Additional Pension vs SIPP

Kellerman

ChocolateWombat said:

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? 

Did you conclude what the best option was for you? I'm trying to answer this very question. My wife and I both have DB schemes (her NHS, my CS Alpha) but need to create a bridge to mitigate the actuarial reduction(s) of retiring before 68. Again, probably looking at late 50s early 60s depending how life goes. We're both 34 so attempting to create a decent glide for the next 20-25yrs. 

We save into a S&S ISA now, which deliberately isn't a SIPP because we didn't want to lock it up until minimum pension age. However, I think we will probably now move to a SIPP, or pursue Added Pension through the CS. I'm just struggling to establish the base principles to determine how you make that call. Welcome advice from anyone here!

P.s. if anyone has any wise words on things to consider with an NHS pension please let me know...

NedS

Kellerman said:

ChocolateWombat said:

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? 

Did you conclude what the best option was for you? I'm trying to answer this very question. My wife and I both have DB schemes (her NHS, my CS Alpha) but need to create a bridge to mitigate the actuarial reduction(s) of retiring before 68. Again, probably looking at late 50s early 60s depending how life goes. We're both 34 so attempting to create a decent glide for the next 20-25yrs. 

We save into a S&S ISA now, which deliberately isn't a SIPP because we didn't want to lock it up until minimum pension age. However, I think we will probably now move to a SIPP, or pursue Added Pension through the CS. I'm just struggling to establish the base principles to determine how you make that call. Welcome advice from anyone here!

P.s. if anyone has any wise words on things to consider with an NHS pension please let me know...

Either can be a viable option. Which is best may depend on the individual.

Actuarial reduction is calculated to be fair both to the scheme member and the scheme, and as such is based on average life expectancy. Live longer and you gain, die early and you lose (financially), but you are dead (although you may also have spousal considerations).

The return on CS Added Pension is effectively CPI+1.7%  If you do not think you can beat that return in a SIPP, then Added Pension will likely represent good value and offers guaranteed income vs the flexibility of a SIPP.

Other factors will be your attitude towards risk, and the amount of guaranteed income you have available in retirement. Personally, I have tried to accumulate sufficient index-linked guaranteed income (SP+DB) to cover our essential spending needs (so I can sleep easy at night whatever the stock market is doing), and then a SIPP which can offer flexibility in funding discretionary spending.

Are you likely to remain in the NHS/CS for most of your careers, and do you think there employers will continue to offer a DB pension throughout. If the answer is no to either, you may want to build your guaranteed income levels now whilst you can, and focus on more flexible investments (SIPP/ISA) later. You will likely appreciate having a combination of all once you are into your 50s.

Kellerman

@NedS - thanks for your helpful response. Grateful for a few clarifications - 

Where are you getting CPI+1.7% as a reflection of the return, out of interest? Given the bull market of the last few years, ~4% return doesn't look that attractive right now vs a SIPP in a global tracker, but as you note that return is more uncertain.

I was having a play with the CS added pension calculator and it suggested I'd 'break even' on a years worth of payment after 10.5 yrs of pension drawdown. E.g. buying £2400 would provide an additional £227 p/a = 10.5 yr payback period. So I suppose if I was trying to compare the non DB equivalent, I would need to model £2400 in a SIPP compounding from say now until the equivalent payback period. If I was to claim my pension at 68, this would basically be 34 years plus 10.5 years. £2.4k invested for 44.5 years at an average of 4% is ~£14k. This seems a significantly higher benefit than the added pension, though granted the £227 p/a figure would end up being higher due to the index-link. Am I missing something with this, or is that reduced return for added pension benefit just the price you pay for certainty of guaranteed index-linked income? I see a fair few posts online that suggest added pension, whether CS or NHS (and presumably other public sector schemes) is 'exceptional value' but I'm not clear where that analysis is coming from to suggest it's great value for money compared to alternatives.

In reality as someone who usually ends up doing a bit of everything, that's probably where I'll end up over time! I've been thinking about this in the round and weighing up some of the wider policy risks to try make an informed decision today - notably that income tax will probably increase in my lifetime, pension reliefs may well decrease, SP will probably be less value for money and so on (bruised millennial view of the world, I know).

Thanks

NedS

CPI+1.7% is the discount rate that is used to calculate the cost of buying added pension. You can think of this as the rate of return on your investment for purchasing that added pension, assuming you live to the average age.

If you think you can achieve a real return of 4% (i.e, CPI+4%), then this would of course outperform CS Alpha Added pension, but most investors recognise that there is no guarantee that the next 20 years will be anything like the last 20 years. You should also consider the "price" you place on the guaranteed index-linked income for life (investment risk, inflation risk and longevity risks all removed).

This is why it is often stated that CS Alpha is "better value" for older people, as those over 50 for example, would have less time invested in the stock market for their investments to outperform. The younger you are, the more time a 100% equity portfolio has to outperform that CPI+1.7% return of CS Alpha added pension. So all else being equal I would lean more towards SIPP investments the younger you are. But things are never equal, hence the need to consider how long you may work for employer(s) with generous DB schemes, and how long those schemes may be available, and where you are on your journey towards attaining a reasonable balance of guaranteed inflation-linked income versus flexible investments that perform at the market's whim.

Kellerman

NedS said:

CPI+1.7% is the discount rate that is used to calculate the cost of buying added pension. You can think of this as the rate of return on your investment for purchasing that added pension, assuming you live to the average age.

If you think you can achieve a real return of 4% (i.e, CPI+4%), then this would of course outperform CS Alpha Added pension, but most investors recognise that there is no guarantee that the next 20 years will be anything like the last 20 years. You should also consider the "price" you place on the guaranteed index-linked income for life (investment risk, inflation risk and longevity risks all removed).

This is why it is often stated that CS Alpha is "better value" for older people, as those over 50 for example, would have less time invested in the stock market for their investments to outperform. The younger you are, the more time a 100% equity portfolio has to outperform that CPI+1.7% return of CS Alpha added pension. So all else being equal I would lean more towards SIPP investments the younger you are. But things are never equal, hence the need to consider how long you may work for employer(s) with generous DB schemes, and how long those schemes may be available, and where you are on your journey towards attaining a reasonable balance of guaranteed inflation-linked income versus flexible investments that perform at the market's whim.

Thanks for that, useful advice which has helped frame my thinking on this. 

Universidad

Kellerman said:

Thanks for that, useful advice which has helped frame my thinking on this. 

If it further helps frame your thinking, here's the recent history of the SCAPE discount rate:

• 2011: CPI+3%
• 2016: CPI+2.8%
• 2018: CPI+2.4%
• 2023: CPI+1.7% 

Kellerman

Universidad said:

Kellerman said:

Thanks for that, useful advice which has helped frame my thinking on this. 

If it further helps frame your thinking, here's the recent history of the SCAPE discount rate:

• 2011: CPI+3%
• 2016: CPI+2.8%
• 2018: CPI+2.4%
• 2023: CPI+1.7% 

Thanks, it's a timely reminder that public sector pensions remain unfunded and growth stagnant. It's a strong case to capitalise whilst you still can.