Civil service pension - EPA vs added pension

Universidad

michaels said:

I thought 8400 was a total limit not an annual one?

Oh ho, I think you are correct. 

That does make the limits a bit more achievable over time! Still probably over 100K though!

NedS

michaels said:

Universidad said:

michaels said:

There is a max of £8400 for added pension and EPA.  How does EPA feed into this calculation?

IIRC there's a bit of weirdness where you can't buy EPA if you are at the maximum Added Pension, but any less than the maximum and you can.

This gets talked about a bit but I expect it's fairly rare because of how much you'd need to be contributing to hit 8400, and by how much you'd exceed the AA if you did.

The thread I recall reading is this one.

I thought 8400 was a total limit not an annual one?

As said, it is a total limit, of the combined amounts of added pension purchased excluding any uprating for inflation.

The limit does increase (not sure if this is by inflation or other), so gives some scope for continued annual added pension contributions even once you are at or around the limit.

Added pension of £8400 would cost a 55 year old around £75,700, increasing as they get older, so large monthly contributions in their last 5 years of work could see them hit the limit.

hugheskevi

NedS said:

The limit does increase (not sure if this is by inflation or other), so gives some scope for continued annual added pension contributions even once you are at or around the limit.

Added pension of £8400 would cost a 55 year old around £75,700, increasing as they get older, so large monthly contributions in their last 5 years of work could see them hit the limit.

The limit increases by CPI, rounded up to the nearest £100.

The limit excludes annual increases on Added Pension purchased, it only relates to the cash amounts of Added Pension purchased, so in practice, individuals have their own personal cap depending on when they purchased Added Pension in the past.

helsbels92

Hi everyone, thank you for all your comments. Comparatively I'm sure EPA isn't expensive, however I am on my own surviving in a cost of living crisis, and trying to find £120 extra a month is absolutely not doable. I think @NedS is correct that doing Added Pension gives more flexibility. 

Just to come back to when people say the employers add 27% - are you aware Alpha is not a defined contributions pension? That money doesn't go to my own pension pot as there isn't one, it goes to making sure everyone getting a pension has enough money for their pensions. Alpha is a defined benefits pension so that 27% employer contributions doesn't come to me. 

I'm not entirely how Added Pension works with alpha as a defined benefits however I think for flexibility reasons I might go for that. The EPA is very rigid and would need to be kept up for the rest of my working life and the amount is set by CSP which means if I can't adjust it depending on my ability to afford it. 

I'm hoping the Added Pension will then absorb the percentage reduction I would then take when going earlier. 

Many thanks

hugheskevi

helsbels92 said:

The EPA is very rigid and would need to be kept up for the rest of my working life and the amount is set by CSP which means if I can't adjust it depending on my ability to afford it. 

EPA is only a commitment for 1 year at a time, it can be cancelled for any future year (and resumed in future years if desired).

helsbels92

hugheskevi said:

helsbels92 said:

The EPA is very rigid and would need to be kept up for the rest of my working life and the amount is set by CSP which means if I can't adjust it depending on my ability to afford it. 

EPA is only a commitment for 1 year at a time, it can be cancelled for any future year (and resumed in future years if desired).

Yes I know, but it's uncertain times financially at the moment. I want to try to secure my future without badly affecting my present.

helsbels92

I can't edit my first comment above, but I realise now what people meant about the 27% (ie you already know its a defined benefits) so apologies that was a misread on my part.

I know the CSP is amazing. That's why I'm planning on staying as long as possible  As I said in my second comment. I just want to secure my future (and retire hopefully a bit earlier) without hurting my present. 

mark45446

Universidad said:

EPA isn't expensive, the rest of your pension is an astoundingly good deal.

Each year you pay about 5.5% of your salary to get 2.32% of that salary paid to you every year, for the rest of your life. Your employer pays about 27%. 

That's nearly 5x as much that your employer puts in as you do, on top of your salary. And the benefits earned are absolutely great - the accrual rate is class leading.

For EPA, nobody else is helping out financially, it's all on you. So you pay another 4% ish of your salary to earn that same pension for an extra three years.

The real question is whether you could do anything better with the money in that time.

You're basically paying (example numbers) about 1400 pounds to claim back an inflation protected 2400 pounds. And the money you're paying for that with is very tax efficient.

You *could* do better with a personal pension, but then again you could also do worse - that's investments for you.

Meanwhile the Alpha pension is a guaranteed income, no matter what the ups and downs of the market.

Given there's nothing more expensive than certainty, Alpha seems like a good deal to me!

Hi all - thanks for this super helpful thread. 

