Civil Service Added Pension or SIPP

Nikster

Hi all,
I would be very grateful for some advice. I have a lump sum of about 10k that I’m looking to put into my pension. The two options I’m considering are added Civil Service Alpha pension or payment into my vanguard SIPP which is diversified across four index trackers. I am 43 and a higher rate tax payer. I’ve been in the Civil Service for 18 years. 10k lump sum into Alpha would buy approx £900 self and dependent added pension. I think this is the less risky option but with funds looking like good value, the vanguard SIPP is also attractive.
Many thanks in advance. 

Bravepants

If you intend to retire at normal retirement age (NRA) buying Added Pension is much better value as you are buying a guaranteed index-linked pension that won't be subject to the whims and fancies of the stock exchange, including pandemics.

If you intend to retire early then you have to weigh up the return from an actuarially reduced Added Pension balanced against perhaps:

1. spending the 10k from a cash pot (which could be in a SIPP) to bridge over a period until you take your non-reduced (or perhaps less-reduced) pension

2. putting the £10k in a SIPP and drawing down, say 4% a year. 

There are plenty of other threads on this similar subject.

AnotherJoe

Seems to me that, unless teh financial benefits are stunningly better with one option that the other, its best from a flexibilty POV to have different options, and for example as in point 1 above, bridging the time to taking your pension, without being encumbered by CSP rules which may not allow that.

Bravepants

As an example of the effects of actuarial reduction and Added Pension....

Many of us on MSE have developed our own retirement spreadsheets. Now, I have been buying Added Pension into Alpha by monthly contribution from salary, but I have also made at least one lump sum payment too. So my aim is to take the Alpha portion of my CS pension early from age 55, in 3 years time. If I were to spend £10k a year for each of 3 years on Added Pension I could buy approx £900 of AP per year (total of about £2700) and that would boost the amount of actuarially reduced pension I get at 55. Even when actuarially reduced the return would be equivalent to around 4% annual drawdown from an ISA or SIPP of the £30k - the oft touted Safe Withdrawal Rate, thus:  (£2700 times 0.543 divided by 30000) times 100 times 0.8 (for tax). AND it would be index-linked, there would be no worries aboutt he stock market...excellent!

Fair enough...however...

If I DON'T buy Added Pension, but put the £30k in a cash account and then delay taking the pension for three years instead, until 58, the effect on actuarial reduction is such that I can get the same level of "income" as taking it at 55 by adding spending from the £30k cash pot of just £15k (£5k per each of the 3 year difference). Thus saving me £15k!

So I would have the exact same spending power, but an extra £15k in my pocket!

berbatov10

I have read this with some interest, is tax relief taken into account in your calculations? As it almost makes it a 'free' extra 20% or more you are contributing if you pay into CSP  

Bravepants

You can set up a contract to buy Added Pension out of monthly salary, in which case tax relief is provided there and then. If lump-sum payments are made, say by cheque, then you would claim the tax relief using a self-assessment form. You can pay monthly AND make a lump-sum payment once a year.

83705628

You're unlikely to get a better deal than buying added pension, it's a guaranteed index linked life annuity at better than commercial annuity rates.

berbatov10

Thank you all for your input, I am now able to make an advised decision. I am eligible to buy added pension after 1 year service which will be December 2020, would I be allowed to make a retrospective purchase for the period/tax years covering the 4 months between me joining and the start of the 2020/2021 tax year?   

Albermarle

I think this is the less risky option but with funds looking like good value, the vanguard SIPP is also attractive.

The problem is that funds may currently be 'good value' but equally that might prove not to be the case.

To be more positive, over a 10 to 15 year period they should show some decent growth ( hopefully) but it is not guaranteed , like the Civil service pension.

NedS

berbatov10 said:

Thank you all for your input, I am now able to make an advised decision. I am eligible to buy added pension after 1 year service which will be December 2020, would I be allowed to make a retrospective purchase for the period/tax years covering the 4 months between me joining and the start of the 2020/2021 tax year?   

If you are purchasing by monthly deductions, then these have to start in April and run for the full tax year (e.g, 2021-2022) so it is too late for this tax year.

If you want to take advantage of the current tax year, then you will have to make a one off lump sum contribution, either from salary if you have enough salary to cover it in a single month, or by cheque and claim back any tax at end of year.

So you could do a single lump sum in Jan 2021 and then monthly contributions from April 2021.