Civil Service Alpha Pension & EPA3

Dazed_and_C0nfused

NedS said:

jonnym1985 said:

hugheskevi said:

 You are not understanding.

Think of your pension as being a collection of blocks, each year you build up a block and when you retire all the blocks are added together to give you your pension.

Each individual block can be payable from NPA, or earlier than NPA if you purchased EPA. You might even have multiple different EPA contacts.

When you take the pension, your pension entitlement is determined based on all the blocks (regardless of whether a block has EPA or not - you claim your whole pension) and when they are payable from - some might be reduced, others might be enhanced depending on the age at which you retire.

Once the pension is determined, that is it. It is all put into payment and increases by CPI each year. Nothing gets added or changed when they reach NPA - after you take the pension NPA ceases to have any relevance.

EPA and Added Pension are mathematically very similar, and Added Pension would be impacted in the same way by an increase to NPA, as that is when Added Pension is payable from.

In your opinion, given my circumstances provided, would it be more beneficial to purchase EPA3 @2.9% or added pension @£135/mth?

Obviously no one can predict if NPA will increase but would you be able to deduce if paying extra contributions of £135/mth would give a better final pension than if retiring at 65, compared to EPA3, if NPA ever increased to 70 (claiming pension at 67)?

Hypothetically speaking, taking the deduction per year over the 5 years early retirement if going for the Added Pension option.

As @hugheskevi stated above, purchasing Added Pension and EPA are mathematically very similar. In theory, buying EPA-3 allows you to retire 3 years earlier than NPA with the same pension. Spending the same amount on Added Pension would buy you extra pension at NPA, but if you were to retire 3 years early, would then give approximately the same amount of pension once actuarially reduced as the EPA option. So, for the same investment from you, either option should give a similar final pension at any given age.

Personally, I'm buying Added Pension, simply for the fact I find it easier to get my head around exactly what I've accrued and what the impact will be if taking it early, before NRA. But I did like the explanation of EPA above which made it easier for me to understand.

Is that definitely correct?

As I understood it all EPA-3 does is allow you to take the pension accrued to the point you reach EPA-3 without any reduction to the pension accrued at that point.

So say you join Alpha aged 30 and have a NPA of 68 you could take 35 years of accused pension at age 65 without any reduction.

But this suggest EPA-3 would get you 38 years of accrued pension at age 65 without any reduction?  Or am I reading too much into this?

In theory, buying EPA-3 allows you to retire 3 years earlier than NPA with the same pension.

NedS

Yes @Dazed_and_C0nfused, you have worded/explained it better than me - thank you.

jonnym1985

NedS said:

jonnym1985 said:

hugheskevi said:

 You are not understanding.

Think of your pension as being a collection of blocks, each year you build up a block and when you retire all the blocks are added together to give you your pension.

Each individual block can be payable from NPA, or earlier than NPA if you purchased EPA. You might even have multiple different EPA contacts.

When you take the pension, your pension entitlement is determined based on all the blocks (regardless of whether a block has EPA or not - you claim your whole pension) and when they are payable from - some might be reduced, others might be enhanced depending on the age at which you retire.

Once the pension is determined, that is it. It is all put into payment and increases by CPI each year. Nothing gets added or changed when they reach NPA - after you take the pension NPA ceases to have any relevance.

EPA and Added Pension are mathematically very similar, and Added Pension would be impacted in the same way by an increase to NPA, as that is when Added Pension is payable from.

In your opinion, given my circumstances provided, would it be more beneficial to purchase EPA3 @2.9% or added pension @£135/mth?

Obviously no one can predict if NPA will increase but would you be able to deduce if paying extra contributions of £135/mth would give a better final pension than if retiring at 65, compared to EPA3, if NPA ever increased to 70 (claiming pension at 67)?

Hypothetically speaking, taking the deduction per year over the 5 years early retirement if going for the Added Pension option.

As @hugheskevi stated above, purchasing Added Pension and EPA are mathematically very similar. In theory, buying EPA-3 allows you to retire 3 years earlier than NPA with the same pension. Spending the same amount on Added Pension would buy you extra pension at NPA, but if you were to retire 3 years early, would then give approximately the same amount of pension once actuarially reduced as the EPA option. So, for the same investment from you, either option should give a similar final pension at any given age.

