Is it worth buying AVCs/EPA in CS Alpha scheme?

indiasign

Hi everyone, I’m looking towards retiring (hopefully)  in the next 5 years and wondering if I can get some advice about AVCs/EPA.

Numbers first - I’m 58, Civil Servant in the Alpha scheme, currently earning £36K. I have a DB pension that comes into payment at 60, just over £12K (plus lump sum of £36k) I also have a couple of years in the Premium Scheme, also payable at 60 at about £3k, and Alpha is currently estimating at around £7K at age 65

Wife is 56, also CS, also in Alpha, earning £30k. Her DB pension at 60 will be around £6.5 (£18k lump sum), a small Premium of £800pa and Alpha estimating £9.5k

Mortgage is paid off, have £50k in savings

I haven’t been enjoying work for a long time, so I’m looking to take my DB pension a year early, at 59 (2023) and reducing my hours to 4 days a week - the reductions in the DB are minimal.

Then at 60 (2024) I’m looking to take the Premium pension and drop another day (which takes care of any abatement issue)

Wife would take her DB pension at either 59 or 60 (2025/26) and drop at least 1 day, and we’d both be looking to retire at 63 (2027/2029 respectively)and the wife use savings to make up any shortfall until State Pension kicks in at 67

Neither of us have ever put anything into AVCs and I’m wondering if it is worth doing so now, for the remaining 5/7years of our working lives, to boost our Alpha pensions

Marcon

indiasign said:

Neither of us have ever put anything into AVCs and I’m wondering if it is worth doing so now, for the remaining 5/7years of our working lives, to boost our Alpha pensions

If you want to boost your Alpha pensions, then paying AVCs is the only way to do so. From what you've said, there doesn't seem to be a LifeTime Allowance issue.

Not quite sure what the 'real' question is or why you've given so much background info. Perhaps I've just missed the point and others will be more on the ball - otherwise perhaps you could clarify, please?

hugheskevi

I’m 58, Civil Servant in the Alpha scheme, currently earning £36K. I have a DB pension that comes into payment at 60, just over £12K (plus lump sum of £36k) I also have a couple of years in the Premium Scheme, also payable at 60 at about £3k

It sounds unlikely, but is McCloud Remedy relevant?

and Alpha is currently estimating at around £7K at age 65

Why is the £7k estimate based on 65 rather than 63, and does it take into account the move to part-time work?

I’m looking to take my DB pension a year early, at 59 (2023) and reducing my hours to 4 days a week - the reductions in the DB are minimal.

Then at 60 (2024) I’m looking to take the Premium pension and drop another day (which takes care of any abatement issue)

You could consider taking Premium at age 59 and buying out the actuarial reduction. There is a buy-out calculator here. You (or your wife) could also do the same with alpha if you wished, either at age 59 or a later date, eg, 63.

Wife would take her DB pension at either 59 or 60 (2025/26) and drop at least 1 day, and we’d both be looking to retire at 63 (2027/2029 respectively) and the wife use savings to make up any shortfall until State Pension kicks in at 67

At age 63 your wife would have DB pension of £6,500 + £800 = £7,300 (assuming she does not commence alpha pension early). That is £5,000 of unused Personal Allowance for 4 years. Putting savings into a DC pension could get 20% tax relief and be drawn tax free between age 63-67 (although the freezing of Personal Allowance combined with increases to DB pension will erode that £5,000 difference).

Have you checked that both of you will be entitled to a full State Pension, as you have had contracted-out service in the past?

Neither of us have ever put anything into AVCs and I’m wondering if it is worth doing so now, for the remaining 5/7years of our working lives, to boost our Alpha pensions

If your wife plans to use savings to make up shortfall between age 63 to State Pension age, how much is left unallocated? You should have around £100,000 from savings and lump sums and using this to fund living whilst put earnings into a pension is tax efficient (either to enhance pension income, or to take advantage of tax relief and take out money shortly afterwards).

There are different ways money could be put into a pension - Added Pension, EPA, or DC AVC. Depending on whether you want income, capital or temporary extra resources to fund a gap to State Pension age will determine which is optimal.

More generally, you have not said how much you think you need to live on, and whether your State Pension plus Defined Benefit pension income will be sufficient to meet that. If it will, then your main concern is smoothing income between now and State Pension age. Whereas if income is not sufficient, then enhancing DB pension income is the priority.

As you will always be a basic-rate taxpayer in all future years whereas it appears your wife will not, it would probably be best to increase your wife's pension.

michaels

Thanks, hadn't seen possibility of buyout.  It appears I could effectively purchase an RPI annuity (with dependent benefit) of £9k pa from age 55 for £205k.  If that is not good value I don't know what is!

