Saving for the future - civil service pensions for twenty year olds

AKM96

draiggoch said:

Are you filling the LISA with the full £4000? This would be my priority at the moment as you are well covered with the CS pension. If you are then maybe look at a separate pension that can be taken to bridge early retirement.

Yes this is very much my priority at the moment. Are there any DC schemes that stand out that you would recommend?

AKM96

Dazed_and_C0nfused said:

or switch to another scheme?

If you do the maths you will realise what a fantastic scheme that is.  Although the rest of the country would prefer you to leave it would be a terrible financial choice.

You currently pay £3000/year (probably £1800 after tax relief). And in return will accrue a pension of £1,276.

If you think you can do better please let us know how 😊

A separate DC scheme adds flexibility but the civil service scheme has other options worth reading up on.

As a (just) higher rate payer then some extra pension contributions will be very tax efficient.

Thanks for doing the maths for me - I find the pensions statements very confusing!

Do you think I am paying in about the right percentage for my current salary then? I wasn't sure what a good / average amount would be!

I worked in DWP for a while in CDC pensions, so I now have a new found interest in pensions haha

AKM96

Universidad said:

The Alpha scheme is one of the best pensions schemes currently open. You are in an exceptionally good position to take advantage of it, on account of your career average being high from the get go.

You can almost certainly not do any better in terms of retirement savings bang for buck, and even if you could, you definitely wouldn't guarantee results that are better, which is really the killer feature of a Defined Benefits pension - you know what you're getting, and it doesn't depend on market performance.

If you want to know you can retire early, defined benefits answers that question earlier and better than most other options.

First up look into EPA with Alpha (Effective Pension Age). You can effectively reduce your retirement age by 1, 2, or 3 years by buying it, and it doesn't count towards your Annual Allowance if you really start pumping money into pensions. It will take your contributions from 5.45% to nearer 10% if you buy the EPA -3 option, but you'll be able to retire at 65 without reduction to the amount of your pension (unless the retirement age goes up again, but at any rate EPA  takes three years off the State Pension Age).

The other thing to consider is Added Pension. This is where you buy extra Alpha pension. It's expensive compared to your main Alpha pension because there's no employer contribution, you pay for it all. But it's still good value and you don't pay tax on your contributions (up to the Annual Allowance - look up how to calculate that, but you probably won't hit it unless you're really serious about overpaying).

Your added pension won't be subject to the EPA if you're paying both, so it will be reduced if you retire early. If you retire 5 years early, you can multiply what you've earned by (roughly) 0.75 and if you retire 10 years early you can (again, roughly) multiply by 0.6 to get the actual pensioniable amount.

You do have other options, such as to pay into a separate DC only pension plan, as well as Alpha, and save up enough of a pot of money that it will carry you from when you want to retire to when you want to take your Alpha pension. The advantage of this is that there's no actuarial reduction on taking a DC pot at an earlier age, so you can hedge a bit against the retirement age going up, but there's no guarantee that your investment performs well - although over a whole career, the odds are good that it would.

I had never heard of an EPA - i'll look into it for sure thank you very much!

Universidad

AKM96 said:

Thank you so much everyone I really appreciate it

No problem - one last thought, since you're in London where there are both better salaries out there and everything is bloody expensive: Don't underestimate the value of your pension, when considering jobs elsewhere in future.

Don't feel stuck, and by all means move on if it makes sense.

But if you just take EPA on your current pension and don't do anything else, you're probably adding ~1250 pension per year, that you may likely collect for 20 years. That's like an extra 25000 you're getting paid each year - it's just that you'll collect it much later in life. 

So don't jump for a ten grand pay rise, unless you either feel like you need to get out, or really want to do the new job. (Both totally valid reasons, and never feel otherwise. Money is  only money, but while we're playing for cash it makes sense to maximise it)

AKM96

Universidad said:

AKM96 said:

Thank you so much everyone I really appreciate it

No problem - one last thought, since you're in London where there are both better salaries out there and everything is bloody expensive: Don't underestimate the value of your pension, when considering jobs elsewhere in future.

Don't feel stuck, and by all means move on if it makes sense.

But if you just take EPA on your current pension and don't do anything else, you're probably adding ~1250 pension per year, that you may likely collect for 20 years. That's like an extra 25000 you're getting paid each year - it's just that you'll collect it much later in life. 

So don't jump for a ten grand pay rise, unless you either feel like you need to get out, or really want to do the new job. (Both totally valid reasons, and never feel otherwise. Money is  only money, but while we're playing for cash it makes sense to maximise it)

That's a very good point! One last thing - do you think there is any pros or cons in paying a bit extra into my workplace pension vs opening a stocks and shares ISA... Cashing in a pension early seems to deduct so much so I just thought if I could avoid doing that for a few more years by having a stocks and shares isa and working part time maybe that's the way to f

Emmia

AKM96 said:

Universidad said:

AKM96 said:

Thank you so much everyone I really appreciate it

No problem - one last thought, since you're in London where there are both better salaries out there and everything is bloody expensive: Don't underestimate the value of your pension, when considering jobs elsewhere in future.

Don't feel stuck, and by all means move on if it makes sense.