Personally, I'm buying Added Pension, simply for the fact I find it easier to get my head around exactly what I've accrued and what the impact will be if taking it early, before NRA. But I did like the explanation of EPA above which made it easier for me to understand.

Thank you all. You’ve made this pension novice a pension amateur 👍🏻👍🏻

jonnym1985

NedS said:

jonnym1985 said:

hugheskevi said:

 You are not understanding.

Think of your pension as being a collection of blocks, each year you build up a block and when you retire all the blocks are added together to give you your pension.

Each individual block can be payable from NPA, or earlier than NPA if you purchased EPA. You might even have multiple different EPA contacts.

When you take the pension, your pension entitlement is determined based on all the blocks (regardless of whether a block has EPA or not - you claim your whole pension) and when they are payable from - some might be reduced, others might be enhanced depending on the age at which you retire.

Once the pension is determined, that is it. It is all put into payment and increases by CPI each year. Nothing gets added or changed when they reach NPA - after you take the pension NPA ceases to have any relevance.

EPA and Added Pension are mathematically very similar, and Added Pension would be impacted in the same way by an increase to NPA, as that is when Added Pension is payable from.

In your opinion, given my circumstances provided, would it be more beneficial to purchase EPA3 @2.9% or added pension @£135/mth?

Unless I have misunderstood, you are not comparing like for like here. Are you saying EPA3 is at a cost of 2.9% of your salary which would be £73.78/month, compared to paying £135/month for added pension? As you will get similar benefits for an investment into either option, clearly paying £135/month will purchase a lot more pension than paying £73.78/month.

Hi, yes that’s what I mean, by comparing the two. EPA is actually 3.4% according to the online estimator so £86.50 per month

added pension estimator is providing £182.39 but it is not clear per month or per year.

I used both calculations in the retirement remodeller and they’re giving very similar predictions (if I’ve done them correctly which I very much doubt 😂)

Added being slightly better at both 65 and 60 when using the sliders

NedS

jonnym1985 said:

NedS said:

jonnym1985 said:

hugheskevi said:

 You are not understanding.

Think of your pension as being a collection of blocks, each year you build up a block and when you retire all the blocks are added together to give you your pension.

Each individual block can be payable from NPA, or earlier than NPA if you purchased EPA. You might even have multiple different EPA contacts.

When you take the pension, your pension entitlement is determined based on all the blocks (regardless of whether a block has EPA or not - you claim your whole pension) and when they are payable from - some might be reduced, others might be enhanced depending on the age at which you retire.

Once the pension is determined, that is it. It is all put into payment and increases by CPI each year. Nothing gets added or changed when they reach NPA - after you take the pension NPA ceases to have any relevance.

EPA and Added Pension are mathematically very similar, and Added Pension would be impacted in the same way by an increase to NPA, as that is when Added Pension is payable from.

In your opinion, given my circumstances provided, would it be more beneficial to purchase EPA3 @2.9% or added pension @£135/mth?

Unless I have misunderstood, you are not comparing like for like here. Are you saying EPA3 is at a cost of 2.9% of your salary which would be £73.78/month, compared to paying £135/month for added pension? As you will get similar benefits for an investment into either option, clearly paying £135/month will purchase a lot more pension than paying £73.78/month.

Hi, yes that’s what I mean, by comparing the two. EPA is actually 3.4% according to the online estimator so £86.50 per month

added pension estimator is providing £182.39 but it is not clear per month or per year.

I used both calculations in the retirement remodeller and they’re giving very similar predictions (if I’ve done them correctly which I very much doubt 😂)

Added being slightly better at both 65 and 60 when using the sliders

£182.39 is the annual amount of Added Pension you will have purchased for your £135/month contribution. So you pay 12 x £135 = £1,620 (£1296 cost to you before tax relief is added)) to purchase an additional £182.39 pa of index-linked pension at NRA (whatever that may be for you in the future). I like to think of that as an 11.26% (or 14.1% with tax relief) inflation-linked return with the caveat that it's not payable until ~30 years time.

