Civil Service Alpha EPA vs Added pension

SC_Pump

Again excellent advice! So many nuances I’ve missed!!

SC_Pump

Thanks for the additional help.  After multiple iterations I am converging on a plan...

(a) Before February 2021, make a £15,500 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 [Note, not worth contributing any more as would not get higher rate tax relief). This will buy additional pension of ~£1,555p/a based on civil service alpha added pension calculator. 
This should be below Annual Allowance (AA) limit if I make use of unused allowance from the previous 3 years (~£55,000 in total) plus the £40,000 limit for this year giving total limit of £95,000; 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 = £1,555p/a
(£1,600 + £1,555) x 16 = £50,480  < AA of £95,000

(b) Before Feb 2021 arrange a monthly contribution though payroll of £600 per month to buy AP (that’s £7,200p/a). Based on the civil service alpha added pension calculator, this will buy AP of £705p/a. This should be below AA limit; working as follows:
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 £3,120 margin, i.e. £36,880 compared to the £40,000 AA limit as shown below, also I may be able to claim some of that unused from the previous three years as not all used up by (a) above)
Added pension increase = £705p/a
(£1,600 + £705) x 16 = £36,880  < AA of £40,000

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

(d) Starting with the initial £15,500 lump sum paid for AP in 2020/21 which gives £1,555p/a (from (a) above) and then adding the AP of £705p/a generated through my £600 per month contributions each year after (from (b) above), the AP cumulative total would be as follows:
2020/21 - £1,555p/a
2021/22 - £2,260p/a
2022/23 - £2,965p/a
2023/24 - £3,670p/a
2024/25 - £4,375p/a
2025/26 - £5,080p/a
2026/27 - £5,785p/a
2027/28 - £6,490p/a
2028/29 - £7,195p/a
2029/30 - £7,900p/a

From above, the AP/EPA limit of £7,200 (which is the current limit) would be exceeded in year 2029/30. [Note: As the £7,200 limit excludes annual increases to pension and a fixed contribution will buy less AP in future years reaching the AP/EPA limit could occur later, or at all].

It is possible that reaching the AP/EPA limit could prevent me buying EPA from that point on, although this might not be the case providing the EPA contract is entered into before reaching the AA cap. NEED TO CHECK THIS.  If this is an issue, I can get round this by stopping paying monthly AP contributions the year just prior to when the AP/EPA limit would be reached (would need to do it the year before as can't stop payments mid-year).  So in the example above, I would stop payments at the end of 2028/29.  This will prevent the AP/EPA limit being reached 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

All looks fine. Only thing that stands out is how close to AA you will be in future years.

Remembering that the £40,000 AA limit is frozen in cash terms, once your salary reaches £77,371 you will have a pension input of £40,000 p/a. This will be mitigated slightly by your Added Pension purchases buying a lower amount each year, but even so, you are probably going to be breaching the AA by the time you reach a salary of £80,000.

Even in the absence of promotion, a salary increase of 2-3% p/a would quickly eat into that headroom, so the later years of your plan might be in jeopardy.

SC_Pump

If in coming years I did reach the AA limit e.g. due to salary increase and the amount of AP I’m buying, could I reduce the amount of AP I buy? I know you can stop paying for AP at the end of each year, but not sure if you’re able to amend the contract to reduce payments. Would it be a case of having to start a new contract at the beginning of the next year for a reduced amount? If so would having an EPA prevent taking out a new contract?

hugheskevi

SC_Pump said:

If in coming years I did reach the AA limit e.g. due to salary increase and the amount of AP I’m buying, could I reduce the amount of AP I buy? I know you can stop paying for AP at the end of each year, but not sure if you’re able to amend the contract to reduce payments. Would it be a case of having to start a new contract at the beginning of the next year for a reduced amount? If so would having an EPA prevent taking out a new contract?

I don't know. Looking at the scheme rules, there are references to fixed amounts of annual payment and no mention of being able to vary payments. That rather suggests that to change the contribution amount it would be necessary to cancel the existing contract and commence a new one, but in this case it would not be possible as due to the EPA purchase you would have exceeded the AP/EPA limit and so could not take out a new contract.

You could cancel the EPA for a year, take out a new AP contract and then re-commence EPA the following year, so you would just miss out on one year of EPA.

But I would not rely on this, best to get an answer in writing from the scheme administrator.

SC_Pump

Ok, I’ll check this out with them. Thanks for all your help with this, I’ve learned a lot.
take care

geblad

Sorry to resurrect this thread, but I'm thinking of doing something similar to allow me to contribute enough pension so that my child benefits are unaffected by going over the £50k salary.
How do you buy an added pension contract and the EPA in the same year? Or would you need to agree the AP contract first in say 21/22 and then buy an EPA contract the following year in 22/23?

hugheskevi

geblad said:

How do you buy an added pension contract and the EPA in the same year? Or would you need to agree the AP contract first in say 21/22 and then buy an EPA contract the following year in 22/23?

Just fill in the appropriate forms. No reason it cannot all be done ready for to purchase both in 2022/23.

If the shared EPA / Added Pension purchase limit isn't an issue, it is all straightforward.

If the limit is an issue, purchase Added Pension such that you are slightly below limit, then purchase EPA.

spy

Sorry to jump on to an existing thread but I have also been looking at this and there are a couple of things I don’t quite understand.

I think EPA would probably be better for me than added pension and I have been using the calculators available on the website. When I choose EPA-3 it says the EPA contract value is 144% as a percentage of the added pension limit so does this mean I can only do EPA-2 which is 99.6%? Or does this only mean that I can’t then buy added pension too?

I am also trying to understand the interaction with the annual and lifetime allowances which seems quite confusing. From my reading the lifetime limit is calculated as 20 times your pension and therefore the max pension you can have without exceeding the limit is ~£55k. If you take the pension earlier than NPA it is reduced so does this mean you can avoid breaching the lifetime limit by retiring earlier? E.g. if I would get 60k retiring at 66 but only 53k retiring at 63 then would retiring at 63 mean I avoid breaching the limit?

With respect to the annual limit my reading is this is calculated at 16 times the annual increase in your pension. Is there any way of estimating what this would be as the website says it’s calculated differently to the annual increase I shown in your ABS?

Finally I have a question about McCloud. My understanding is that I will be able to choose to retain the old PCSCS benefits untimely March 2022. Does this mean it wouldn’t be worth starting an EPA in the current year as ultimately I won’t be receiving Alpha benefits for the current year?

Appreciate any clarification that anyone could give on these points as I am really struggling to find the answers to them on the pensions website!

Dazed_and_C0nfused

Finally I have a question about McCloud. My understanding is that I will be able to choose to retain the old PCSCS benefits untimely March 2022. Does this mean it wouldn’t be worth starting an EPA in the current year as ultimately I won’t be receiving Alpha benefits for the current year?

Are you 100% certain you will choose your old scheme over Alpha for the remedy period?

Alpha appears to build up pension at a generous rate so for some people it may be financially better to choose an actuarially reduced Alpha pension rather than the old scheme (assuming you want to take the pension at 60).