Civil Service Alpha EPA vs Added pension

spy

Dazed_and_C0nfused said:

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).

I’m pretty sure the extra 7 years of premium will be better than 7 years of Alpha actuarially reduced by 8 years but I don’t think you need to choose until you retire so will know which is better then. Not sure whether there is a way of me working it out but then I see the impact of changing the retirement age even by a few years in the tool it is pretty large. 

hugheskevi

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?

As long as you are not already at the limit, you can purchase any amount of EPA. So you could purchase EPA-3, but would then not be able to buy any added pension. If you wanted to buy added pension, you could do this before the EPA purchase and as long as you don't purchase the full limit of Added Pension you can then purchase EPA.

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?

Yes, the Lifetime Allowance calculation is very simplistic, and so gives an incentive (other things being equal) to commence a DB pension earlier than would be the case if either the limit did not exist, or if the calculation of value was more sophisticated.

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?

Only doing things yourself manually in a spreadsheet.

Your premium pension is quite simple, just being years of service/60 multiplied by final pay, although calculating your final pay may not be easy as it uses figures from as far back as 13 years and includes inflation adjustments. Unfortunately your ABS only shows latest salary, although you could ask MyCSP for your final pay figure.

Your alpha accrual is 2.32% of pensionable earnings, although inflation also affects the figures so it will be hard to get a precise estimate. Service between 1-5 April also causes some variance as payrolls all treat it slightly differently.

However, you should be able to get a quite close estimate of your pension input with fairly minimal effort. Given your research and understanding on points above, you seem quite capable of that.

A bigger problem may be McCloud - in due course your past pension inputs will all be recalculated to be based on Premium service. So it is all quite confusing to understand your actual position in terms of what carry-forward from past years you will have once all the corrections are made.

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?

You can't start an EPA contract until start of next scheme year (1 April 2022) so it is a moot point.

I’m pretty sure the extra 7 years of premium will be better than 7 years of Alpha actuarially reduced by 8 years but I don’t think you need to choose until you retire so will know which is better then. Not sure whether there is a way of me working it out but then I see the impact of changing the retirement age even by a few years in the tool it is pretty large.

Premium was a very generous scheme, and alpha will struggle to beat it in most cases.

gdad73

I've been following the questions and answers above and have a query if any one would be able to offer an insight i would be very grateful.

I currently have a Civil service pension approx.17 years Premium and 6 Alpha (will be affected by Mcloud judgement for the 6 years in Alpha).  Im 48 and unsure when I will look to retire but maybe around 63 at this time.

Salary is currently approx. £55,000 pa, Id like to minimise both the Child tax credit impact (earning above £50,000) and higher tax bracket payments I would be encountering by making additional payments into my pension.  I’m pretty sold on taking out EPA but then unsure whether to pay the remaining amount (to bring Salary closer to the £50,000 pa) into either Added Pension payments or CSAVS or a mix of both.   I would be grateful for people’s views or anyone who has made similar decisions and the reasons for this.

Many thanks in advance.

NedS

gdad73 said:

I've been following the questions and answers above and have a query if any one would be able to offer an insight i would be very grateful.

I currently have a Civil service pension approx.17 years Premium and 6 Alpha (will be affected by Mcloud judgement for the 6 years in Alpha).  Im 48 and unsure when I will look to retire but maybe around 63 at this time.

Salary is currently approx. £55,000 pa, Id like to minimise both the Child tax credit impact (earning above £50,000) and higher tax bracket payments I would be encountering by making additional payments into my pension.  I’m pretty sold on taking out EPA but then unsure whether to pay the remaining amount (to bring Salary closer to the £50,000 pa) into either Added Pension payments or CSAVS or a mix of both.   I would be grateful for people’s views or anyone who has made similar decisions and the reasons for this.

Many thanks in advance.

It's pretty much a no-brainer increasing your contributions to get yourself under the £50k threshold.

Whether you do this by buying additional DB (Alpha) pension or AVCs (or a personal SIPP) is a decision that's personal to you and your circumstances. Buying more DB pension gives to a guaranteed, index-linked income for life whereas additional DC contributions will give you a pension pot whose value is linked to the performance of the stock market with no guarantees. What it does give you is a bit more flexibility in how you take your pensions. For example, you could use the DC pot to help bridge the gap from retirement before drawing your DB pensions, thus reducing the amount of actuarial reduction from taking them early.

DC pensions have been quite popular over the last 10 years or so due to great stock market performance and a period of sustained low inflation. If we were to now enter a period of lower returns and higher inflation, they may look a lot less attractive compared to an index-linked DB pension.

hugheskevi

gdad73 said:

Salary is currently approx. £55,000 pa, Id like to minimise both the Child tax credit impact (earning above £50,000) and higher tax bracket payments I would be encountering by making additional payments into my pension.  I’m pretty sold on taking out EPA but then unsure whether to pay the remaining amount (to bring Salary closer to the £50,000 pa) into either Added Pension payments or CSAVS or a mix of both.   I would be grateful for people’s views or anyone who has made similar decisions and the reasons for this.