Universidad, you said:

"You're basically paying (example numbers) about 1400 pounds to claim back an inflation protected 2400 pounds. And the money you're paying for that with is very tax efficient."

I couldn't work out the maths in this. How do you get 2400 back off 1400? 

Also I had one other question on EPAs, which is if I start paying for now (I'm 44) to an EPA -3 and continue every year until I'm 65, would the EPA pension I received each year (between 65 and 68) be the same amount of money each year as the Alpha pension I will receive from 68.  Maybe this is obvious but I couldn't see it confirmed anywhere.

thanks so much

hugheskevi

mark45446 said:

Universidad said:

EPA isn't expensive, the rest of your pension is an astoundingly good deal.

Each year you pay about 5.5% of your salary to get 2.32% of that salary paid to you every year, for the rest of your life. Your employer pays about 27%. 

That's nearly 5x as much that your employer puts in as you do, on top of your salary. And the benefits earned are absolutely great - the accrual rate is class leading.

For EPA, nobody else is helping out financially, it's all on you. So you pay another 4% ish of your salary to earn that same pension for an extra three years.

The real question is whether you could do anything better with the money in that time.

You're basically paying (example numbers) about 1400 pounds to claim back an inflation protected 2400 pounds. And the money you're paying for that with is very tax efficient.

You *could* do better with a personal pension, but then again you could also do worse - that's investments for you.

Meanwhile the Alpha pension is a guaranteed income, no matter what the ups and downs of the market.

Given there's nothing more expensive than certainty, Alpha seems like a good deal to me!

"You're basically paying (example numbers) about 1400 pounds to claim back an inflation protected 2400 pounds. And the money you're paying for that with is very tax efficient."

I couldn't work out the maths in this. How do you get 2400 back off 1400? 

The post to which Universidad was replying was a person aged 41 years of age earning £35,000 p/a in the alpha pension scheme. This individual will have a State Pension age of 68.

They accrue £35,000 x 2.32% (alpha accrual rate) = £812 p/a of alpha pension each year. If they purchase an EPA-3 contract their unreduced alpha pension is payable without reduction from 3 years prior to State Pension age, and £812 x 3 = £2,436.

The cost of an EPA-3 contract for a person aged 41 today is 4.4% of salary. £35,000 x 4.4% = £1,540 (note - the cost of EPA has recently increased, so may have been lower when Universidad wrote the post quoted)

So for a gross cost of £1,540 the OP would receive £2,436 of pension over the period they are aged 65-68. Note they would receive tax relief on the £1,540 contribution and the £2,436 is taxable income.

However, this is extremely age-sensitive and the result would be very different for a member aged 20 or a member aged 60. It may be easier to think of the return on investment simply being CPI+1.7% p/a (the current scheme discount rate) for a typical member. 

mark45446 said:

Universidad said:

EPA isn't expensive, the rest of your pension is an astoundingly good deal.

Each year you pay about 5.5% of your salary to get 2.32% of that salary paid to you every year, for the rest of your life. Your employer pays about 27%. 

That's nearly 5x as much that your employer puts in as you do, on top of your salary. And the benefits earned are absolutely great - the accrual rate is class leading.

For EPA, nobody else is helping out financially, it's all on you. So you pay another 4% ish of your salary to earn that same pension for an extra three years.

The real question is whether you could do anything better with the money in that time.

You're basically paying (example numbers) about 1400 pounds to claim back an inflation protected 2400 pounds. And the money you're paying for that with is very tax efficient.

You *could* do better with a personal pension, but then again you could also do worse - that's investments for you.

Meanwhile the Alpha pension is a guaranteed income, no matter what the ups and downs of the market.

Given there's nothing more expensive than certainty, Alpha seems like a good deal to me!

Also I had one other question on EPAs, which is if I start paying for now (I'm 44) to an EPA -3 and continue every year until I'm 65, would the EPA pension I received each year (between 65 and 68) be the same amount of money each year as the Alpha pension I will receive from 68.  Maybe this is obvious but I couldn't see it confirmed anywhere.

EPA only applies to future accrual of alpha pension, not that already accrued. If you stopped working at age 65 you would not accrue pension between age 65-68. State Pension could also increase, in which case both your Normal Pension age and EPA age would increase. Each year pension increases by CPI (which could also change) so the cash amount would be different but the real amount would be the same.

But subject to the above, yes. 

Assume State Pension remains the same, that you started to purchase EPA-3 at the start of alpha membership and do so throughout your entire Civil Service career. The amount of alpha pension you receive at age 65 would be the same (in real terms) as it would be with an identical work pattern (but without purchasing EPA) in which you worked until age 65 then deferred the pension and claimed it at age 68.

mark45446

hugheskevi said:

mark45446 said:

Universidad said:

EPA isn't expensive, the rest of your pension is an astoundingly good deal.

