Civil service pension - EPA vs added pension

michaels

mark45446 said:

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 

Perhaps more likely you would retire at 65, the EPA bit would be unreduced and the remainder would see a 3 year reduction (a few percent, look up In the reduction tables on mycsp)

hugheskevi

mark45446 said:

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.

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?

At what age would you be retiring in this scenario? Not that it matters much, but to get a precise figure it does.

Assuming you purchase EPA-3 from 2024 until you retire and take your pension at age 65, you would receive:

• Your Premium pension (unreduced) for the period from when you started employment to 2015
• Your alpha pension accrued between 2022 and 2024, reduced for early payment by 3 years (approximately a 12% reduction)
• Your alpha EPA-3 pension accrued between 2024 and 2045. This is the amount of alpha pension you have accrued in this period and is paid without any reduction due to the EPA-3 you purchased

and due to the 2015 Remedy (McCloud) a choice between:

• Premium pension for the period 2015-22 (unreduced)
• Alpha pension for the period 2015-22, reduced for early payment by 3 years (approximately a 12% reduction)

In terms of the amount paid out from EPA-3, it is your total salary between 2024 and 2045 multiplied by the accrual rate, 2.32%, and then that figure multiplied by the 3 years the EPA is paid for. The pension accrued increases each year by CPI and so retains its real value over time.

Being a Premium member, do you have plans about what you would do at age 60? If still in the Civil Service at that time, you have a very strong incentive to partially retire, draw your Premium pension and set your hours equal to the level required to avoid abatement. Otherwise, you just forego the Premium pension between the age of 60 and the age at which you draw it. Some way off yet of course, but something to be aware of for the future. As the answer to this could affect your pensionable earnings, it could affect the calculation above.

Note also that State Pension may change which would change all the ages and years above. Actuarial reductions are also subject to regular change, and the alpha accrual rate may change in the event of a cost cap breach in future years. Note also that your EPA contribution rate increases each year as it is based on your age - so you cannot simply multiply all 2024 figures by 21 to get a lifetime answer.

mark45446

Thanks again for the advice. 

It's really helpful in thinking this through/understanding. 

I would be retiring at 65 years in this scenario (in 2045).

Based on this I am thinking: 

- I wouldn't want to take my Alpha pension before 68 years if I can avoid it, to avoid reducing that pension for early payment. 

- I will probably still be in the civil service aged 60. I would take my Premium pension at this age (to 2015, unreduced ), as I would reduce my working hours to avoid abatement as you suggest. 

- I would stop working at age 65. I would purchase an EPA-3 (start contributing now), to provide me with a pension from 65-68 to supplement by premium pension. 

- I would then draw my Alpha pension at aged 68 (unreduced). I would have a potential choice here as I understand it, under the McCloud judgement, between the premium and alpha pension for the period 2015-22. 

Final questions! - hopefully the above makes sense and I have understood correctly? 

Thank you for explaining how I can roughly calculate how much EPA I would receive. I find it odd that there doesn't appear to be a calculator on the civil service pension website covering this (there is a calculator which will tell you how much you have to pay into the EPA, but not one that gives you a projection for how much you would get from it as far as I can see) 

Does the accrual rate of 2.32% for the EPA match the amount you are putting into the EPA? (or is it more generous ie are you getting back more than you put in (aside from the tax benefit to contributing)? 

Thanks so much for the help

NedS

mark45446 said:

Thanks again for the advice. 

It's really helpful in thinking this through/understanding. 

I would be retiring at 65 years in this scenario (in 2045).

Based on this I am thinking: 

- I wouldn't want to take my Alpha pension before 68 years if I can avoid it, to avoid reducing that pension for early payment. 

- I will probably still be in the civil service aged 60. I would take my Premium pension at this age (to 2015, unreduced ), as I would reduce my working hours to avoid abatement as you suggest. 

- I would stop working at age 65. I would purchase an EPA-3 (start contributing now), to provide me with a pension from 65-68 to supplement by premium pension. 

- I would then draw my Alpha pension at aged 68 (unreduced). I would have a potential choice here as I understand it, under the McCloud judgement, between the premium and alpha pension for the period 2015-22. 

Final questions! - hopefully the above makes sense and I have understood correctly? 

Thank you for explaining how I can roughly calculate how much EPA I would receive. I find it odd that there doesn't appear to be a calculator on the civil service pension website covering this (there is a calculator which will tell you how much you have to pay into the EPA, but not one that gives you a projection for how much you would get from it as far as I can see) 

Does the accrual rate of 2.32% for the EPA match the amount you are putting into the EPA? (or is it more generous ie are you getting back more than you put in (aside from the tax benefit to contributing)? 

