Additional payments into civil service Alpha scheme

hugheskevi

Wobble101 said:

I'm intending to purchase EPA and added pension, paid out of payroll. The added pension will take me to just below the limit allowed by the alpha scheme and taking into account the headroom left after EPA. This is c £2k below my annual allowance based on the calculations further up this thread (for 2019/20). I note @hugheskevi's point that it is difficult to calculate pension inputs for the current financial year - on the basis that my pensionable salary has changed little and there is a £2k buffer between my calculation of my annual allowance and the civil service maximum payment per year of £7,200 (minus EPA headroom calculations). Does that sound reasonable?

Inflation makes a difference and can be signficant. The value of your pension used to calculate the pension value for Annual Allowance at the start of the 2021/22 year is increased by September 2020 CPI, but then your accrued pension is revalued by September 2021 CPI rate. The September 2020 CPI rate is 0.5%, if inflation is higher in September 2021 that will put upward pressure on your pension input amount. However, as you have little accrued pension the effect of this should be minimal, but it is something to keep an eye on as your accrued pension increases. It evens itself over time, as if the inflation rate is lower that has a downward pressure on pension input.

Remember also that the Added Pension you purchase in 2021/22 gets increased by September 2021 CPI just before the end of the year so you need to factor that in too. If you are going to sail quite so close to the wind by using up all available carry-forward and leave only £2,000 'spare' allowance based on input from last year, you will need to calculate your expected pension input as accurately as possible.

When you say "The added pension will take me to just below the limit allowed by the alpha scheme" that would suggest taking out a contract over a period of years to purchase close to £7,200 of annual pension, but I suspect your meaning may instead be that you plan to contribute close to £7,200 (see comment below).

Wobble101 said:

 a) I assume the civil service £7,200 added pension limit applies here, even if my annual allowance would permit me to pay in more - so I can only pay in £7,200 for 2019/20; b) in making this calculation it does not matter that I am carrying forward allowance from before I joined the civil service? I note the previous point about needing to be on the ball about ensuring this is treated correctly by HMRC. Thanks all.

The £7,200 Added Pension limit applies to the annual amount of Added Pension that you purchase in the scheme, not the amount you can pay in each year. To purchase £7,200 p/a of Added Pension would cost something like £100,000 (cost varies by age).

It is only the amount of carry-forward that matters, the pension you previously contributed toward is irrelevant.

IAMIAM

I have checked similar calculators across civil pensions. It will cost approx £200 a month over 10 years totalling approx 30k to get £3000 per month extra in 25 years time. On the surface, how does a lay person know this is a good deal.  I am presuming 1st off that the £200 a month is pre tax so 20% saving there....

hugheskevi

IAMIAM said:

I have checked similar calculators across civil pensions. It will cost approx £200 a month over 10 years totalling approx 30k to get £3000 per month extra in 25 years time. On the surface, how does a lay person know this is a good deal.  I am presuming 1st off that the £200 a month is pre tax so 20% saving there....

The simplest way is to consider whether the scheme discount rate (CPI+2.4%) represents a good rate of return or not. As a risk-free rate of return it is much better than anything else available. However, compared to the expected real rate of return on investments it isn't particularly good. Although, the lack of charges and no annuitisiation cost means it is by no means uncompetitive.

You do need to avoid the common error of using annuity rates for a 60 or 65 year old and comparing that to the cost of the Added Pension. That is fine for those close to retirement, but misses many years of growth for those with a long distance to retirement.

Added Pension is also income, and although it can be converted to lump sum at 12:1, that is a terrible rate so best avoided in many circumstances, meaning that effectively there is no tax-free lump sum benefit. So if you want risk-free pension income, then Added Pension is good, if you are seeking the best rate of return or flexible capital then it is less competitive.

Wobble101

Wobble101 said:

 a) I assume the civil service £7,200 added pension limit applies here, even if my annual allowance would permit me to pay in more - so I can only pay in £7,200 for 2019/20; b) in making this calculation it does not matter that I am carrying forward allowance from before I joined the civil service? I note the previous point about needing to be on the ball about ensuring this is treated correctly by HMRC. Thanks all.

The £7,200 Added Pension limit applies to the annual amount of Added Pension that you purchase in the scheme, not the amount you can pay in each year. To purchase £7,200 p/a of Added Pension would cost something like £100,000 (cost varies by age).

It is only the amount of carry-forward that matters, the pension you previously contributed toward is irrelevant.

Ah, thank you. I realise you'd said this earlier in the thread and I'd not understood. So that is good news for me in the sense that I would like to pay in more this financial year if I can. 
I'm struggling as you can no doubt tell with the complexity of this. So I'm now clear that the £7200 limit applies to the pension I can purchase through added pension purchases (ie it relates to the outputs from the additional payments not the inputs). But the £40k annual allowance applies to inputs (ie the payments I'd be making) and not the pension outputs, is that correct? Assuming that is true, that sets the parameters of what I can pay in this financial year (with carry forward as an additional consideration). 

hugheskevi

Wobble101 said:

But the £40k annual allowance applies to inputs (ie the payments I'd be making) and not the pension outputs, is that correct? Assuming that is true, that sets the parameters of what I can pay in this financial year (with carry forward as an additional consideration).

The pension input relates to the value of the Defined Benefit pension purchased, not the cost of that pension. For example, if you contributed £5,000 to purchase £500 of Added Pension, the pension input from that is £500 x16 = £8,000 (and there would also be indexation as pension increase applied on 31 March would also count).