On your annual pension statement it's really easy to see how much pension you have built up. It's split into two - your regular scheme pension (2.32% of pensionable salary, so for you £30530 * 2.32% = £708.30 per year) plus your added pension of £182.39, each increased by CPI inflation. So if you had done that this year, in April 2023 your statement would show £708.30 + 10.1% = £779.83 and added pension of £182.39 + 10.1% = £200.81 accrued this year (plus any previously accrued pension, also increased by CPI).

You can then choose to take your pension early if you wish (at any age above the minimum scheme age), and your whole pension entitlement will be reduced by the published actuarial reduction factors (around 4-5% per year). To compare that Added Pension option for early retirement (based on single year figures above), the actuarial reduction factor for an NRA of 68 taking their pension 3 years early (at 65) is currently 0.84. If you had not purchased any extra pension, you would have a standard pension entitlement of £779.83/year at 68. With the Added Pension, your entitlement increases to £779.83 + £200.81 = £980.64, which would be reduced to £980.64 * 0.84 = £823.74pa which is actually better than the pension you would have received at NRA and you're taking it 3 years early. So £135/month Added Pension, as expected, is better than the EPA-3 quote, purely because you are paying more per month for it.

Now lets try a more like for like comparison using the £86.50/month figure quoted for EPA-3. £86.50/month would buy you approx £117.14 of Added Pension (for a notional 37 year old). Using the same logic as above, your standard pension at NRA would be £779.83/year. With added pension that would increase to £779.83 + (£117.14 + 10.1%) = £908.80, reduced by 0.84 to take 3 years early is £763.39 so it's buying you a slightly lower pension (same ballpark) when taken 3 years early compared the EPA-3 option. On that basis the EPA-3 option does appear to give you slightly better value but as expected they are similar.

I think there is one advantage of purchasing EPA in that it may allow you to increase the amount of extra pension you are able to purchase, currently limited to just over £7000 in total (I think it keeps increasing annually). This may be an issue for you if you are planning on purchasing extra pension over a very long period of time, or wish to make significant extra contributions in the future. The calculators tell you how much of your total allowance you have used / have remaining. Hopefully someone else can confirm the details for you.

jonnym1985

@NedS you are a star, thank you for taking the time to explain all that.  I have been sitting here with a pen and paper like Russell Crowe in a beautiful mind and got nowhere near anything you have expertly explained. Thank you.

Ultimately, it is likely to be 2024 before I consider either as I want my SL deduction cleared and then may either take EPA3 or buy added pension with a contribution of £135-200/mth 

The drawback of EPA3 is that it is directly linked the NRA and if this increases so would my remaining service and it’s my goal to retire at 65 (or under if it is feasible as I should be mortgage free, I understand there will be a reduction in pension to reflect this) so you have definitely given me food for thought.

who knows what the future holds with pension ages, or indeed pension scheme changes, but thank you again for explaining this using my current circumstances

hugheskevi

NedS said:

I think there is one advantage of purchasing EPA in that it may allow you to increase the amount of extra pension you are able to purchase, currently limited to just over £7000 in total (I think it keeps increasing annually). This may be an issue for you if you are planning on purchasing extra pension over a very long period of time, or wish to make significant extra contributions in the future. The calculators tell you how much of your total allowance you have used / have remaining. Hopefully someone else can confirm the details for you.

Note also that there are some slight differences between EPA and AP in some particular scenarios around death and ill-health, where it would be better to have AP than EPA due to the way benefits are calculated - these will go a long way toward explaining why EPA-3 appears to give a slightly better headline pension as that overlooks the cost of ancillary benefits.

The drawback of EPA3 is that it is directly linked the NRA and if this increases so would my remaining service and it’s my goal to retire at 65 (or under if it is feasible as I should be mortgage free, I understand there will be a reduction in pension to reflect this) so you have definitely given me food for thought.

The same applies to Added Pension - the Normal Pension age of Added Pension is linked to NRA too. As NedS explains above, the value of either is essentially the same so if NRA increased to 69, 70 or whatever, regardless of whether you had purchased AP or EPA you could take your pension at age 65 and it would be almost the same whether you had purchased AP or EPA.

jonnym1985

@hugheskevi @neds

Thank you both very much

michaels

Minor point, but I believe there may be slight differences in terms of Annual and Lifetime allowance calculations