Additional Pension vs SIPP

hugheskevi

GunJack said:

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. 

I think it probably has more to do with the psychological effect of loss aversion, which is very powerful. People have seen that they have £x on their benefit statements, and taking it early would reduce it to £y, and the sense of not wanting to lose something is very strong.

All the modern career average public service pension schemes apply an actuarial increase for taking them after State Pension age, yet I have never met anyone who plans to do that.

Given the presence of actuarially fair reductions and increases, it really makes Normal Pension age of little relevance if approaching the decision from a purely mathematical perspective. Normal Pension age becomes just a reference point for the calculation of benefit entitlement, yet it continues to have a disproportionately important role in many people's planning decisions.

davidr1964

I am very interested in this.

I have 38.6 years in the CS pension scheme. I have only 18 months until I am 60 and can take it without a reduction. I know I should 'grit it out' and hang on, but I am not sure I will be able to.

I am facing the psychological barrier of taking my CS pension early and seeing it permanently reduced. So much so that I've looked into 'buying out' the actuarial reduction. Unfortunately it is too expensive at present.

Does anyone have a view on this buy-out? Is it considered good value?

By the way, I'm still in the 'classic' scheme and it looks like Alpha won't affect me.

hugheskevi

davidr1964 said:

Does anyone have a view on this buy-out? Is it considered good value?

By the way, I'm still in the 'classic' scheme and it looks like Alpha won't affect me.

As you are so close to age 60, the cost of buy-out will be very close to the amount of classic pension you will receive in the period up to 60, with a little extra for the cost of buying out your alpha benefits.

You will receive tax relief on the cost of the contribution, so for maximum tax efficiency you would want to ensure you benefit from tax relief on the full contribution (ie that after deducting the cost of the buy-out contribution from your taxable earnings for the full financial year, you still use up your Personal Allowance). Calculating this may well give you a window later in the financial year during which it would be optimal to buy-out.

You are not in the classic scheme anymore - that closed to new accrual on 31 March 2022 and you were moved to alpha.

Dazed_and_C0nfused

By the way, I'm still in the 'classic' scheme and it looks like Alpha won't affect me

That's impossible and even for the period from 2015 to 2022 it might be that Alpha is the better option for you to choose when the time comes.

It will be down to your personal preferences as what's "best" for one person isn't necessarily best for someone else but it's definitely not something to dismiss without looking at the actual figures 

davidr1964

Thanks. Hanging on until the end of the financial year is my only option if I am to opt of the buy out.

I am still in Classic. I'm in the Research Councils Pension Scheme, which is "unreformed' and "The RCPS is by analogy to the Principal Civil Service Pension Scheme (PCSPS)". I am no expert in this by any means, but Alpha won't come in until 2025 at the earliest.

r6mile

davidr1964 said:

I am very interested in this.

I have 38.6 years in the CS pension scheme. I have only 18 months until I am 60 and can take it without a reduction. I know I should 'grit it out' and hang on, but I am not sure I will be able to.

I am facing the psychological barrier of taking my CS pension early and seeing it permanently reduced. So much so that I've looked into 'buying out' the actuarial reduction. Unfortunately it is too expensive at present.

Does anyone have a view on this buy-out? Is it considered good value?

By the way, I'm still in the 'classic' scheme and it looks like Alpha won't affect me.

Do you have any savings or other pension provision that could ride you over until you reach 60?

PS: not really the main point but you will still have about 1 year of Alpha service as everyone since 2022 has been enrolled in that. Which won’t make a huge difference to your calculations! But you may have to decide whether to take that small Alpha service at the same time as your classic at 60 - and be reduced as Alpha NPA is 66.

davidr1964

I have built up a stakeholder pension to keep me going until state pension age and it could tide me over an extra year. I've also been buying CS 'Added Pension'. I'm certain I could afford to go over, but this psychological barrier is proving a real hurdle. I also feel I ought to help my section over one more end of financial year as I'm the one holding a lot of the processes in my head. I never normally worry about this sort of thing, but in this case I am feeling stressed.

hugheskevi

davidr1964 said:

I have built up a stakeholder pension to keep me going until state pension age and it could tide me over an extra year. I've also been buying CS 'Added Pension'. I'm certain I could afford to go over, but this psychological barrier is proving a real hurdle. I also feel I ought to help my section over one more end of financial year as I'm the one holding a lot of the processes in my head. I never normally worry about this sort of thing, but in this case I am feeling stressed.

DC pension contributions used to cover period to age 60 may well be better than buy out. Under buy out you would pretty much get back what you put in, whereas with DC you would get the benefit of 25% tax free. Although the automatic lump sum of classic does complicate this calculation a little.

Research Councils are indeed introducing reforms at a future point so have not yet introduced career average schemes. I'm not sure if their by analogy status extends to using the same actuarial factors as the Civil Service Scheme to calculate cost of buy out though. Something you might want to confirm if going down that route.

davidr1964

Thank you. I have some decisions to make over the next few months!

michaels

hugheskevi said:

GunJack said:

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. 

I think it probably has more to do with the psychological effect of loss aversion, which is very powerful. People have seen that they have £x on their benefit statements, and taking it early would reduce it to £y, and the sense of not wanting to lose something is very strong.

All the modern career average public service pension schemes apply an actuarial increase for taking them after State Pension age, yet I have never met anyone who plans to do that.

Given the presence of actuarially fair reductions and increases, it really makes Normal Pension age of little relevance if approaching the decision from a purely mathematical perspective. Normal Pension age becomes just a reference point for the calculation of benefit entitlement, yet it continues to have a disproportionately important role in many people's planning decisions.

In some ways it may be tax advantageous to take some early as with the frozen personal allowance and triple lock almost all pension taken post SPA will be taxed.

For example compare and contract taking the 1:12 TFLS or take the same amount out 'tax free' before SPA (assuming no other taxable income) by taking it early and accepting the reduction