Civil Service Pension: Is is worth making additional payments into Premium?

Milkmaid1

Hi, apologies if some of you have seen an earlier variation of this post, but I had to delete it.

I am late 40s, basic rate payer, no dependents, mortgage free, with an emergency cash fund.  

I make additional payments into an old Premium pension (£265 pm: total payments of £3180 last year bought me an additional pension of £123 per annum) plus £200 pm split between Alpha EPA (NPA-2, currently 65) and Alpha (NPA currently 67.)

When I started making additional payments into Premium I was advised that my normal retirement age for the scheme was 60 years old.  The bulk of my pension is in Premium and so my plan was to access it at 60, or maybe a bit earlier with actuarial reduction. Recently it was confirmed that my normal retirement age will, in fact, be 65, because I joined Premium under the terms of a “club transfer.” 

As I result of that information I have opened a S&S Isa to try and “bridge” the gap.  

My question is whether it still worth making the additional payments into Premium under those circumstances or should I be looking at SIPP or another option?  (my concern with a SIPP is that both the S&S Isa and SIPP are dependent of the performance of the stock market, whereas the CS pension is a guaranteed amount.)

Any opinions or suggestions would be gratefully received.  Many thanks

NedS

You essentially have two choices if you wish to retire before your scheme pension age. You can contribute to a SIPP (or S&S ISA) to bridge the gap, or you can purchase added pension (or similar) in a DB scheme and then accept actuarial reduction by taking it early. Obviously the former exposes you to stock market risks but is perhaps more flexible whereas the later gives you a guaranteed inflation-linked income. Or you do a combination of both and hedge your bets. You will need to crunch the numbers to see which works best for you, but it's difficult as we have no idea how investments or inflation will perform over the next 10 plus years.

If you are very risk adverse, then the DB route is likely more appealing to you. If you go the SIPP route, then a SIPP is almost certainly more tax efficient than an ISA as you will be able to draw down your personal tax allowance each year whilst 'bridging the gap' to taking your CS DB pension.

Albermarle

As above, if you are going to build up retirement money outside the CS pension, then a separate pension is better than an ISA due to the tax benefit.
Only if you think you might need the money before age 57, would a S&S ISA be the choice.

Milkmaid1

Many thanks to you both, NedS and Albermarle, for your responses.  They are greatly appreciated.

I will look into opening a SIPP and apportioning some of funds that I was going to put into the S&S Isa into that.  According to my CS statement I have used 40% of my LTA to date and it appears that my current arrangements increase that percentage by approximately 2% pa.  So even if I do end up continuing to make pension contributions for another, even 20 years, at my current rate, I will still have scope to contribute to another pension without breaching the limit.

I think I will keep paying a lesser amount into the ISA, to cover all bases, in case I do need access to funds before 57.

I found a similar question regarding the additional DB on a thread regarding a NHS scheme pension and the suggestion was it still a good deal, in comparison with buying an annuity paying a similar amount and taking into account the tax relief and that the amount is guaranteed.  Therefore I think that I will continue with those payments too.

Thanks  again

hugheskevi

According to my CS statement I have used 40% of my LTA to date and it appears that my current arrangements increase that percentage by approximately 2% pa.  So even if I do end up continuing to make pension contributions for another, even 20 years, at my current rate, I will still have scope to contribute to another pension without breaching the limit.

Remember the LTA is frozen and you CS pension is increasing by CPI. With CPI looking to be the best part of 10% in September, your LTA usage this year will be around 6% [(40% x 10%) + 2%]. The LTA is frozen until 2027, so just normal indexation, normal accrual plus your additional contributions will quite rapidly increase your LTA usage.

Even so, it doesn't look like a big issue for you, as you can always take the pension early if LTA begins to look like a problem, but over the next 5 years many people who think they are far from the LTA will start getting much closer to it.

Albermarle

Just as a more general point, reaching the LTA is actually an achievement, as it means you have a good retirement income waiting for you. Far above the average person, even if more people will reach it in future.
Also to be clear ( as many people seem confused about this ) if you do go over the LTA, you only pay the charge on funds above the limit, not on the whole pot . So going over LTA by a small amount is not a big deal.

NedS

Additionally, there are steps you can take to mitigate or avoid breaching the LTA - most notably taking your DB pension early with actuarial reduction. You could calculate how close you think you will get based on expected future pension contributions, and making assumptions for inflation, wage increases and changes to the LTA over the next 10 years, to see under what circumstances, if any, you may trouble the LTA.

hugheskevi

NedS said:

Additionally, there are steps you can take to mitigate or avoid breaching the LTA - most notably taking your DB pension early with actuarial reduction. You could calculate how close you think you will get based on expected future pension contributions, and making assumptions for inflation, wage increases and changes to the LTA over the next 10 years, to see under what circumstances, if any, you may trouble the LTA.

 I'm currently at 80% of LTA based on taking my DB pension at age 60.

Aged 44, and assuming no further pension accrual, taking my DB pension (with a protected minimum pension age) at age 55 reduces LTA usage to 67%.

If my DB pension increases by 3% and my DC pension by 4% per year, and I take DB at 55 and DC at 57, then I will be at 99% of the LTA, assuming LTA remains frozen in cash terms.

I suspect CPI will be higher than 3% p/a over the next 10 years, and 4% nominal, net of fees, is quite a pessimistic DC return.

So even though I am only using two-thirds of my LTA and so nowhere near the limit - and don't actually further pension accrual, unlike most 44 year olds - I still have LTA issues, and getting taxed on inflation