Each year you pay about 5.5% of your salary to get 2.32% of that salary paid to you every year, for the rest of your life. Your employer pays about 27%. 

That's nearly 5x as much that your employer puts in as you do, on top of your salary. And the benefits earned are absolutely great - the accrual rate is class leading.

For EPA, nobody else is helping out financially, it's all on you. So you pay another 4% ish of your salary to earn that same pension for an extra three years.

The real question is whether you could do anything better with the money in that time.

You're basically paying (example numbers) about 1400 pounds to claim back an inflation protected 2400 pounds. And the money you're paying for that with is very tax efficient.

You *could* do better with a personal pension, but then again you could also do worse - that's investments for you.

Meanwhile the Alpha pension is a guaranteed income, no matter what the ups and downs of the market.

Given there's nothing more expensive than certainty, Alpha seems like a good deal to me!

"You're basically paying (example numbers) about 1400 pounds to claim back an inflation protected 2400 pounds. And the money you're paying for that with is very tax efficient."

I couldn't work out the maths in this. How do you get 2400 back off 1400? 

The post to which Universidad was replying was a person aged 41 years of age earning £35,000 p/a in the alpha pension scheme. This individual will have a State Pension age of 68.

They accrue £35,000 x 2.32% (alpha accrual rate) = £812 p/a of alpha pension each year. If they purchase an EPA-3 contract their unreduced alpha pension is payable without reduction from 3 years prior to State Pension age, and £812 x 3 = £2,436.

The  is 4.4% of salary. £35,000 x 4.4% = £1,540 (note - the cost of EPA has recently increased, so may have been lower when Universidad wrote the post quoted)

So for a gross cost of £1,540 the OP would receive £2,436 of pension over the period they are aged 65-68. Note they would receive tax relief on the £1,540 contribution and the £2,436 is taxable income.

However, this is extremely age-sensitive and the result would be very different for a member aged 20 or a member aged 60. It may be easier to think of the return on investment simply being CPI+1.7% p/a (the current scheme discount rate) for a typical member. 

mark45446 said:

Universidad said:

EPA isn't expensive, the rest of your pension is an astoundingly good deal.

Each year you pay about 5.5% of your salary to get 2.32% of that salary paid to you every year, for the rest of your life. Your employer pays about 27%. 

That's nearly 5x as much that your employer puts in as you do, on top of your salary. And the benefits earned are absolutely great - the accrual rate is class leading.

For EPA, nobody else is helping out financially, it's all on you. So you pay another 4% ish of your salary to earn that same pension for an extra three years.

The real question is whether you could do anything better with the money in that time.

You're basically paying (example numbers) about 1400 pounds to claim back an inflation protected 2400 pounds. And the money you're paying for that with is very tax efficient.

You *could* do better with a personal pension, but then again you could also do worse - that's investments for you.

Meanwhile the Alpha pension is a guaranteed income, no matter what the ups and downs of the market.

Given there's nothing more expensive than certainty, Alpha seems like a good deal to me!

Also I had one other question on EPAs, which is if I start paying for now (I'm 44) to an EPA -3 and continue every year until I'm 65, would the EPA pension I received each year (between 65 and 68) be the same amount of money each year as the Alpha pension I will receive from 68.  Maybe this is obvious but I couldn't see it confirmed anywhere.

EPA only applies to future accrual of alpha pension, not that already accrued. If you stopped working at age 65 you would not accrue pension between age 65-68. State Pension could also increase, in which case both your Normal Pension age and EPA age would increase. Each year pension increases by CPI (which could also change) so the cash amount would be different but the real amount would be the same.

But subject to the above, yes. 

Assume State Pension remains the same, that you started to purchase EPA-3 at the start of alpha membership and do so throughout your entire Civil Service career. The amount of alpha pension you receive at age 65 would be the same (in real terms) as it would be with an identical work pattern (but without purchasing EPA) in which you worked until age 65 then deferred the pension and claimed it at age 68.

Thanks so much for taking the time to reply on this. really helpful Hugheskevi

One follow up question - I am currently 44 years old, and I have been on the Alpha scheme since 2015 (I was previously on the premium scheme).

If I was to start buying an EPA-3 this year and contribute each year until I retire, how do I work out how much the EPA would pay out (a projection) for those first three years of my retirement?

(apologies if the answer is obvious, it's just hard seeing the wood for the trees!) 

Mark