomes payable). I also have a S&S ISA, invested in some global index funds, BUT given my Added Pension contributions so far, and the ones I plan to make, the ISA will not be required at all, even with a 3% standard withdrawal rate (note the US equivalent is about 4% but UK people assume 3% to 3.5% to be on the safer side). I can take 3% drawdown from 55 of course and it will provide extra spending power and make life even more comfortable for my partner and I (she also has her own investments) but I don't need to and I am not therefore dependent on the stock market.



The way I think is this...I base my measure of value on my ability to draw 3% per annum from a pot. For example, by buying Added Pension I can increase the amount I get from the DB to the equivalent of the 3% drawdown amount I would get had I invested the cash, used to buy the Added Pension, in my S&S ISA. But the former is index linked and guaranteed, the latter is not.