Civil Service Alpha EPA vs Added pension

SC_Pump

My current age is 40.

My NPA is currently 68.

Current salary is £72,206

 

I have been in the Civil Service Alpha scheme since joining the Civil Service on 18 July 2016. 

Alpha provides a defined benefit worked out on a Career Average basis.  

For example, in year 1 April 2018 – 31 March 2019 my pensionable earnings were £68,962.  I paid in 7.35% of my pensionable earning (£5,068.72) into the alpha scheme and my employer paid 22.1% (£15,240.65) giving a total of £20,306.37 contribution in 2018-19.

 [Note: The contribution rates have been updated and I currently pay 7.35% of my pensionable earning into the alpha scheme and my employer pays 30.3%.]

The alpha pension is built up by adding 2.32% of my actual pensionable earnings from each scheme year to my alpha pension. So for 2018-19, where my pensionable earnings were £68,962, this added 2.32% of £68,962 to my pension i.e. £1,599.92.  A cost of living adjustment is made to the total pension balance at the start of each scheme year.

 

I have no other Civil Service Pensions.  I have four other stakeholder pensions which I no longer contribute to.

 

My current alpha pension accrued to 31 March 2020 is £6,071.  I assume this means if I make no more contributions this is the annual pension I would get when I reach my NPA (assuming I do not take a lump sum).

 

Using the retirement modeller  provided by the Civil Service assuming I do not take a lump sum, my estimated annual pension is:

Retiring at 68 (my NPA): £50,137

Retiring at 67: £45,770

Retiring at 66: £41,727

Retiring at 65: £38,083

Retiring at 64: £34,771

Retiring at 63: £31,729

 

I presume the retirement modeller makes some assumptions on interest rates, maintaining a salary similar to what I am paid currently etc.

 

I’m very keen to (a) increase my pension and (b) try to retire earlier than my NPA (probably three years earlier or more). To do this I would like to utilise the Added Pension and also EPA (described in Section 2 of the scheme guide and some other documents on the Civil Service Pension Website.

Essentially, I’d like to pay as much extra into my pension as possible without exceeding tax limits e.g. Annual Allowance Limit and Lifetime Allowance.  I am after some advice on how best to do this?  I’m more than happy to retire earlier / take a larger lump sum in order to avoid exceeding the Lifetime Allowance.

I have spent ages reading the available guidance and trying the ‘added pension calculator’ and ‘EPA estimator’ calculators on civil Service Pensions Website and I’m pretty confused.

Some specific questions:

- Does anyone have an opinion on whether I would be better going for EPA or added pension?

Apparently I need to calculate the growth in my pension savings each year so I can compare this against the Annual Allowance Limit, but it is still unclear how to do this. Any ideas?

- Am I able to make a lump sum payment for added pension now for the 2020-2021 scheme year?  If so, what would be the maximum lump sum I could pay without exceeding the Annual Allowance Limit?

- If I go for an EPA (NPA-3) commencing in 2021-2022 scheme year, would I exceed the  Annual Allowance Limit?

- If I pay a lump sum payment for added pension now, would this prevent me contributing to EPA in future years?

Thanks for taking the time to read this long winded post. Any help would be really appreciated.

hugheskevi

SC_Pump said:

For example, in year 1 April 2018 – 31 March 2019 my pensionable earnings were £68,962.  I paid in 7.35% of my pensionable earning (£5,068.72) into the alpha scheme and my employer paid 22.1% (£15,240.65) giving a total of £20,306.37 contribution in 2018-19.

Ignore the employer contribution, it is of no significance. All that matters is what you contribute and the amount of pension you accrue. To demonstrate this, despite the employer contribution increasing from 22.1% to over 30% this year, you don't get anything extra. Note - an employer conrtibution rate of 30.3% is consistent with pensionable earnings over £77,001 which is higher than you say your salary

I have no other Civil Service Pensions.  I have four other stakeholder pensions which I no longer contribute to.

