Additional Pension vs SIPP

MetManMark

Hi there

I am a member of the Alpha Civil Service pension scheme and have been for a few years (and before that on Classic). For the last few years I have also contributed towards a SIPP. My salary is ~£60k so I add enough to the SIPP to dip below the higher tax bracket. 

My question is whether I should be doing this or whether I should be "Adding Pension" to my Civil Service scheme. Part of the reason for taking out a SIPP was because I don't really trust that the Govt won't change the goal posts (again) before I retire. I am 47 and would like to retire at 62 (ie before my Alpha pension kicks in) which is why I am paying into a SIPP.

Thoughts on whether to pay into SIPP vs contributing more to a civil service scheme would be much appreciated.

Thanks in adance.

saucer

This question comes up in some form very regularly, so you could save yourself the wait by searching. Regarding the govt., any changes to the rules are unlikely to be retrospective, so you would have the chance to stop payments if the rules change. Beyond that there a number of considerations to take into account e.g. flexibility of when you can access the pension (likely more with SIPP) vs the additional pension being more of a secure annual income until you die etc. I have both (NHS).

Albermarle

I assume that when you pay more into the CS pension/buy extra years or however it works, then the employer will also have to shoulder some of the cost of providing extra pension. ( not 100% sure but I assume so)
When you pay into a SIPP there is no employer contribution.

You should also be clear in your mind that guaranteed pension income that increases with inflation each year, costs a lot of money to provide. The rule of thumb for a DC pension pot is that at around age 60, you need £100,000 to safely generate an annual income of around £3,000 increasing with inflation each year.

On the other hand a DC pension/SIPP can be useful to bridge a gap between retiring and your CS or state pension kicking in.

hugheskevi

I assume that when you pay more into the CS pension/buy extra years or however it works, then the employer will also have to shoulder some of the cost of providing extra pension. ( not 100% sure but I assume so)

When you pay into a SIPP there is no employer contribution.

The cost of additional purchases is entirely borne by the member, there is no employer contribution.

MetManMark

Thanks all. The plan is indeed to use the SIPP to cover my living costs from the time that I retire until I receive my main alpha pension and also the state pension (if that still exists when I get there ). 

I do not believe that the CS has any employer contribution. At the moment I am tempted to stay with the SIPP as I understand it and it is pretty transparent. I am little unclear of how exactly the Added Pension actually works - if it is tied to salary then I have no confidence in my salary keeping up with inflation over the next 15 years

So I am inclined to stick with the SIPP.

r6mile

I am in a very similar situation and had similar considerations, but ended up going down the Additional Voluntary Contributions route. In my case to also stay below HR threshold and avoid child benefit clawback.

The AVC scheme is basically a DC pension, except that contributions gets taken from payslip every month. Plus you don’t have to chase HMRC for tax rebates etc. And the fees (fund is managed by L&G) are pretty low. Sure, you don’t have as much flexibility as a SIPP but I am not an very active investor so would chose a multi asset fund anyway, of which L&G offers a few to suit different risk profiles. 

I still have a SIPP (now moved to Vanguard) and may make the odd contribution if for example a pay award or bonus takes me just over the HR threshold. Though I know I could also move this money into the AVC scheme so as to simplify things.

hugheskevi

I am a member of the Alpha Civil Service pension scheme and have been for a few years (and before that on Classic). For the last few years I have also contributed towards a SIPP. My salary is ~£60k so I add enough to the SIPP to dip below the higher tax bracket. 

Worth considering how sustainable this will be given the freezing of higher rate threshold until 2028 - hopefully you can afford to keep increasing the annual contribution, which will mean more going into the pension.

My question is whether I should be doing this or whether I should be "Adding Pension" to my Civil Service scheme. 

It is called "Added Pension"

Part of the reason for taking out a SIPP was because I don't really trust that the Govt won't change the goal posts (again) before I retire. I am 47 and would like to retire at 62 (ie before my Alpha pension kicks in) which is why I am paying into a SIPP.

The most likely change would be to your State Pension age, which would also affect the age at which your alpha pension (and any alpha Added Pension) is paid without reduction. This is currently 67 for you - it could be prudent to assume it is increased to age 68, and consider what you would do if was increased to 70 (rather unlikely, but conceivable).

saucer said:

Regarding the govt., any changes to the rules are unlikely to be retrospective, so you would have the chance to stop payments if the rules change. 

Other than in legal terms, the change from RPI to CPI uprating in 2011 was retrospective and a very significant cut to benefits. Changes to minimum pension age have retrospective effect, as do changes to State Pension age which affect Normal Pension age.

There is a lot of policy change risk to consider.

I am little unclear of how exactly the Added Pension actually works - if it is tied to salary then I have no confidence in my salary keeping up with inflation over the next 15 years

Added Pension is extremely simple. Each year (and the terms change every year as they are based on your age) you contribute whatever you wish, and in return receive an amount of annual income payable from State Pension age. This amount increases each year in line with prices (currently measured by CPI). You take this extra amount when you receive your alpha pension, so can take it before or after Normal Pension age if you wish. You can exchange some for a lump sum when you take the pension, but with an exchange rate of 12:1 it is a lousy deal so you probably wouldn't want to do that.

Note the price of Added Pension will soon increase, due to the review of the pricing terms.

The AVC scheme is basically a DC pension, except that contributions gets taken from payslip every month. 

Just for clarity, the AVC scheme is 100% a DC pension, the contribution arrangements do not affect what type of scheme it is.

I still have a SIPP (now moved to Vanguard) and may make the odd contribution if for example a pay award or bonus takes me just over the HR threshold. Though I know I could also move this money into the AVC scheme so as to simplify things.

