Added pension

horsewithnoname

I’m in the pcsps Alpha only now as I’ve partly retired and taken all my Classic (subject to McCloud). I’m now 60 years old. 

I have looked at buying added Alpha, but £50 a month for one year would by me about £40 of extra pension p.a. Is that a decent rate of return? On the face of it, it looks low, but of course it’s for life and index linked ( as it stands now) so maybe it’s not that bad? Or would I be better just putting in savings, or investing though I know nothing about investing. 

Might be a bit moot depending on how prices go, but as I get a decent pension increase next April it’s something I’m thinking about. 

Dazed_and_C0nfused

horsewithnoname said:

I’m in the pcsps Alpha only now as I’ve partly retired and taken all my Classic (subject to McCloud). I’m now 60 years old. 

I have looked at buying added Alpha, but £50 a month for one year would by me about £40 of extra pension p.a. Is that a decent rate of return? On the face of it, it looks low, but of course it’s for life and index linked ( as it stands now) so maybe it’s not that bad? Or would I be better just putting in savings, or investing though I know nothing about investing. 

Might be a bit moot depending on how prices go, but as I get a decent pension increase next April it’s something I’m thinking about. 

Is that £50 the real cost or before any tax saving you may benefit from?

If not it could be you would be only be paying £480 (net of tax relief).  For one year.

In return you could be getting maybe £384 (net of basic rate tax).  With uncapped inflation protection. Every year.  From NPA for the rest of your life.

Could you do better with your £50/month?

NedS

As stated by D&C above, that £50 is a gross contribution before tax, so the cost to you would be £40/month (£480/year) net of tax relief assuming you are a basic rate tax payer (even better if you are HRT payer).

Monthly contributions from April 2023 will buy you £41.42 of added pension, index-linked for life. So the 'return' on your investment is around 8.6% (41.42/480*100), index linked for life at age 67. Assuming you will pay basic rate tax on that pension when you receive it, it's a 6.9% return after tax ((41.42-20%)/480*100). As D&C asks above, do you think you can get a better return elsewhere?

Note: I must declare an interest here, as I purchase large amounts of Alpha added pension every month so my opinion may be biased.

af1963

"return of 8.6% or 6.9%" is slightly misleading though - to get these regular payments, you need to give up your right to the original £50 that you paid each month. So it's not directly comparable with other investments where you get x% return ON TOP OF your original money.

Closest comparison is probably with buying an annuity - it depends on the age you can start getting the payments, but (assuming 65, and RPI inflation linked) it's still a better deal than I can see available on the 'best buy' tables online.  

Another thing worth considering is whether you could gain some flexibility by saving elsewhere, or into a separate personal defined contribution pension. It's unlikely to be as good a deal in raw financial terms, but might mean you can access the extra money at a time of your choosing; and also gives the option of keeping it in a DC pension scheme which can be inherited.

horsewithnoname

Thank you. I suspected it was probably better than it looked at first sight. I didn’t realise the £50 was before tax relief so that makes it better. 

I’ll give it due thought, and not being able to access it is a plus really - there’s always something you need to spend it on if you can access it 😉