Civil Service Alpha EPA vs Added pension

Rachel_222

Hi all, I've read though this thread and found it really interesting, thank you. 

I'm trying to decide whether I should buy added pension or EPA. I know this thread has said there isn't much difference between them, so is it really just a case of flipping a coin to decide which one to go with!?

For context - I'm 31, on the Alpha scheme (plus a few years on Nuvos at the beginning), I've had a Civil Service pension since I was 21. Current salary around 43K. I haven't paid any extra into my pension before. I don't know exactly when I plan to retire, but I hope at around 60, possibly earlier. My mortgage will be paid off at 55 and I save and invest (modestly) outside of my pension, and I think I'll be able to retire on around half my current salary. 

I think I'm looking to contribute between £100-200 extra a month to my pension, but am unsure whether this should be added pension or EPA. I'm currently leaning towards EPA, but only because this is more understandable to me and I find it hard to hard to understand what added pension will actually mean for me.

hugheskevi

Rachel_222 said:

I'm trying to decide whether I should buy added pension or EPA. I know this thread has said there isn't much difference between them, so is it really just a case of flipping a coin to decide which one to go with!?

Key things to consider:

• You can only buy Added Pension equal to remaining Added Pension / EPA cap, but can purchase any amount of EPA as long as there is some cap headroom remaining. This may lead to a preference for Added Pension before EPA.
• EPA does not result in any pension input, this is relevant to higher earners who may be affected by the Annual Allowance.
• EPA gives no benefit to survivor pension, Added Pension with dependent cover can be chosen.
• EPA gives no benefit should you suffer ill-health, Added Pension does
• EPA could result in a slightly lower death lump sum payment compared to Added Pension
  

All the things above are reflected in the cost of EPA and Added Pension. So consider how much extra voluntary benefits you plan to purchase, whether the Annual Allowance will be an issue, and whether you value benefits in case of death or ill-health.

My mortgage will be paid off at 55

You could consider paying it off with a pension lump sum instead, which would be more tax efficient if it suits your circumstances.

I think I'm looking to contribute between £100-200 extra a month to my pension

You are close to higher rate tax threshold. Have you considered LISA or investment ISA for additional saving, and extra pension when you are a higher rate taxpayer?

I've had a Civil Service pension since I was 21...I don't know exactly when I plan to retire, but I hope at around 60, possibly earlier ...I think I'll be able to retire on around half my current salary.

39 years of Civil Service pension may well provide that, even with actuarial reduction. Have you planned your saving and decumulation to determine whether you need to save more? If you already are on course for sufficient pension then Defined Contribution or ISA saving may be preferable to fund years of earlier retirement.

michaels

This is such a useful thread - thanks all.

I am looking to join the CS and Alpha with an existing DC pot.  Questions

1) I believe it is possible to transfer DC pension into the scheme at a similar rate to purchasing lump sum within the scheme.  Would the same 7.2k cap apply for such purchases - I have read elsewhere that the cap is 50% of pensionable salary?

2) What are the AA and LA consequences of such a transfer in - if I were able to transfer in 270k of DC and purchase 21k pa of DB for AA purposes would I have increased my total pot by 20 x 21k minus 270k = 150k?  Would there also be any AA impact of such a transfer in?

3) Given I have no AA carry forward would my max annual pension increase with added be 40k/16 = £2500 from which I would need to subtract the standard 2.32% (say 900) leaving £1600 (what wold this cost from my gross salary?)

4) Does anyone know what the AA charge for exceeding the AA through larger contributions might be - assuming this is allowed via the scheme?  Even though it will only be BR relief lost and I will pay BR on 75% on the way out the extra savings in NI (12%) and the generous accrual rate may still make it worthwhile given I am looking to retire soon rather than having multiple years to build up any entitlement.

Thanks for any help/suggestions

Edit:  If the answer is 'seek professional advice' how would I go about finding a professional who would know the details for this particular scheme?

hugheskevi

I am looking to join the CS and Alpha with an existing DC pot.  Questions

1) I believe it is possible to transfer DC pension into the scheme at a similar rate to purchasing lump sum within the scheme.  Would the same 7.2k cap apply for such purchases - I have read elsewhere that the cap is 50% of pensionable salary?

