Civil Service Pensions: Why I plan to pick Partnership over Alpha

nottinghammer

 

Hello,

I am about to join the UK Civil Service at age 47 and plan to pick the PARTNERSHIP pension scheme, which I know is a very unusual choice over ALPHA. There is lots in forums (here and elsewhere) about how they compare, but I have not found any detailed and convincing comparison apart from the usual DB praising. My thinking is that PARTNERSHIP is better for someone my age or younger if one can bear the risk of a lower return. Here are my thoughts:

 

Assumptions: Annual pensionable salary 60k, my current age 47, UK retirement age 67.

ALPHA: Pays 2.32% of salary as annual pension from age 67. Own contributions are 7.35%.

PARTNERSHIP: Employer pays 14.75% (for age 46 and over, less for younger ages) and matches my 3% contribution. To make both comparable, I assume that I pay a further 4.35% into the pension (or a SIPP) so that my own contribution is the same as under ALPHA, and tax benefits are the same. The total amount that goes into the pot is therefore 25.1% of my salary, of which 7.35 is from me.

 

For PARTNERSHIP to be as good as ALPHA, I assume I need to have a pension pot of about 20-25 annual ALPHA pensions at age 67. Why? That is roughly the life expectancy, but also the very rough current cost of an annuity with similar conditions (full inflation adjustment and reduced pension for partner). Let’s say I aim for 22.5 annual ALPHA pensions, which would be 52.2% of my salary. PARTNERSHIP gets me 25.1% of my salary, so for my 2023 contributions I need to roughly double my pension pot over 20 years in real terms or a 3.7% annual real yield (because ALPHA is inflation-adjusted). That is not guaranteed but long-term historical averages have been well above that (at least for the US, where the S&P 500 seems to have a long-term average of 6-7% real yield). Some examples for other ages are shown below, taking into account different PARTNERSHIP employer contribution levels (levels shown here are without the 3% match):

-          Age 27, employer contribution 8%, required yield 2.6%

-          Age 37, employer contribution 11%, required yield 3.0%

-          Age 42, employer contribution 13.5%, required yield 3.2%

-          Age 47, employer contribution 14.75%, required yield 3.7%

-          Age 52, employer contribution 14.75%, required yield 5.0%

-          Age 57, employer contribution 14.75%, required yield 7.6%

Therefore, I believe the best approach for someone with age 45 or below would be to go for PARTNERSHIP, but from say age 50 it would be best to switch to ALPHA. In between it is less clear. Anyone close to pension age should of course pick ALPHA because it would be very unlikely that one could make up the difference in a few years. There are of course other considerations (see below), and obviously it will depend on the level of risk appetite.

 

Other pros and cons:

-          ALPHA helps with the “longevity risk” but the counterargument would be that one can buy an annuity at age 67 with the PARTNERSHIP money that closely mirrors ALPHA. The only question would then be whether the pot is big enough to get a similar annual pension. With bad health, one could get a higher annuity, which is not possible in ALPHA.

-          ALPHA provides a pension for kids up to about age 18, but most people won’t have kids that young at age 67.

-          PARTNERSHIP offers the benefit of not being forced into an annuity and the money can be accessed earlier and what is left can be inherited (in an IHT-efficient way).

-          ALPHA employee contributions are less for salaries below around 51k (4.6% or 5.45%), which is a small benefit for ALPHA. I haven’t calculated this here, but of course this would be the typical situation especially for younger staff.

-          Annual Allowance and use of SIPP: ALPHA would use up about 25k of my Annual Allowance of 40k, and in years with high inflation it can use up a lot more (currently around 33k based on what is said here: https://forums.moneysavingexpert.com/discussion/6415441/alpha-civil-service-pension-annual-allowance-calculation-validation). This would be a big problem if one wanted, for example, pay an extra 10k or more into a SIPP to avoid the 40% tax rate (or >50% effective tax rate for 50k-60k incomes when having kids). In contrast, the PARTNERSHIP scheme would only use up around 15k of my Annual Allowance (with my extra payments to match ALPHA costs).

-          Lifetime Allowance: Could be a problem for either scheme when paying in over several decades. I have not looked into this in detail.

 

Does this all make sense? I would appreciate any thoughts on my main point that PARTNERSHIP trumps ALPHA for “younger” people if one is not overly risk-averse, and any views on the other pros and cons.

Thanks!

N

Dazed_and_C0nfused

Does this all make sense? I would appreciate any thoughts on my main point that PARTNERSHIP trumps ALPHA for “younger” people if one is not overly risk-averse, and any views on the other pros and cons

I suspect a more concise post would get more comments.

And I fail to be convinced someone who can get 20 years of inflation proofed (seemingly generous) CARE pension will achieve the same outcome from contributing to Partnership.

Ignoring inflation and pay rises your 20 years of Alpha will get you an annual pension of £27,840.