NedS

michaels said:

Thanks, hadn't seen possibility of buyout.  It appears I could effectively purchase an RPI annuity (with dependent benefit) of £9k pa from age 55 for £205k.  If that is not good value I don't know what is!

I wasn't aware of buy out options either, so thank you again to @hugheskevi. However, unless I'm missing something, it's not tax efficient - i.e, you are paying the buyout sum out of net income (savings etc), unless you use a tax free lump sum? Wouldn't it be more tax efficient to purchase as much added pension as you can out of gross pay through increased monthly contributions and then accept the actuarial reduction on that increased amount (notwithstanding added pension is capped slightly below your £9k example)?
With a NPA of 67, the buyout to take Alpha DB pension 2 years early at 65 works out an an equivalent rate of 5.6%, CPI linked. Certainly something to consider in 10 years time, and an option to further de-risking some DC assets.

hugheskevi

However, unless I'm missing something, it's not tax efficient - i.e, you are paying the buyout sum out of net income (savings etc), unless you use a tax free lump sum?

Funds used to buy out pension reduction are a pension contribution and so eligible for tax relief. Although the full reduction has to be bought-out, not just part of it. For people taking larger pensions many years early the cost of buy-out may well be more than the amount of their taxable income in excess of the Personal Allowance. It can be a good way to get round the Annual Allowance though, and make large contributions.

Wouldn't it be more tax efficient to purchase as much added pension as you can out of gross pay through increased monthly contributions and then accept the actuarial reduction on that increased amount (notwithstanding added pension is capped slightly below your £9k example)?

It should all work out much the same, as the same discount rate is used for all the factors.

indiasign

@ Marcon - Thanks for the clarification on AVCs - it’s  true that this is just one of many questions I have to find answers to, but having been lurking here for a few weeks, I’d seen plenty of requests for more information after an initial post, so I thought I’d throw in as much detail as possible (at the same time getting some if it straight in my own head!) 

@ hugheskevi - thanks for the detailed response - to answer your questions:

1 no, not impacted by McCloud
2 Oops, forgot to put the Alpha figures at 63 in - approx £5.5k, but yes, that is based on full time work - not sure how to tweak the retirement modeller to reflect that
3 Will check out the buy out calculator, thanks
4 State Pension, I’m looking at £175 at the moment with another 2 years contributions to get full SP, the wife is at £183 
5 Thanks for the pointer about the wife’s personal allowance, hadn’t occurred to me

michaels

NedS said:

michaels said:

Thanks, hadn't seen possibility of buyout.  It appears I could effectively purchase an RPI annuity (with dependent benefit) of £9k pa from age 55 for £205k.  If that is not good value I don't know what is!

I wasn't aware of buy out options either, so thank you again to @hugheskevi. However, unless I'm missing something, it's not tax efficient - i.e, you are paying the buyout sum out of net income (savings etc), unless you use a tax free lump sum? Wouldn't it be more tax efficient to purchase as much added pension as you can out of gross pay through increased monthly contributions and then accept the actuarial reduction on that increased amount (notwithstanding added pension is capped slightly below your £9k example)?
With a NPA of 67, the buyout to take Alpha DB pension 2 years early at 65 works out an an equivalent rate of 5.6%, CPI linked. Certainly something to consider in 10 years time, and an option to further de-risking some DC assets.

My understanding is that added pension for alpha is also purchased from net pay, so both this and buyout involve using post tax pay to purchase taxed pension.  Is this correct?

However the rate of accrual offered for both would still seem to offer value despite the extra taxation.

hugheskevi

My understanding is that added pension for alpha is also purchased from net pay, so both this and buyout involve using post tax pay to purchase taxed pension.  Is this correct?

However the rate of accrual offered for both would still seem to offer value despite the extra taxation.

Added Pension can either be purchased under net pay arrangements (ie pension contributions are taken before PAYE is applied by payrolls) or from post tax funds with a tax refund provided by HMRC. Periodic purchases of Added Pension, ie, monthly payments, will be made under a net pay arrangement, and small lump sum payments can be made using these arrangements, whereas larger lump sum payments will be from post tax funds.

The tax refund from HMRC for contributions made from post tax funds can be made through a Tax Code adjustment in-year, via Self-Assessment, or by a claim to HMRC after the end of the financial year if Self-Assessment is not completed.

But it doesn't matter what the specific route to tax relief is, the end position is the same. Both Added Pension contributions and contributions to fund buy-out are contributions to a registered pension scheme and so are eligible for tax relief at marginal rate.

Dazed_and_C0nfused

so are eligible for tax relief at marginal rate.

That being the crucial thing for some people.

They are not relief at source contributions so no automatic entitlement to any tax relief, it all depends on what other taxable income you have in the tax year the contribution is paid.

This has caught one or two people out in the past expecting 20% tax relief on a largish lump sum when they had paid no or very little tax.