This is very sensible, particularly for anything that happens late in the financial year - contributions to SIPPS are very quick and easy compared to the alternatives. In particular, purchases of Added Pension usually have to be completed by February or March (depending on payment method).

I am 47 and would like to retire at 62 (ie before my Alpha pension kicks in) which is why I am paying into a SIPP.

Thoughts on whether to pay into SIPP vs contributing more to a civil service scheme would be much appreciated.

I wouldn't necessarily rule out commencing your Alpha pension before State Pension age, it may or may not make sense in your future circumstances. You would still want extra to effectively replace State Pension in the years between retirement and State Pension age.

Added Pension is best if you want extra secure, inflation-linked pension payable for life. The discount rate will be CPI+1.7%, so that is the effective rate of return on the investment assuming you have the characteristics of a typical member. A SIPP is more flexible, enables you to extract more of the contribution earlier in life and gives the possibility of greater returns.

It comes down to a choice between two good options. The main consideration is what annual income you will need after State Pension age, and whether you think you will have at least that amount when you retire. If not, Added Pension becomes very attractive. Once that point is achieved, the SIPP is very attractive.

You might also want to think about how you plan to invest the SIPP. You will be drawing on it heavily in only 15 years from now, so it might not be long before you reduce the investment risk, although if the investment is small and you have a large DB then the need for derisking is reduced. But the bigger the DC pension becomes, the more you need to consider risk management.

You also say you are a classic member (and so presumably in-scope of the 2015 Remedy Project) and also that you expect your salary to fall behind inflation. You may wish to consider whether switching to Partnership at some point would be worthwhile to lock-in a higher salary for the calculation of your classic pension. Alpha gets more valuable to older you are, and you need to be out of the scheme for 5 years to lock-in the salary on date of leaving if you return to the scheme so if you did the calculations and concluded switching to Partnership was optimal in your circumstances, it is likely to be something you would want to do sooner rahter than later. This would of course mean a lot more DC contributions for the next 5 years, so after that you may well be in a position of wanting to rejoin the scheme and make Added Pensions instead.

MetManMark

Wow @hugheskevi - thanks for your comprehensive response! So many things to think about...

I see the additional pension contributions that I am currently making into a SIPP as a way to bridge the time between retirement and the time that my state pension / alpha kicks in. So I think I'll stick with the SIPP. I agree that fixing the higher tax rate threshold essentially means that I will have less to live on over the next 5 years in the meantime, but I am keen to put everything above the threshold into a pension so we avoid losing child benefit etc. Thankfully we have paid off our mortgage and we don't live a particularly extravagant lifestyle...

My SIPP is invested through Aviva and has a mix of UK, UK and International (2/3 US plus some European / Asian) trackers which seem to have done pretty well over the last 6 years.

I will have to think about what to do with my Classic / Alpha pensions. TBH I just thought I'd leave them be until I retire and worry about how the McCloud ruling would impact me nearer the time.

My Dad was a civil servant all his life (retiring 1982) and things seemed a lot more straightforward then! He really had no idea what sort of a pension he would get - he even got a gratuity aged 60! How things have changed since then...

ChocolateWombat

I find Hugheskevi’s comment about the answer depending on whether your provision for state pension age is going to be adequate, really useful.

I have been thinking about this same issue.  We both have DB pensions building and will get to full state pension.  We will be laughing at 68.  However, we want to finish work in late 50s.  It’s bridging  the gap that is the issue for us.  Extra pension savings really need to go into a SIPP or something accessible from 55/57 for us.  In fact, taking one of the DB early with the actuarial reduction is looking like a good option.  Yes, the monthly payments at NPA will be less, but we won’t be ‘losing out’ until we are mid 80s and actually the key thing is smoothing income across retirement, not maximising the overall payout.  The latter would mean struggling in the early years of retirement in order to have loads in the later phases….wrong way round and not worth it, just to have a sense that the government had overall paid us more pension  overall.

I guess a question is, with any extra pension savings, can it be better to buy additional pension with a view to taking it early and actuarially reduced, rather than putting the money into SIPP or AVC? I wonder about this as an option in terms of funding retirement from about 57-62 from SIPPs and an early paying DB, and then looking to take the other DB pension about 3 years early, but having bought added pension for this one, so there is a guaranteed (albeit lower as actuarially reduced) income from the additional savings, rather than more SIPP pension.

Any thoughts?  It’s not about either/or really.  We already have DB with different payout  dates, SIPPs and will be using everything we’ve got to take income at different points as needed.  We’ve probably got another 6 years ahead of us of putting extra contributions into some form of pension saving.  Would this be best in SIPPs or as added pension for the DB schemes we are in?  Thansk

michaels

I think too many dismiss taking govt DB early - the reduction is 'fair' based on life expectancy, there is no penalty (the way there is for TFLS), the only drawback is that taking it later gives better longevity insurance.

GunJack

michaels said:

I think too many dismiss taking govt DB early - the reduction is 'fair' based on life expectancy, there is no penalty (the way there is for TFLS), the only drawback is that taking it later gives better longevity insurance.

I think the main issue people (including me) have in taking a CS/Public Sector DB early is that it is in effect the main (or indeed only) pension they have apart from SP. The idea of getting the same amount out of it overall if taken lower, earlier, is not as significant as the question of is the reduced amount enough income to live on, and in most cases the answer to that is probably not.

Add in that the majority of Civil Service (moreso than other Public Sector) are not on great salaries and therefore their pension is also not that high to start with - yes, it may be guaranteed, but it ain't that many ££s, so to take a hit on that is, for many, just not doable.