Stakeholder pensions are rather dated now, with a limited investment choice and usually charges higher than available now. You may wish to consider moving them, and note that the Civil Service has a Defined Contribution AVC scheme which accepts transfers-in.

My current alpha pension accrued to 31 March 2020 is £6,071.  I assume this means if I make no more contributions this is the annual pension I would get when I reach my NPA (assuming I do not take a lump sum).

Correct.

I presume the retirement modeller makes some assumptions on interest rates, maintaining a salary similar to what I am paid currently etc.

Assuming you are accessing the modeller from within the Pension Portal so that all details are populated automatically, the assumptions about inflation and earnings growth are set at 0% by default and salary growth can be edited. So it is effectively in real terms.

Essentially, I’d like to pay as much extra into my pension as possible without exceeding tax limits e.g. Annual Allowance Limit and Lifetime Allowance.  I am after some advice on how best to do this?

The Annual Allowance (AA) is the immediate concern, so work out maximum contribution under that and then see how your Lifetime Allowance (LTA) position will look, using the retirement modeller. Due to EPA and Added Pension (AP) you would probably need to augment the modeller with some simple spreadsheet work to consider your future position.

 As well as AA and LTA you also have a limit on how much AP/EPA you can purchase. The rules are odd in that as long as you have any remaining limit you can purchase EPA however, so to max out AP and EPA you should enter into an AP contract that doesn't quite max out your limit and then purchase EPA.

- Does anyone have an opinion on whether I would be better going for EPA or added pension?

Mathematically they should end up almost identical as they are calculated using the same discount rate. There will be nuances around survivor benefits but those are minor. Given your pension input from your salary is already quite high and you want to maximise pension contributions, EPA may be more attractive as that does not produce a pension input whereas Added Pension does.

Apparently I need to calculate the growth in my pension savings each year so I can compare this against the Annual Allowance Limit, but it is still unclear how to do this. Any ideas?

Look at change in annual pension and multiply it by 16. That won't be quite right unless inflation is unchanged from September to September, but is going to be quite close.

- Am I able to make a lump sum payment for added pension now for the 2020-2021 scheme year?  If so, what would be the maximum lump sum I could pay without exceeding the Annual Allowance Limit?

Yes.

It depends how much carry-forward of unused AA you have from last 3 years. You can find this out by requesting a Pension Saving Statement from MyCSP.

- If I go for an EPA (NPA-3) commencing in 2021-2022 scheme year, would I exceed the  Annual Allowance Limit?

No. EPA does not generate any pension input as you are reducing the age at which the pension is payable from. Due the HMRC calculation methodology, this does not generate an input as inputs are based on the annual amount of pension payable ignoring the age from which it is payable.

- If I pay a lump sum payment for added pension now, would this prevent me contributing to EPA in future years?

No, unless it was so implausibly large as to take you to the Added Pension limit (£7,200 p/a of pension, which would cost a lump sum of something around £70,000 or more). That would also give you Annual Allowance issues.

SC_Pump

Thank you Hugheskevi for taking your time to read and your response. It’s really helpful and I’ll need to take some time to read an digest.

on other point which I forgot to include in my original post was that I’ve used the EPA calculator and based on my current salary and a NPA-3years option it works out that the EPA contract value would be 138.88% of my added pension limit, meaning I would not be able to purchase added pension. So does that mean it’s either one or the other (EPA or AP) but both both?

hugheskevi

SC_Pump said:

on other point which I forgot to include in my original post was that I’ve used the EPA calculator and based on my current salary and a NPA-3years option it works out that the EPA contract value would be 138.88% of my added pension limit, meaning I would not be able to purchase added pension. So does that mean it’s either one or the other (EPA or AP) but both both?

This is the issue about the combined AP and EPA cap. If you take out the EPA contract first you cannot buy AP. But if you take out an AP contract for 99% of the cap amount first, you can still buy EPA.