You are allowed to transfer-in a value such that the alpha credit is 50% of pensionable earnings. For example, if your salary was £40,000 you could transfer-in an amount such that the alpha pension credited from the transfer was £20,000 p/a. The cost would depend on age, but might be in the region of £200,000 for example.

2) What are the AA and LA consequences of such a transfer in - if I were able to transfer in 270k of DC and purchase 21k pa of DB for AA purposes would I have increased my total pot by 20 x 21k minus 270k = 150k?  Would there also be any AA impact of such a transfer in?

No AA consequences, as it is CETV based so no enhancement of value.

LTA consequence is only relevant at retirement, being the standard calculation of 20x pension put into payment plus any lump sum taken. This could therefore be more or less than DC would have produced, but if you take DB pension early with actuarial reduction you can manage position (and maybe commute lump sum and allocate pension to enhance survivor pension depending on circumstances).

3) Given I have no AA carry forward would my max annual pension increase with added be 40k/16 = £2500 from which I would need to subtract the standard 2.32% (say 900) leaving £1600 (what wold this cost from my gross salary?)

Pretty much, although you also have to factor in the pension increase added on 31st March. In subsequent years you need to factor in the difference between the CPI rate used to uprate starting amount and the CPI rate used to uprate pension close to end of pension input period - if inflation rate is higher that will eat into £40,000 allowance, although the impact will be small in the early years.

Cost of Added Pension is depends on age. It benefits from tax relief in the usual way, although lump sum purchases may be a hassle to reclaim tax relief from HMRC. There is no salary sacrifice option.

4) Does anyone know what the AA charge for exceeding the AA through larger contributions might be - assuming this is allowed via the scheme?  Even though it will only be BR relief lost and I will pay BR on 75% on the way out the extra savings in NI (12%) and the generous accrual rate may still make it worthwhile given I am looking to retire soon rather than having multiple years to build up any entitlement.

There is no NI saving as salary sacrifice does not apply.

If your pension input amount exceeds the limit, the excess is added to your taxable income and taxed at marginal rate. This could push you into higher rate tax, so the charge is 20% or 40% (or somewhere in-between) of the amount by which the limit has been exceeded in your case.

Edit:  If the answer is 'seek professional advice' how would I go about finding a professional who would know the details for this particular scheme?

Most advisors I've come across were pretty useless at this sort of stuff, I'd be very careful. Quite a few just keep asking what the employer contribution is, seemingly unaware it doesn't matter for AA purposes in a DB scheme, for example.

michaels

hugheskevi said:

I am looking to join the CS and Alpha with an existing DC pot.  Questions

1) I believe it is possible to transfer DC pension into the scheme at a similar rate to purchasing lump sum within the scheme.  Would the same 7.2k cap apply for such purchases - I have read elsewhere that the cap is 50% of pensionable salary?

You are allowed to transfer-in a value such that the alpha credit is 50% of pensionable earnings. For example, if your salary was £40,000 you could transfer-in an amount such that the alpha pension credited from the transfer was £20,000 p/a. The cost would depend on age, but might be in the region of £200,000 for example.

2) What are the AA and LA consequences of such a transfer in - if I were able to transfer in 270k of DC and purchase 21k pa of DB for AA purposes would I have increased my total pot by 20 x 21k minus 270k = 150k?  Would there also be any AA impact of such a transfer in?

No AA consequences, as it is CETV based so no enhancement of value.

LTA consequence is only relevant at retirement, being the standard calculation of 20x pension put into payment plus any lump sum taken. This could therefore be more or less than DC would have produced, but if you take DB pension early with actuarial reduction you can manage position (and maybe commute lump sum and allocate pension to enhance survivor pension depending on circumstances).

3) Given I have no AA carry forward would my max annual pension increase with added be 40k/16 = £2500 from which I would need to subtract the standard 2.32% (say 900) leaving £1600 (what wold this cost from my gross salary?)

Pretty much, although you also have to factor in the pension increase added on 31st March. In subsequent years you need to factor in the difference between the CPI rate used to uprate starting amount and the CPI rate used to uprate pension close to end of pension input period - if inflation rate is higher that will eat into £40,000 allowance, although the impact will be small in the early years.

