Pension advice - SIPP v additional payments into work pension

me107

Long time lurker, hoping for some advice regarding pensions.

I am 35 and have a civil service alpha pension which i am contributing to at a rate of approx. 7%. I am a 40% tax payer, although only just. From my very rough calculations, and assuming i work until i am 67, i think i will have amassed a DB pension via alpha of around £38,000 p.a.

The alpha pension seems a pretty good one to me, although i don't claim to know much about pensions.

Wider details - mortgage of approx. 110,000 which will be paid off in 19 years - although i do make occasional overpayments. Emergency cash savings of approx. £16,000. I have also just started saving into a S&S ISA (Vanguard Life Strategy 80) at a rate of £350 a month. Currently have £2,000 in there. Married with a young son . My wife works part time but does not earn enough for a pension unless we started a private one for her.

I am thinking about making further pension savings myself. And my question is whether i should make additional payments into my Civil Service Alpha pension or whether i should open and start a SIPP. I think i could only afford to pay £150-200 into either at present, although this might go up once/if i am promoted etc.

In some respects, paying more into the DB Alpha seems sensible - as it is a guaranteed income (less risk). BUT - i won't be able to access it until 67, possibly later if the state pension age rises in my lifetime. More importantly, i am not sure how the formula/calculation for making additional payments works (does anyone know). I would imagine the amount i can amass through it is not calculated the same way as the contributions i make at 7% and is probably less generous.

A SIPP appeals because i will be able to access some of it at 55, i like the idea of being able to handle my own investments, and because of the 40% tax relief (assuming Boris doesn't raise the 40% threshold). On the downside, 150-200 a month into a SIPP won't build up to much, although once i am mortgage free i would probably look to pay more in. I think i would be looking at a SIPP with AJ Bell as their fees seem ok for the modest amount i am likely to build in it and they seem to offer quite a range of funds and shares. No idea what they like on drawdown fees though (not yet looked into).

One additional complication - my health is not great and i may not be able to work until i am 67.

Very grateful for any thoughts or advice on the above - and do correct me if i have misunderstood anything about pensions.

Thank you.

swindiff

If you are considering retiring early think about maximising your wifes tax free allowance. That is what we have done. My wife an I are both on DB pensions (USS and NHS) but we are looking at retiring at 60 (10 years time). the wife will only have a relatively small NHS pension at that age maybe £5k/year. That leaves 7 years with a possible £7.5k unused tax free allowance. We have therefore started her a SIPP paying in £200/month (made up to £250 thanks to the tax relief). This could give her a £50k+ pot at 60 which can all be withdrawn over the next 7 years tax free until her state pension kicks in.

Dazed_and_confused

I am a 40% tax payer, although only just.

A SIPP appeals because i will be able to access some of it at 55, i like the idea of being able to handle my own investments, and because of the 40% tax relief

You do realise there is no automatic 40% tax relief. In addition to the basic rate tax relief the pension company add to your fund a contribution to a SIPP increases the amount of basic rate tax you can pay. Which can reduce the amount of 40% tax payable. But if you're not paying much 40% tax there can't be much 40% tax relief.

Your wife could get basic rate tax relief despite not paying any tax in the first place.

kinger101

My understanding is that it's possible to make AVCs to a defined benefit scheme administered by Legal and General.

You should ask your employer whether these can be made via salary sacrifice.

The reasons being.

Cost of £1 in pension pot.

SIPP BR = 80 p (6.25%)
SIPP HR = 60 p (41.67%)
Sal. sac BR = 68 p (25%)
Sal. sac HR = 58 p (46.55%)

The uplift (assuming 15 % marginal rate on withdrawal) is shown in brackets

The Conservatives, who have a reasonable chance of winning a majority at the next election, have already signaled an intention to increase the threshold at which HR kicks in, which might well push you back into BR. Under salary sacrifice, BR pension contributions are still highly tax efficient.

Legal and General do some decent low cost index trackers to boot.

Albermarle

Cost of £1 in pension pot.

SIPP BR = 80 p (6.25%)
SIPP HR = 60 p (41.67%)

The uplift (assuming 15 % marginal rate on withdrawal) is shown in brackets

If you do this calculation another way you get a different % uplift figure for the HR but the same for the BR

For BR - Add £1 from post tax income - Sipp provider adds 25p . Then £1.25 is taxed at 15% to leave £1.0625 P - a 6.25% uplift
For HR - Add £1 from post tax income - Sipp provider adds 25 p and you claim back an other 25p .
The £1.50 is taxed at 15% , leaving £1. 275 p - a 27.5% uplift

I think the lower ( 27.5% ) figure is correct, although to be honest I am struggling to explain why your logic is wrong:)

Dazed_and_confused

For HR - Add £1 from post tax income - Sipp provider adds 25 p and you claim back an other 25p .
The £1.50 is taxed at 15% , leaving £1. 275 p - a 27.5% uplift

But you don't have £1.50 in the pension fund, you only have £1.25.

xylophone

My wife works part time but does not earn enough for a pension

Her employer offers a workplace pension? See

https://www.gov.uk/workplace-pensions/joining-a-workplace-pension

It would seem quite possible that she could join if she wished?

Albermarle

But you don't have £1.50 in the pension fund, you only have £1.25.

Ok good point but if you calculate around this :

You have £1.25 taxed at 15% + the 25 p you have in your pocket as a tax rebate = £1.3125 - so a 31.25% uplift, different again from the other two figures

kinger101

Albermarle wrote: »

If you do this calculation another way you get a different % uplift figure for the HR but the same for the BR

For BR - Add £1 from post tax income - Sipp provider adds 25p . Then £1.25 is taxed at 15% to leave £1.0625 P - a 6.25% uplift
For HR - Add £1 from post tax income - Sipp provider adds 25 p and you claim back an other 25p .
The £1.50 is taxed at 15% , leaving £1. 275 p - a 27.5% uplift

I think the lower ( 27.5% ) figure is correct, although to be honest I am struggling to explain why your logic is wrong:)

The HR taxpayer still has £1.25 in the SIPP (£1.0625 after tax). But the taxman hands them back 25 p. £1.0625/£0.75 = 1.4167

MaxZorin

Your Alpha scheme allows you purchase EPA to reduce the age your pension is payable from by up to 3 years. The Civil Service Pensions website has a calculator feature where you can see how much this (or Added Pension) would cost. Your Alpha pension age will be 68 at present and could potentially increase. You can take it earlier though payments would obviously be subject to actuarial reduction. I think the minimum age you can take it at present is 55 but I expect this will increase.

I’m guessing all your CS Pension is in Alpha rather than any of the earlier schemes?