Civil Service Alpha EPA vs Added pension

geblad

This post has been really informative, many thanks to all!

I think I have arrived at a plan, but I may have misunderstood the part about annual limits, added pension and EPA purchasing so input is most welcome.

Current age 38.5yrs.
Pensions are 10 years in premium (to 2015), rest to date in alpha, but am likely to move all prior to April 2022 back into premium
NPA is currently 68
Salary 21/22 £55212
for 21/22 I also had a salary sacrifice cycle to work, therefore to bring myself under the 50k limit re child benefit, I will make a lump sum payment of £1k in 21/22 (needs to be applied for by Feb 22). Under McCloud, this added pension could be moved back to premium I think?

Salary is due to increase in June 22 to £57972, so normal pension contributions will be:

55212 @ 5.45% x 2/12 = 501.51
57972 @ 7.35% x 10/12 = 3550.78
total = £4,052.29

This means I need to make further contributions of £3,919.71 to get under the 50k limit for child benefit

If I want to get an EPA contract for -3, it will cost me 3.5% which is only £2,012.92, so I need added pension for the balance.

However, the EPA -3 contract uses up 122.28% of the added pension limit.

Therefore I need to enter into a monthly added pension contract for 22/23 before I sign up to an EPA contract.

If I buy added pension of £170pm (total £2,040) first, then I can purchase the EPA -3 contract and get the salary below 50k. 

Is this right? It seems strange that when I use the EPA calculator it tells me I can't buy added pension, but if I buy added pension first I can then get a -3 EPA contract?

Also, would I apply for the monthly added pension for 22/23 at the same time as making the lump sum for 21/22?

And lastly, do I need to think about increasing contributions in later years to keep me under the 50k (my son is two so quite a while of claiming child benefit yet I think)

hugheskevi

geblad said:

for 21/22 I also had a salary sacrifice cycle to work, therefore to bring myself under the 50k limit re child benefit, I will make a lump sum payment of £1k in 21/22 (needs to be applied for by Feb 22). Under McCloud, this added pension could be moved back to premium I think?

Correct.

Salary is due to increase in June 22 to £57972, so normal pension contributions will be:

55212 @ 5.45% x 2/12 = 501.51
57972 @ 7.35% x 10/12 = 3550.78
total = £4,052.29

This means I need to make further contributions of £3,919.71 to get under the 50k limit for child benefit

Your earnings are £57,512 (you seem to have used £57,972 and not accounted for 2 months of lower earnings), less contributions of £4,052.29 for total taxable salary of £53,459.71. So £3,459.71 is needed to get below £50,000.

Is this right? It seems strange that when I use the EPA calculator it tells me I can't buy added pension, but if I buy added pension first I can then get a -3 EPA contract?

Yes - public sector seems to delight in putting in all manner of silly restrictions, and then having lots of loopholes to get around them.

Also, would I apply for the monthly added pension for 22/23 at the same time as making the lump sum for 21/22?

If you like. Remember you need to claim the tax relief from the lump sum contribution from HMRC, which is usually quite a mission and you are likely to be told you are not eligible for tax relief on the contribution at some point. Persist and you get there in the end.

And lastly, do I need to think about increasing contributions in later years to keep me under the 50k (my son is two so quite a while of claiming child benefit yet I think)

Yes, but EPA and Added Pension won't help you for that due to limits if you buy EPA, so you will need AVCs or personal pensions to do that. Or just do Added Pension only, much more flexible and can vary amount each year according to income needs.

NedS

hugheskevi said:

geblad said:

Is this right? It seems strange that when I use the EPA calculator it tells me I can't buy added pension, but if I buy added pension first I can then get a -3 EPA contract?

Yes - public sector seems to delight in putting in all manner of silly restrictions, and then having lots of loopholes to get around them.

Also, would I apply for the monthly added pension for 22/23 at the same time as making the lump sum for 21/22?

If you like. Remember you need to claim the tax relief from the lump sum contribution from HMRC, which is usually quite a mission and you are likely to be told you are not eligible for tax relief on the contribution at some point. Persist and you get there in the end.

And lastly, do I need to think about increasing contributions in later years to keep me under the 50k (my son is two so quite a while of claiming child benefit yet I think)

Yes, but EPA and Added Pension won't help you for that due to limits if you buy EPA, so you will need AVCs or personal pensions to do that. Or just do Added Pension only, much more flexible and can vary amount each year according to income needs.

I would highlight using Added Pension over EPA.

They are (or can be) essentially the same thing. For example, assuming you end up with a pension of £30k per year, and want to retire 3 years early (EPA -3) at 65. You can purchase EPA and retire 3 years early with a fully preserved pension of £30k, or you can use the same level of conts to buy added pension giving, for example, a pension of £34,500 which subject to actuarial reduction of 5% per year would still give you the same £30k pension if taken 3 years early at 65.