SC_Pump

Thanks again. I think I am slowly beginning to understand and have a bit of a plan formulating.
(a) I will look into paying a lump sum to buy some added pension for Period April 2020 - March 2021. I think I’ve missed the deadline for EPA for 2020/21. I’ve tried to work out the maximum I can pay into AP this year without exceeding the annual limit as follows: I’ve done a few calculations and it looks like for 2019-2020 my pension increased by about £1650. Multiplying this by 16 gives £26,400 (I realise that I should use 2020/21 figures, but there’s not been much of a salary change so it should be fairly accurate). That means I’m £13,600 below the £40,000 annual limit.
Working the Annual limit calculation backwards

£13,600 / 16 = £850. So I can pay a lump sum which will provide an £850 added pension increase and the Annual limit will not be exceeded. I’ve used the added pension calculator and that suggests that a lump sum payment of £8,000 will give £850 added pension. So if I arrange to make a £8,000 lump sum payment for 2020/21, I should just be within the Annual Limit.
The current AP/EPA limit seems to be £7,200 (I’m not sure if this is an annual limit or a total limit), so £7,200 - £850 leaves £6,350 of the limit available.
(b) I then want to take out an EPA (NPA-3) for 2021/22, but will this use up some of the remaining £6,350 AP/EPA limit? If I understand you correctly it doesn’t?? I would also want to buy more added pension in 2021/22, again just below the Annual Limit. I think that would mean ~£850 added pension (based on my previous calculation)  meaning I’d have to pay about £8,000 lump sum in 2021/22 (or about £666 per month). You mentioned that you have to take out the AP contract before the EPA. Is this possible if I want to do them both in 2021/22 period? If EPA doesn’t count towards the AP/EPA limit, And assuming the AP/EPA limit is in total not annual then at the end of 2021/22, the amount of added pension I’d have bought is £850x2 = £1,700, so I’d still be £5,500 below the limit.
(c) I continue to buy added pension like this in subsequent years until I almost reach the £7,200 AP/EPA limit. I also continue EPA (NPA-3) until retirement.

Does that seem like it would work, or have I completely missed the point?

SC_Pump

I should add:
(d) reconsider what to do with my stakeholder pensions. This is not something I had even considered, but transferring may be a good option. Thanks for the tip!!

hugheskevi

SC_Pump said:

The current AP/EPA limit seems to be £7,200 (I’m not sure if this is an annual limit or a total limit), so £7,200 - £850 leaves £6,350 of the limit available.

It is a total limit, ie, you can buy a total of £7,200 p/a which would be a total cost of around £80,000.

(b) I then want to take out an EPA (NPA-3) for 2021/22, but will this use up some of the remaining £6,350 AP/EPA limit? If I understand you correctly it doesn’t??

EPA does not count towards the Annual Allowance (a HMRC tax limit) but does count toward the EPA/AP cap (a Civil Service contribution limit). Purchasing EPA -3 would fully use up your EPA/AP allowance.

You mentioned that you have to take out the AP contract before the EPA. Is this possible if I want to do them both in 2021/22 period?

You could make a lump sum AP contribution for 2020/21, then take out an AP contract which continues in future years (which you pay via payroll). You ensure the value of the AP is just below the AP/EPA cap, and then finally take out an EPA contribution for 2021/22 and future years.

Does that seem like it would work, or have I completely missed the point?

Missed that EPA does count toward the AP/EPA cap but not to AA. So you need to play some games and do some guesswork about the future to get round that.

SC_Pump

Thanks for that clarification. I think I've got it and think I've planned out what I want to do.  I'd value some expert opinion though...