So your member contribution rate is 5.45%, or £2,997.50. EPA contributions would cost around 2.5%, or £1,375. Taking those deductions from £55,000 leaves £50,627.50, plus whatever other taxable income you may have (eg bonus). Unless your other taxable income is significant, that doesn't leave much left above £50,000. Whether you purchase Added Pension or AVCs, you could make the contribution by lump sum close to the end of the year when you know your tax position.

In addition to what NedS says above, it is worth noting that Added Pension can only be purchased whilst you work in public sector, whereas DC provision can be made anytime, so if you think you might move to private sector in future you might prefer to prioritise Added Pension now.

gdad73

hugheskevi said:

gdad73 said:

Salary is currently approx. £55,000 pa, Id like to minimise both the Child tax credit impact (earning above £50,000) and higher tax bracket payments I would be encountering by making additional payments into my pension.  I’m pretty sold on taking out EPA but then unsure whether to pay the remaining amount (to bring Salary closer to the £50,000 pa) into either Added Pension payments or CSAVS or a mix of both.   I would be grateful for people’s views or anyone who has made similar decisions and the reasons for this.

So your member contribution rate is 5.45%, or £2,997.50. EPA contributions would cost around 2.5%, or £1,375. Taking those deductions from £55,000 leaves £50,627.50, plus whatever other taxable income you may have (eg bonus). Unless your other taxable income is significant, that doesn't leave much left above £50,000. Whether you purchase Added Pension or AVCs, you could make the contribution by lump sum close to the end of the year when you know your tax position.

In addition to what NedS says above, it is worth noting that Added Pension can only be purchased whilst you work in public sector, whereas DC provision can be made anytime, so if you think you might move to private sector in future you might prefer to prioritise Added Pension now.

Thank you both for the replies.

So i mistakenly hadn't accounted for the current Pension payments i make needing to be taken out of my Salary calculations before I would be taxed at the higher rate.   I assumed that the 40% tax would be taken for any earnings over £50,271 period.  I just assumed any new additional Pension payments would be taken into account for reducing my tax not the existing 5.45%. My mistake and that is good to know and understand. 

Dazed_and_C0nfused

Not all pension contributions reduce your taxable pay.

Net pay ones such as Alpha do but of you contribute to a SIPP or personal pension these will normally be "relief at source" contributions

For example you pay over £1,000 and the pension company, courtesy of HMRC, add £250 in basic rate tax relief giving you a pension fund of £1,250.  The gross contribution doesn't reduce your taxable income but it does increase your basic rate band by £1,250 meaning you could pay more tax at basic rate and less at higher rate.

Relief at source contributions do however reduce your adjusted net income, which is used to calculate the Personal Allowance, High Income Child Benefit Charge and Married Couple's Allowance.

gdad73

My Personal Tax Account (currently based on £52,414 - which will increase for next few months to be circa £55,000 with Overtime etc) is showing that I have £2,136 in the 40% tax bracket.  Is this because the PTA does not take into account Pension payments and is therefore misleading and the fact that my employer takes the tax at Net, then it will essentially account for my Pension payments and therefore I would not encounter the 40% tax rate on this amount.  Apologies for continuing the question I just want to be understand the information below also. 

Income Tax Band	Amount	Tax Rate	Tax
Tax-free amount	£12,570	0%	£0
Basic rate	£37,700	20%	£7,540
Higher rate	£2,136	40%	£854

Dazed_and_C0nfused

You will never see any reference to "net pay" pension contributions as no pension tax relief is due on these.

You get the tax benefit by not paying tax on your salary but on your taxable pay.  

For example if your salary was £55,000 and you contributed 10% under a net pay scheme your employer would report (taxable) pay of £49,500 to HMRC, the £55,000 wouldn't feature anywhere for tax purposes.

You should be able to see this on your payslip.

gdad73

Dazed_and_C0nfused said:

You will never see any reference to "net pay" pension contributions as no pension tax relief is due on these.

You get the tax benefit by not paying tax on your salary but on your taxable pay.  

For example if your salary was £55,000 and you contributed 10% under a net pay scheme your employer would report (taxable) pay of £49,500 to HMRC, the £55,000 wouldn't feature anywhere for tax purposes.

You should be able to see this on your payslip.

Ah yes, just reviewed my payslip in detail and based on comments I now fully understand the detail!  Such a good forum and really appreciate people taking time out to provide comments.  Thank you.