Using added pension has the advantage of (a) being more flexible and not tied in to retiring 3 years early, and (b) allows you to fully utilise the amount of added pension you can purchase before then moving to EPA to continue milking the system if the Added Pension limits become restrictive.

gdad73

Reading the comment below

Also, would I apply for the monthly added pension for 22/23 at the same time as making the lump sum for 21/22?

If you like. Remember you need to claim the tax relief from the lump sum contribution from HMRC, which is usually quite a mission and you are likely to be told you are not eligible for tax relief on the contribution at some point. Persist and you get there in the end.

Can I just confirm the following please.

 - If i was to set up monthly contributions for EPA AND any monthly payments i set up for either Added Pension or CSAVS would not result me in needing to claim any tax relief through HMRC

However for 

- Lump sum payments for Added Pension or CSAVS do require me to claim tax relief through HMRC.

I really would like to avoid claiming relief through HMRC if at all possible.   I assumed if I make a lump sum Added Pension payment prior to this years deadline, essentially it would be taken 'Net' in the same way as a monthly payment thus the relief would be gained at this point.

Dazed_and_C0nfused

Lump sum payments are usually too large to be processed by payroll hence the need for a separate claim.

HMRC are used to dealing with "relief at source" claims and seem to assume that any pension tax relief claims must be related to relief at source contributions.

Typically they will extend your basic rate band by the gross contribution, allowing you to pay more tax at 20% and less at 40% when a gross contribution like the one you are contemplating does not attract any at the point of payment and works a bit like the Personal Allowance for tax relief purposes.

hugheskevi

 - If i was to set up monthly contributions for EPA AND any monthly payments i set up for either Added Pension or CSAVS would not result me in needing to claim any tax relief through HMRC

Correct

 - Lump sum payments for Added Pension or CSAVS do require me to claim tax relief through HMRC.

I really would like to avoid claiming relief through HMRC if at all possible.   I assumed if I make a lump sum Added Pension payment prior to this years deadline, essentially it would be taken 'Net' in the same way as a monthly payment thus the relief would be gained at this point.

As Dazed_and_C0nfused says above, the issue with lump sum payments is the size. However, for a small lump sum payment of a £1,000 or so, that will be within monthly salary so can you could pay with a lump sum from salary, at least for a while.

The easiest way to claim relief on lump sum payments is to write to HMRC (not call, you will just end up speaking to an operator who doesn't understand tax relief), asking them to adjust your Tax Code to give you the necessary relief. At least up until about 2015, HMRC used to do this by treating the contribution as a Retirement Annuity Contract contribution - a legacy type of pension that ceased to new entrants in 1988! RACs have the same tax treatment as Added Pension lump sum contribution though. You can do that at the start of a Tax Year if you like, and get the relief before making the contribution at the end of the tax year  Then each year you can just tweak your letter template to HMRC and everything is easy. You might even be able to do it via the online HMRC Tax Code interface. Anyway, it is quite straightforward after the first year.

spy

Thanks for taking the time to reply, these responses are really helpful. 

hugheskevi said:

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'm not sure its worth me doing the added pension because its more likely to make me go over the lifetime limit and might risk going over the annual allowance some years so EPA is likely to be the better option.

hugheskevi said:

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.

Thanks. I think I have done a reasonable estimate now although I might not have got all of the carry forwards exactly right. I was put off trying to calculate itself before by the notes on the ABS which said the benefits on the statement were calculated in a different way to those used for the annual allowance. The frustrating thing is it sounds like they don't actually tell you whether you have breached the annual allowance until October the following year which is too late to make informed decisions about buying added pension. Am I right that the inflation factor used to calculate the annual allowance is from September the previous year so for 2020-21 pensions it will be based on the September 2020 CPI of 0.7%? 

I hadn't thought this through fully before but it sounds like McCloud will make everything very complicated. On the basis you don't choose which option to take until you retire then will they go back and recalculate whether you breached the annual limit each year at the point you retire too? I assume for anyone who had purchased any added pension or EPA for Alpha between 2015 and 2022 it will make things more complicated too and even if you do chose to take the benefits from the old scheme then you will have missed out on the opportunity to buy added years etc. in the old scheme between 2015 and 2022. 

hugheskevi 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?

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

Thanks, I hadn't appreciated that point before but reading it again I think I need to apply by mid-March to do EPA from 1 April 2022. One thing that I am not clear about (but won't make a difference if I choose the old scheme under McCloud) is when you take the EPA are you only able to get the benefits accrued from that point onwards at an earlier date? i.e. there is no option to get the benefits already accrued under Alpha any sooner than NPA without actuarial reduction? 

hugheskevi

spy said:

I'm not sure its worth me doing the added pension because its more likely to make me go over the lifetime limit and might risk going over the annual allowance some years so EPA is likely to be the better option.

It isn't immediately intuitive, but EPA affects your pension for Lifetime Allowance in the same way as Added Pension. At any given age, your pension will be higher by roughly the same amount whether you purchase EPA or Added Pension. NedS's reply above covers this. EPA is different to Added Pension for Annual Allowance purposes though.