But if you just take EPA on your current pension and don't do anything else, you're probably adding ~1250 pension per year, that you may likely collect for 20 years. That's like an extra 25000 you're getting paid each year - it's just that you'll collect it much later in life. 

So don't jump for a ten grand pay rise, unless you either feel like you need to get out, or really want to do the new job. (Both totally valid reasons, and never feel otherwise. Money is  only money, but while we're playing for cash it makes sense to maximise it)

That's a very good point! One last thing - do you think there is any pros or cons in paying a bit extra into my workplace pension vs opening a stocks and shares ISA... Cashing in a pension early seems to deduct so much so I just thought if I could avoid doing that for a few more years by having a stocks and shares isa and working part time maybe that's the way to f

I'm also a CS at the same grade, but I've been in for nearly 16 years (I joined at about the age you are now) - my most recent pension statement indicates (if I extrapolate forward) that I'll probably hit the lifetime allowance (assuming it stays pretty much where it is) if I carry on as I am, making the required contributions.

I did transfer in a small DC pot when I first joined, but I've not put extra money in since then, instead I've focused on getting a property and putting money into normal S&S ISAs (not LISA or HTB ISA). I may make extra contributions to the pension in future once I have a good level of other savings / depending on how life goes.

You may find the "pension power" sessions that CS pensions offer really helpful to answer questions / understand how your pension works.

Something to bear in mind, if you move off London weighting, there will be an impact on the pension long term as the amounts that go in from you and the employer are a percentage of your earnings.

Universidad

AKM96 said:

That's a very good point! One last thing - do you think there is any pros or cons in paying a bit extra into my workplace pension vs opening a stocks and shares ISA... Cashing in a pension early seems to deduct so much so I just thought if I could avoid doing that for a few more years by having a stocks and shares isa and working part time maybe that's the way to f

That's a personal decision. I would maxmise my pension, because once you have a bulletproof retirement pot you can stop worrying about old age and do whatever you want with your life. But that's just my outlook.

The advantage of something like an ISA is more flexibility around your age. If you've never heard of a LISA, look into it. You need to be under 40 to get one, but it helps save to buy a house and has some tax incentives.

If you don't want deductions from taking a pension early, then you can contribute to a defined contribution pension scheme (look up SIPPs for doing this off your own back). This is just an invested pot of money, so it doesn't get reduced if you take it early.

But the reduction you see with Defined Benefits schemes like Alpha isn't as bad as it sounds, since taking it early is not intended to pay out less in total over your whole life. It's just lower because it gets paid out for longer.

Take this example of retiring early. Let's say you have a 20,000 pension at 68, but you choose to retire at 58, and (multiplied by 0.6) only get 12,000 per year instead. That's a huge reduction, for sure.

But you also get paid 120,000 over those ten years from 58 to 68 that you don't get at all if you wait till you're 68. How long does it take to catch up, if you're being paid 20,000 from age 68?

The anwer is 15 years.

So you'll be 83 years old before you're a penny worse off for retiring early, and even if you live to be 90 you'll only be about 50 grand worse off over all that time since age 58.

The challenge is actually not to avoid reduction, it's to make sure the reduced amount is enough to live on!

SarahB16

AKM96 said:

Universidad said:

AKM96 said:

Thank you so much everyone I really appreciate it

No problem - one last thought, since you're in London where there are both better salaries out there and everything is bloody expensive: Don't underestimate the value of your pension, when considering jobs elsewhere in future.

Don't feel stuck, and by all means move on if it makes sense.

But if you just take EPA on your current pension and don't do anything else, you're probably adding ~1250 pension per year, that you may likely collect for 20 years. That's like an extra 25000 you're getting paid each year - it's just that you'll collect it much later in life. 

So don't jump for a ten grand pay rise, unless you either feel like you need to get out, or really want to do the new job. (Both totally valid reasons, and never feel otherwise. Money is  only money, but while we're playing for cash it makes sense to maximise it)

That's a very good point! One last thing - do you think there is any pros or cons in paying a bit extra into my workplace pension vs opening a stocks and shares ISA... Cashing in a pension early seems to deduct so much so I just thought if I could avoid doing that for a few more years by having a stocks and shares isa and working part time maybe that's the way to f

I am not one of the pension experts on this forum however I have learnt a lot from reading the opinions on here. 

The following is my opinion: 

I can clearly see that you are a very sensible and clever person but you have not yet got onto the property ladder.  

I cannot see that you have set up a pension contributions (with forecast growth) spreadsheet from now until the age of ~57 to see at what age you are likely to reach the lifetime allowance.  

As your salary increases more of this will be subject to the 40% tax rate so more advantageous re pension contributions when looking at the impact on your net salary, i.e. a £1,000 pension contribution (gross) costs you less if all deducted from earnings taxed at 40% compared to 20%.  

Personally, I would put that bit extra into a stocks and shares ISA because it will give you that flexibility to use towards a house purchase or to help you when you are in retirement, i.e. you have more flexibility that you will not have with pension contributions (your pension contributions cannot go towards the deposit on a house).   

When you have bought a home then I think you can contribute even more towards your pension but I wouldn't add too much more at the moment as it may mean you cannot afford a house that you really want and you end up settling for your second favourite home.