Cost of Added Pension is depends on age. It benefits from tax relief in the usual way, although lump sum purchases may be a hassle to reclaim tax relief from HMRC. There is no salary sacrifice option.

4) Does anyone know what the AA charge for exceeding the AA through larger contributions might be - assuming this is allowed via the scheme?  Even though it will only be BR relief lost and I will pay BR on 75% on the way out the extra savings in NI (12%) and the generous accrual rate may still make it worthwhile given I am looking to retire soon rather than having multiple years to build up any entitlement.

There is no NI saving as salary sacrifice does not apply.

If your pension input amount exceeds the limit, the excess is added to your taxable income and taxed at marginal rate. This could push you into higher rate tax, so the charge is 20% or 40% (or somewhere in-between) of the amount by which the limit has been exceeded in your case.

Edit:  If the answer is 'seek professional advice' how would I go about finding a professional who would know the details for this particular scheme?

Most advisors I've come across were pretty useless at this sort of stuff, I'd be very careful. Quite a few just keep asking what the employer contribution is, seemingly unaware it doesn't matter for AA purposes in a DB scheme, for example.

Brilliant, really helpful.

Just to confirm, any extra pension whether added or EPA is purchased from post tax salary?  Is tax relief then claimed via tax return - or does it come from gross salary (so no tax relief to claim) but is still subject to NI?  Thanks

hugheskevi

michaels said:

Just to confirm, any extra pension whether added or EPA is purchased from post tax salary?  Is tax relief then claimed via tax return - or does it come from gross salary (so no tax relief to claim) but is still subject to NI?  Thanks

It depends how you purchase them. EPA is always net pay arrangement, where contributions are taken before income tax is deducted so you get the full relief through payroll (but it is net pay, not salary sacrifice, so no National Insurance benefit).

Added Pension purchased through monthly contributions is the same net pay arrangements.

Added Pension purchased via lump sum from pay is again net pay.

Added Pension lump sum from a separate payment requires all tax relief, including basic rate, to be reclaimed from HMRC. This can be done in a number of ways, but the most convenient is an in-year tax-coding adjustment. Alternatively it can be claimed via self-assessment, or through a letter to HMRC at the end of financial year with evidence of earnings and pension contribution.

Dazed_and_C0nfused

Added Pension lump sum from a separate payment requires all tax relief, including basic rate, to be reclaimed from HMRC. This can be done in a number of ways, but the most convenient is an in-year tax-coding adjustment. Alternatively it can be claimed via self-assessment, or through a letter to HMRC at the end of financial year with evidence of earnings and pension contribution.

Op, you also need to understand the tax relief difference between a separate contribution like that explained above and relief at source pension contributions.

With a payment like that explained above the tax relief is entirely dependent on your personal circumstances.  If you contribute say £5,000 and have paid £200 in tax then the maximum refund you can get is £200.

But relief at source contributions are not directly linked to the tax you pay so if you contributed £5,000 to a personal pension or SIPP the pension company would add £1,250 in basic rate tax relief even if you had only paid £200 in tax.

Relief at source isn't necessarily a better choice but there have been posters on here in the past who didn't understand the different in tax relief and assumed they would get 20% tax back from this type of gross payment.

CloesUnc

Dazed_and_C0nfused said:

Added Pension lump sum from a separate payment requires all tax relief, including basic rate, to be reclaimed from HMRC. This can be done in a number of ways, but the most convenient is an in-year tax-coding adjustment. Alternatively it can be claimed via self-assessment, or through a letter to HMRC at the end of financial year with evidence of earnings and pension contribution.

Op, you also need to understand the tax relief difference between a separate contribution like that explained above and relief at source pension contributions.

With a payment like that explained above the tax relief is entirely dependent on your personal circumstances.  If you contribute say £5,000 and have paid £200 in tax then the maximum refund you can get is £200.

But relief at source contributions are not directly linked to the tax you pay so if you contributed £5,000 to a personal pension or SIPP the pension company would add £1,250 in basic rate tax relief even if you had only paid £200 in tax.

Relief at source isn't necessarily a better choice but there have been posters on here in the past who didn't understand the different in tax relief and assumed they would get 20% tax back from this type of gross payment.