The frustrating thing is it sounds like they don't actually tell you whether you have breached the annual allowance until October the following year which is too late to make informed decisions about buying added pension. 

Correct.

Am I right that the inflation factor used to calculate the annual allowance is from September the previous year so for 2020-21 pensions it will be based on the September 2020 CPI of 0.7%?

The starting value of the Pension Input Amount is increased by September 2019 CPI for 2020/21. Just before the end of the financial year, on 31st March 2021 alpha pension increases by September 2020 CPI.

I hadn't thought this through fully before but it sounds like McCloud will make everything very complicated.

Very much so - basically impossible to accurately estimate unless you have a lot of good data on your past salary, fully understand how past final pay is calculated and are handy with a spreadsheet.

On the basis you don't choose which option to take until you retire then will they go back and recalculate whether you breached the annual limit each year at the point you retire too? I assume for anyone who had purchased any added pension or EPA for Alpha between 2015 and 2022 it will make things more complicated too and even if you do chose to take the benefits from the old scheme then you will have missed out on the opportunity to buy added years etc. in the old scheme between 2015 and 2022.

No. Your past pension inputs will be corrected when you are rolled back to the legacy scheme at some point in 2023.

When you retire, if you choose alpha benefits for the period 2015-22 and they produce a higher pension input, HM Treasury have said they will compensate members for the one-off spike choosing alpha would produce.

People who purchase EPA or alpha Added Pension will get the value reflected in their legacy scheme when they are rolled back, or can choose to take a refund of the voluntary contributions in 2023.

New purchases of Added Pension ceased in 2008 so are not affected by McCloud. The opportunity to make legacy scheme Added Pension purchases is what was lost, although members could have entered into a legacy scheme Added Pension contract prior to moving to alpha, as those continued after the move.

One thing that I am not clear about (but won't make a difference if I choose the old scheme under McCloud) is when you take the EPA are you only able to get the benefits accrued from that point onwards at an earlier date? i.e. there is no option to get the benefits already accrued under Alpha any sooner than NPA without actuarial reduction?

Yes, EPA is prospective accrual only.

At retirement, you could choose to buy-out the actuarial reduction if you wished, although that may be problematic with regard to having enough earnings to get tax relief on the contribution to buy-out the reduction if you take it very early.

geblad

Can't thank everyone enough for this thread, it's been super helpful and given me lots to think about!

I note the comments on McCloud, but as I'll only have £1k "added" pension for 21/22 that may be moved I'm not going to lose sleep over that. I can ask for that one off to be taken via salary also, so no issues with the tax relief position.

I note the comments on EPA vs Added. I want to retire early (I have in my head 58 at the latest), does this mean that taking EPA now rather than filling up added pension is a better bet as there will be a larger pot available earlier, or does it not really matter?

If it works out roughly the same, then I may as well fill up on added pension as suggested, so just pay £315pm to added pension to bring me under the £50k child benefit threshold?

I'm also conscious that the NPA for alpha can be moved upwards in future at the whim of the govt (and mine is already 68), so the number of years to be actuarily reduced will likely be more, hence my initial thinking on going for an EPA contract.

I intend to save money outside of a pension to bridge the gap to 60 when I can take premium with no reduction.

Can you retire and take premium in full and leave alpha untouched until you need it to mean less of an actuarial reduction?

Also, if I take added pension, how do I calculate the pension input amount for the purposes of calculating the annual allowance? 

hugheskevi

geblad said:

I note the comments on EPA vs Added. I want to retire early (I have in my head 58 at the latest), does this mean that taking EPA now rather than filling up added pension is a better bet as there will be a larger pot available earlier, or does it not really matter?

Doesn't matter - EPA gives you a smaller pension with a lower NPA, Added Pension gives you a larger pension with a higher NPA. After actuarial reduction it all adds up to the same thing pretty much.

If it works out roughly the same, then I may as well fill up on added pension as suggested, so just pay £315pm to added pension to bring me under the £50k child benefit threshold?

The problem with monthly contributions is that they will never be quite right. Even in the first year, bonuses, etc, will cause variance. After that salary and tax threshold changes cause further variance. Lump sum contributions are better for maintaining ideal contribution over time.

I'm also conscious that the NPA for alpha can be moved upwards in future at the whim of the govt (and mine is already 68), so the number of years to be actuarily reduced will likely be more, hence my initial thinking on going for an EPA contract.

If State Pension age, and hence NPA, increases, then your EPA age also increases. For example, if State Pension age increased to 69 your EPA-3 would then give an unreduced pension from age 66.

I intend to save money outside of a pension to bridge the gap to 60 when I can take premium with no reduction.

Defined Contribution pension (minimum pension age of 57) is ideal for this, with tax advantages.

Can you retire and take premium in full and leave alpha untouched until you need it to mean less of an actuarial reduction?

As long as you are not still working, yes.

Also, if I take added pension, how do I calculate the pension input amount for the purposes of calculating the annual allowance?

Annual amount of Added Pension purchased multiplied by 16. Not quite precise after the first year, but very close.