Long term potential cost benefit of Alpha EPA scheme

ljayljay

I am looking for information that I can pass onto my son. He is in his early 20’s undertaking a Civil Service apprenticeship earning around £20,000 pa. He is enrolled in the Alpha scheme & also contributes towards a LISA.

I was wondering if anyone could provide a calculation in today’s money of what could be the approximate potential financial benefit of also choosing to contribute the maximum 3 years EPA.

Obviously, lots of life events will change things in the next 40 plus years & he is understandably not very motivated to think so far ahead. However, as sometime who is extremely fortunate to have been able to finish working several years before SPA, I think he will appreciate much later in life. Furthermore, although it may not always be the case, he currently has the spare income to pay for it.

Although, I don’t expect an accurate cost benefit ratio it would be good to provide him with some £ figures that will show the potential return. Also, as I understand it, his current NPA – 3 years EPA would enable him to take the full Alpha Pension at 65. No doubt the SPA will increase in the future but the 3-year benefit will still remain.

Alternatively, would anyone recommend a different route such as taking out a SIPP? Especially, as I guess, that may need to replace Alpha if he moves on to a different employer. Or should he, if he can afford it, take out a SIPP as well as an EPA? Any other advice on this or anything that I may have missed will be gratefully received.

hugheskevi

ljayljay said:

Furthermore, although it may not always be the case, he currently has the spare income to pay for it.

If he may need the money in the future, is it sensible to put it into an inaccessible pension?

Although, I don’t expect an accurate cost benefit ratio it would be good to provide him with some £ figures that will show the potential return.

The expected return would be the discount rate used in the actuarial calculations, which is CPI+2.4%.

Alternatively, would anyone recommend a different route such as taking out a SIPP? Especially, as I guess, that may need to replace Alpha if he moves on to a different employer. Or should he, if he can afford it, take out a SIPP as well as an EPA? Any other advice on this or anything that I may have missed will be gratefully received.

I don't see the urgency for a very young low earner to be putting extra into a pension. Assuming a key financial goal for him will be property purchase, the LISA plus standard alpha seems very sensible and appropriate. If there is extra on top of that I'd be thinking low risk saving / investments depending on the investment horizon of building a house deposit. But without knowing overall financial goals it is difficult to say, except that it looks odd for a low earning 20 year old to want to be considering augmenting an already very good pension with EPA and/or SIPP.

ljayljay

Thanks for this & I take note of the points you make, especially around property purchase.

There is no urgency for him to do this & yes, he is already in a favourable position with regards to his pension. Plus, at the moment he saves excess income as you have suggested. My take is that if in the future he requires the additional income he can make the decision to stop contributing to the EPA & that part of his pension will be preserved. Are there any specific negatives?

hugheskevi said:

The expected return would be the discount rate used in the actuarial calculations, which is CPI+2.4%.

Are you able to expand what this potentially means over a 40-year time frame? According to the EPA calculator EPA-3 = additional 2.5% pension contribution.

So, my back of a fag packet today's value calculations consists of £20,000 x 2.5% = £500pa additional pension = £400net x40 years = £16,000 in total

Pension £20,000 x 2.32% x40years = £18,560pa x 3years paid early = £55,680 in total.

Have I just totally misunderstood how this works? Or will the current 2.5% additional pension contribution increase over time?

hugheskevi

ljayljay said:

My take is that if in the future he requires the additional income he can make the decision to stop contributing to the EPA & that part of his pension will be preserved. Are there any specific negatives?

That works for additional income, but the capital already invested into EPA and/or SIPP would be inaccessible. Given the biggest obstacle to house price purchase may well be deposit rather than available income, it may well be that having additional capital available would be desirable.

hugheskevi said:

The expected return would be the discount rate used in the actuarial calculations, which is CPI+2.4%.

Are you able to expand what this potentially means over a 40-year time frame? According to the EPA calculator EPA-3 = additional 2.5% pension contribution.

So, my back of a fag packet today's value calculations consists of £20,000 x 2.5% = £500pa additional pension = £400net x40 years = £16,000 in total

Pension £20,000 x 2.32% x40years = £18,560pa x 3years paid early = £55,680 in total.

Have I just totally misunderstood how this works? Or will the current 2.5% additional pension contribution increase over time?

The cost of EPA is age-dependent, and the cost increases each year as an individual gets older.

The discount rate is CPI+2.4%. If the individual is typical, ie, the actuarial assumptions about life expectancy, etc, are accurate, the expected rate of return they will receive for an EPA contribution is CPI+2.4% p/a. That applies over their expected lifetime. For a guaranteed return, that is very good. Compared to risk-based investments it is okay but may well be beaten.