Apologies, may I please just ask for clarification by way of an extreme example?

1. So if someone earns up to the annual allowance (for argument's sake) and then makes a lump sum of £5000, they would receive no tax refund. Because they would not have paid tax. They would have received the same tax relief had they paid via relief at source.

2. If that someone earns more than the tax allowance, they would receive tax relief on lump sum contributions, but only up to the amount of tax they had already paid. Is that correct? 

Thanks

Dazed_and_C0nfused

CloesUnc said:

Dazed_and_C0nfused said:

Added Pension lump sum from a separate payment requires all tax relief, including basic rate, to be reclaimed from HMRC. This can be done in a number of ways, but the most convenient is an in-year tax-coding adjustment. Alternatively it can be claimed via self-assessment, or through a letter to HMRC at the end of financial year with evidence of earnings and pension contribution.

Op, you also need to understand the tax relief difference between a separate contribution like that explained above and relief at source pension contributions.

With a payment like that explained above the tax relief is entirely dependent on your personal circumstances.  If you contribute say £5,000 and have paid £200 in tax then the maximum refund you can get is £200.

But relief at source contributions are not directly linked to the tax you pay so if you contributed £5,000 to a personal pension or SIPP the pension company would add £1,250 in basic rate tax relief even if you had only paid £200 in tax.

Relief at source isn't necessarily a better choice but there have been posters on here in the past who didn't understand the different in tax relief and assumed they would get 20% tax back from this type of gross payment.

Apologies, may I please just ask for clarification by way of an extreme example?

1. So if someone earns up to the annual allowance (for argument's sake) and then makes a lump sum of £5000, they would receive no tax refund. Because they would not have paid tax. They would have received the same tax relief had they paid via relief at source.

2. If that someone earns more than the tax allowance, they would receive tax relief on lump sum contributions, but only up to the amount of tax they had already paid. Is that correct? 

Thanks

Not sure what you mean.  The annual allowance for pension contributions is £40k so 99.99% of people earning that much would be paying a considerable amount of tax.

hugheskevi

CloesUnc said:

Dazed_and_C0nfused said:

Added Pension lump sum from a separate payment requires all tax relief, including basic rate, to be reclaimed from HMRC. This can be done in a number of ways, but the most convenient is an in-year tax-coding adjustment. Alternatively it can be claimed via self-assessment, or through a letter to HMRC at the end of financial year with evidence of earnings and pension contribution.

Op, you also need to understand the tax relief difference between a separate contribution like that explained above and relief at source pension contributions.

With a payment like that explained above the tax relief is entirely dependent on your personal circumstances.  If you contribute say £5,000 and have paid £200 in tax then the maximum refund you can get is £200.

But relief at source contributions are not directly linked to the tax you pay so if you contributed £5,000 to a personal pension or SIPP the pension company would add £1,250 in basic rate tax relief even if you had only paid £200 in tax.

Relief at source isn't necessarily a better choice but there have been posters on here in the past who didn't understand the different in tax relief and assumed they would get 20% tax back from this type of gross payment.

Apologies, may I please just ask for clarification by way of an extreme example?

1. So if someone earns up to the annual allowance (for argument's sake) and then makes a lump sum of £5000, they would receive no tax refund. Because they would not have paid tax. They would have received the same tax relief had they paid via relief at source.

2. If that someone earns more than the tax allowance, they would receive tax relief on lump sum contributions, but only up to the amount of tax they had already paid. Is that correct? 

Thanks

Presumably you mean Personal Allowance (£12,570) rather than Annual Allowance (£40,000).

If such a person made a lump sum Added Pension purchase they would not be due any tax relief. They would simply write a cheque for the full cost of the Added Pension and that would be it. If they instead made a contribution to a personal pension using Relief at Source they would make a payment for 80% of the gross contribution they wished to make and the personal pension provider would add 20% basic rate relief automatically, despite them not paying any income tax (subject to the usual earnings limit).

Point 2 is correct, aside from noting that it is tax in the full financial year which matters, so not literally the amount of tax already paid. So for example an individual earning £40,000 could make a large lump sum contribution in May and would get still get tax relief based on their earnings across the full financial year, not just those already earned in April and May.