(a) Before February 2021, make a £8,500 lump sum payment to buy added pension (AP) in scheme year 2020/21.  I will need to claim back tax for this as tax relief will not have been given at source. This will buy additional pension of ~£850p/a based on civil service alpha added pension calculator. 
This should be below Annual Allowance (AA) limit of £40,000; working as follows:
Normal alpha increase = £1,600p/a (this is based on 2019/20 which should be roughly the same for 2020/21 an no significant salary change)
Added pension increase = £850p/a
(£1,600 + £850) x 16 = £39,200  < AA of £40,000

(b) Before Feb 2021 arrange a monthly contribution though payroll of £450 per month to buy AP (that’s £5,400 p/a). Based on the civil service alpha added pension calculator, this will buy AP of £530p/a. This should be below AA limit
Normal alpha increase = £1,600p/a (this is based on 2019/20 this could go up in following years, but will limit the AP bought to leave some margin, in this case ~£6,000 margin, i.e. £34,080 compared to the £40,000 AA limit as shown below)
Added pension increase = £530p/a
(£1,600 + £530) x 16 = £34,080  < AA of £40,000

(c) Before Feb 2021 (BUT AFTER (b) above) buy an EPA (NPA-3) which I will continue to pay into each year until retirement.

(d) Starting with the initial £8,500 lump sum paid for AP in 2020/21 which gives £850p/a (from (a) above) and then adding the AP of £530p/a generated through my £450 per month contributions each year after (from (b) above), the AP cumulative total would be as follows:
2020/21 - £850p/a
2021/22 - £1,380p/a
2022/23 - £1,910p/a
2023/24 - £2,440p/a
2024/25 - £2,970p/a
2025/26 - £3,500p/a
2026/27 - £4,030p/a
2027/28 - £4,560p/a
2028/29 - £5,090p/a
2029/30 - £5,620p/a
2030/31 - £6,150p/a
2030/31 - £6,680p/a
2031/32 - £7,210p/a

From above, the AP/EPA limit of £7,200 (which is the current limit) would be exceeded in year 2031/32 which would prevent me buying EPA from that point on.  To prevent this I could stop paying monthly AP contributions at the end of 2030/31. Although I'd have only bought £6,680 of AP which is a little short of the maximum that £7,200 that can be bought I'd be happy with that. This will prevent the AP/EPA limit being exceeded and allow me to continue buying EPA for further years till retirement. 

(e) Keep an eye on Lifetime limit as I get closer to retirement and potentially retire early if it looks like I will exceed lifetime limit.  Can also increase tax free lump sum which will reduce pension compared to lifetime limit.

hugheskevi

The main point to note is that if you want to, you can probably purchase more than £8,500 of AP in 2020/21 by using carry-forward of unused Annual Allowance from the last 3 years.

The £7,200 limit rather confusingly excludes annual increases to pension, so you wouldn't reach the limit for quite some time after 2031/32. Also, the amount of AP a fixed contribution purchases decreases each year, so by 2031/32 you would be purchasing quite a bit less than £530 p/a of AP. I think you can also continue with EPA after reaching the cap, as long as you set up the contract before reaching the cap. But all that is so far into the future it isn't worth considering at the current time.

SC_Pump

Thanks again. Good point, I’ve probably got about £55,000 unused annual allowance from the previous 3 years, so the AA could be up to £95,000. 

(£95,000 - (£1,600x16))/16 = £4,338. So I could accumulate £4,338p/a of added pension by paying a lump sum of about £43,000 this year without exceeding the AA if I take credit for unused AA from the previous 3 years.

I’d then only have to keep the £450 per month payments up for about five years (end 2025/26) rather than till 2031/32 before I hit the £7,200 limit. Although I note that it could be a bit later than 2025/26 given what you said about exclusion of annual increases and the amount of AP a fixed contribution can purchase, although I presume the effect could be lessened due to the spread now being only 5 years rather than 11?

Now, where to get a £43,000 lump sum this year 🤔

hugheskevi

It would probably be sensible just to contribute enough to benefit from higher rate relief, so around £17,000. Otherwise you are compromising tax efficiency, and given things like LTA might be an issue in future years that may well not be ideal with the benefit of hindsight in future years.

Don't underestimate the effect of pension increases not counting toward the limit - in the last year the AP/EPA cap increased from £7,000 to £7,200 so that was £200 of extra saving that can be made. Given you would only be adding £540p/a and the £540 would be declining over time whereas the inflation adjustment to the AP/EPA limit is increasing in cash terms, it is quite difficult to get to the cap level.