Civil Service transfer-in - no brainer?

Grabs39

Afternoon,

At the start of the year I took a job in the CS, having never worked in the public sector.  The pension (and improved work-life balance) being one of the main reasons.

I have a rough understanding of how the pension scheme works, and requested information about transferring in.  I'll try to give a full picture of our finances

About me -
29
Salary 21,800 + non-pensionable overtime of around £1500/year
Homeowner with no plans to move before retirement age
Mortgage of around £165k on a house now worth around £200k.
Paying a small amount into a LISA each month - £30, with a view to increase this every year to top up retirement money

Wife-
30
Salary around £40k but will go down to about £38k at end of secondment
6 years in the Teachers Pension Scheme

Baby due in October

No debt other than the mortgage - credit cards are paid off in full every month.

Ideally we'd like to retire at 60 with over £3000/month (in todays money).  I appreciate the glaring hole in the plan is funding ages 60-68 which is something we'll have to address when we aren't staring down the barrel end of £12k a year in nursery fees!  Hopefully we will be able to take some of the pension earlier as our DB schemes should pay for more than we need if we stay in the public sector.

We overpay the mortgage regularly (not everyone's cup of tea on these boards, I know) and have emergency savings of around £10k in premium bonds and instant saver accounts.

So my transfer estimate is as follows -
£20,269 in old scheme.
I can have £2663 a year from age 68 with a widow's pension of £998

Unless I'm missing something obvious this means if I live to 75ish then I'm quids in.  Even if I don't, if my wife outlives me it'll still probably be worth it.


Does all of the above seem right and realistic, or have I missed something? (And sorry this post is much longer than I'd intended!)  

hugheskevi

So my transfer estimate is as follows -

£20,269 in old scheme.
I can have £2663 a year from age 68 with a widow's pension of £998

Unless I'm missing something obvious this means if I live to 75ish then I'm quids in.  Even if I don't, if my wife outlives me it'll still probably be worth it.

Does all of the above seem right and realistic, or have I missed something? (And sorry this post is much longer than I'd intended!)  

The main thing is what you think will be the returns net of charges and inflation to the DC scheme.

Your calculation of 75ish implicitly assumes returns equal to inflation plus fees. That would be a very pessimistic assumption over a long period if invested in return-seeking assets.

Grabs39

Ah I see thank you.  So  some rough figures

if I get a return of 2% above inflation and fees I’d have £43,300 so breakeven at 84
If I get a return of 4% above inflation and fees I’d have £92,440 so breakeven at 102

So it really does depend on an unknown variable.

Presumably then though, if I also invest into AVCs/ISA etc (after nursery is done with) then I’d hedge my bets and have both security and not risk missing out on investment gains completely.

hugheskevi

Presumably then though, if I also invest into AVCs/ISA etc (after nursery is done with) then I’d hedge my bets and have both security and not risk missing out on investment gains completely.

Absolutely - and remember that the strengths and weaknesses of an AVCs/ISA perfectly complement the Civil Service Defined Benefit (DB) Pension.

The DB pension's strengths are that it has no investment risk, is certain, and carries no longevity risk. But it is also quite inflexible, with poor terms for a lump sum and no ability to take more earlier in retirement, eg, before State Pension age. Whereas the AVC/ISA is totally flexible, but has no guarantees.

Albermarle

Grabs39 said:

Ah I see thank you.  So  some rough figures

if I get a return of 2% above inflation and fees I’d have £43,300 so breakeven at 84
If I get a return of 4% above inflation and fees I’d have £92,440 so breakeven at 102

So it really does depend on an unknown variable.

Presumably then though, if I also invest into AVCs/ISA etc (after nursery is done with) then I’d hedge my bets and have both security and not risk missing out on investment gains completely.

These ( and the previous ) breakeven quotes are not really that valid ( on my opinion ) as inflation continues to be an issue even after you start taking an income. So ever year you need a larger income to keep up with inflation.
I presume the CS pension increase with inflation each year ( up to a limit) , so an invested DC pension would have to do the same . It might increase more, or less.

Overall though having guaranteed pension income, and the flexibility of a DC pot, is regarded as the sweet spot by many.

michaels

Grabs39 said:

Ah I see thank you.  So  some rough figures

if I get a return of 2% above inflation and fees I’d have £43,300 so breakeven at 84
If I get a return of 4% above inflation and fees I’d have £92,440 so breakeven at 102

So it really does depend on an unknown variable.

Presumably then though, if I also invest into AVCs/ISA etc (after nursery is done with) then I’d hedge my bets and have both security and not risk missing out on investment gains completely.

You should actually probably compare the DB pension annual amount with the annual amount of annuity you could buy with the DC pot - this is also unknown but current levels are about 2.5% so the 43k might purchase an equivalent annuity of about £1,100pa and even the 92k doesn't match the DB pension.

michaels

hugheskevi said:

Presumably then though, if I also invest into AVCs/ISA etc (after nursery is done with) then I’d hedge my bets and have both security and not risk missing out on investment gains completely.

Absolutely - and remember that the strengths and weaknesses of an AVCs/ISA perfectly complement the Civil Service Defined Benefit (DB) Pension.

The DB pension's strengths are that it has no investment risk, is certain, and carries no longevity risk. But it is also quite inflexible, with poor terms for a lump sum and no ability to take more earlier in retirement, eg, before State Pension age. Whereas the AVC/ISA is totally flexible, but has no guarantees.

Can't you take the CS pension form 55/57 with an actuarial 'fair' reduction reflecting the exrta years it is likely to have to be paid for?

MX5huggy

I would (and did, although a smaller value and in to LGPS) take the offer. You don’t get the chance to do it at another time. And buying extra later seems very expensive. From another thread on here today:- 

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).

You know exactly what you are getting for the money. The inflation protection is unlimited but CPI not the better RPI. 

you can then build up separate DC pot again 

ussdave

Seems like a good idea to me.  I'd be very happy with that price for more DB pension.

Between now and retirement I'd also look to further build up a SIPP and/or AVC.  I'm not sure if the CS pension offers a linked AVC + DB in terms of calculating lump sum (I think it does but I'm not an expert) so if that's an option it can be very advantageous to build up a separate lump sum.  I'd stop paying into your LISA and pay into AVCs in this case.

hugheskevi

michaels said:

hugheskevi said:

Presumably then though, if I also invest into AVCs/ISA etc (after nursery is done with) then I’d hedge my bets and have both security and not risk missing out on investment gains completely.

Absolutely - and remember that the strengths and weaknesses of an AVCs/ISA perfectly complement the Civil Service Defined Benefit (DB) Pension.

The DB pension's strengths are that it has no investment risk, is certain, and carries no longevity risk. But it is also quite inflexible, with poor terms for a lump sum and no ability to take more earlier in retirement, eg, before State Pension age. Whereas the AVC/ISA is totally flexible, but has no guarantees.

Can't you take the CS pension form 55/57 with an actuarial 'fair' reduction reflecting the exrta years it is likely to have to be paid for?

You can take it early, but you can't massively front-load it like you can with DC. If all you had was the DB pension then taking it at age 57 would mean a big increase in come at State Pension age. DC enables you to smooth out income between 57 and State Pension age.

hugheskevi

I'm not sure if the CS pension offers a linked AVC + DB in terms of calculating lump sum (I think it does but I'm not an expert) so if that's an option it can be very advantageous to build up a separate lump sum.  I'd stop paying into your LISA and pay into AVCs in this case.

It doesn't.