Coupled with a full State Pension that's a very healthy position to be in.

Partnership gives you a fund of £301k after 20 years.  Plus whatever investment returns (or losses) you make.

NedS

Your arguments seem rational to me (I'm older than you, and in Alpha). Some thoughts:

In an ideal world, most seem to accept that the ideal scenario is to have a mixture of fixed (guaranteed) income from DB/SP/Annuity to cover essential day to day costs combined with the flexibility of a DC pot to allow funding of one off larger expenses, luxury items, special occasions etc. So I would factor in how much DB/DC pension provision I already have/need. You address this with a view to using the partnership pot to purchase an annuity, but I wonder if the plan is to purchase an annuity anyway, why not just go with Alpha in the first place. Maybe there are good reasons such as not needing spousal protection so why pay for it through Alpha when you can purchase a single life annuity at a better rate.

Alpha offers a type of life assurance by way of death benefits. Partnership passes the full DC pot to a surviving partner / dependant children.

The AA observation is interesting, and having almost been caught out by very high inflation this year, I certainly agree that DBs can be less flexible if you are planning on maxing out the AA year on year, and not having any carry forward available to smooth out the peaks and troughs of inflation.

I still wouldn't give up my gold plated CS pension though.

Universidad

The reason an annuity is so expensive is that you are buying away all the "could" and "should" and "what if".

That's baked right into Alpha, and costs a lot less than we're putting in.

You are absolutely right that it may be possible to do better out of partnership.

(And I suspect that you're not planning to buy an annuity, you're using that to give a like for like example).  

But it's not guaranteed.

What if we all survive climate change, give or take, but there's an unprecedented 30 year hit economically as technology evolves, and supply chains adjust? Sure wouldn't want that to be MY 30 years of contributions...

One difference to bear in mind: Alpha, being tied to inflation, is essentially static in real terms. But partnership isn't.

There's another input to consider, and I'm not just talking about risk here, I'm talking about the other element of growth: TIME.

If you're 47 and planning to retire at 57, it's Alpha all day, every day.

I'm 45 and planning to stop ASAP because at this point I'm essentially rubble bouncing around in a sack of ever slackening skin.

For me, heavily overpaying on Alpha for a few years is my ticket to early retirement.

 I don't care about actuarial reduction, in anything but the most basic sense: I just need "my pension x 0.6" to be enough to get by on, and then I'll quit the next day and stack shelves till my late fifties.

Partnership can't give me that certainty, and neither can a SIPP, even though I could access them earlier without reduction.

sammyjammy

In all likelihood that pension age will be 68 within a few months time

Universidad

sammyjammy said:

In all likelihood that pension age will be 68 within a few months time

That's actually the riskiest part of Alpha!

hara____

I'm with NedS: the floor and upside approaches outlined on Monevator and elsewhere are convincing. Having both DB and DC is great for that. So maybe the key question is what pension provision you already hold. 

BTW the AA point is no big deal. Just wait until you know the September CPI before making any large SIPP additions.

ewaste

I've run similar scenarios myself and although technically I'd have been better off in a DC scheme I'm a member of a DB scheme by informed choice. Although like many it's far inferior to Alpha as it has a capped revaluation rate. Having made an informed decision I also have a DC pension and a SIPP so a slice of each pie as it were. 

You don't make any allowance for ill health retirement and other scenarios that end employment earlier than expected. That is a primary reason I chose to be in the DB scheme, it's basically a comprehensive insurance plan. 

Getting_greyer

Hmm. Not sure but probably need to add the Alpha employer contributions in your calculations when comparing the two schemes. I understand why you wouldn't as it's not sitting there as a cash balance but it essentially is, it's just it get instantly transfered into a defered government paid annuity.

What's your thoughts on staying Alpha, but adding more via AVC's or separate SIPP?

NedS

Getting_greyer said:

Hmm. Not sure but probably need to add the Alpha employer contributions in your calculations when comparing the two schemes. I understand why you wouldn't as it's not sitting there as a cash balance but it essentially is, it's just it get instantly transfered into a defered government paid annuity.

The employer contributions to Alpha are not relevant. It makes no difference if the employer is paying £10/month or £10,000/month, the cost to the employee is the same and their final pension is the same.

nottinghammer

 Hi all,
All very useful comments, thanks! I certainly agree that Alpha is less risky and for most people it would be the right choice. But I do think if one was not risk-averse (eg, due to other pensions or significant savings) and happy to invest in the global stock market, then it's not completely irrational to go for Partnership, especially at a young age when there is more time to "catch up" with the Alpha pension. Hoping for 3-4% long term real returns on the stock market is of course optimistic but there is then the chance of ending up with 5-6% and a much higher pension than with Alpha. There are many other features of both schemes that matter, and some of them I haven't even fully understood yet (eg, what benefits are provided with early death, or being unable to work), so I will need to think it through a bit further. 
Thanks!
N