Thanks so much for the help

EPA should be broadly equivalent* to Added Pension in monetary terms, so if for example you just want a ball-park figure of what a contribution of £1000 gets you in monetary terms, you can use the Added Pension Calculator, apply 3 years actuarial reduction factor to account for the fact it's payable 3 years earlier, and the answer won't be a million miles off.

* When I say broadly equivalent, if for example someone worked 20 years in Alpha buying EPA-3 and retired at 65 instead of 68, and someone else of the same age and earning the exact same salary worked 20 years in Alpha but bought Added Pension at the same annual cost of the EPA plan, and then also retired at 65 with actuarial reduction for taking their pension 3 years early - both would have paid about the in extra contributions, both would retire at the same age 3 years early and both would receive around the same pension. The end result is about the same

hugheskevi

I wouldn't want to take my Alpha pension before 68 years if I can avoid it, to avoid reducing that pension for early payment. 

You shouldn't put too much reliance on the Normal Pension age - it is simply the age at which unreduced pension is payable. You can take it early with a lower amount or later with a higher amount, so the age itself isn't of much importance.

I would stop working at age 65. I would purchase an EPA-3 (start contributing now), to provide me with a pension from 65-68 to supplement by premium pension. 

I would then draw my Alpha pension at aged 68 (unreduced).

You can only choose to receive part of your alpha pension (which includes both EPA and non-EPA segments) if you are in work and partially retire. If commencing your benefits from deferred status you only have the choice to take all of the pension.

Does the accrual rate of 2.32% for the EPA match the amount you are putting into the EPA? (or is it more generous ie are you getting back more than you put in (aside from the tax benefit to contributing)? 

This question doesn't really make sense. By purchasing EPA-3 you are simply accruing normal alpha pension that is payable without reduction 3 years prior to Normal Pension age.

The discount rate used to calculate the cost of EPA (and also Added Pension) is CPI+1.7%. You can think of this as the rate of return on your contribution - it might be slightly higher or lower than this depending on your characteristics as the CPI+1.7% applies to the typical scheme member, so if you live longer than average you gain, etc.

helsbels92

mark45446 said:

Thanks again for the advice. 

It's really helpful in thinking this through/understanding. 

I would be retiring at 65 years in this scenario (in 2045).

Based on this I am thinking: 

- I wouldn't want to take my Alpha pension before 68 years if I can avoid it, to avoid reducing that pension for early payment. 

- I will probably still be in the civil service aged 60. I would take my Premium pension at this age (to 2015, unreduced ), as I would reduce my working hours to avoid abatement as you suggest. 

- I would stop working at age 65. I would purchase an EPA-3 (start contributing now), to provide me with a pension from 65-68 to supplement by premium pension. 

- I would then draw my Alpha pension at aged 68 (unreduced). I would have a potential choice here as I understand it, under the McCloud judgement, between the premium and alpha pension for the period 2015-22. 

Final questions! - hopefully the above makes sense and I have understood correctly? 

Thank you for explaining how I can roughly calculate how much EPA I would receive. I find it odd that there doesn't appear to be a calculator on the civil service pension website covering this (there is a calculator which will tell you how much you have to pay into the EPA, but not one that gives you a projection for how much you would get from it as far as I can see) 

Does the accrual rate of 2.32% for the EPA match the amount you are putting into the EPA? (or is it more generous ie are you getting back more than you put in (aside from the tax benefit to contributing)? 

Thanks so much for the help

Can recommend this website that I found - I'm sure there will be nuances where it might not be exactly accurate, but it should give a relatively good approximation.

Civil Service Alpha Pension Calculator (civilservicepensioncalculator.co.uk)

john798

Hi
did anyone join the EPA scheme since the last post? any words of wisdom or advice?
It's that time of year again and i've been considering going into EPA for a retirement age of 65 (buying 2 years) NPA is 67.
i've done some rough calculations and it will cost me 3.3% of my pensionable pay each year. Using that website above I could get £13600 a year pension for the 2 years I retire early (so £27200 in total) and it would cost me £16000 if I pay from now until 65. 
i know the figures adjust each year but does this sound about right.
basically i'd get out a lot more than i pay in, which is the idea. 

thanks

Yorkie1

Note that the % for EPA goes up as you get a bit older. If memory serves right, my EPA -2 started at 3.3%, then 3.6%, and it will go up to 3.7% next year and 3/8% the following year. I think you can play around with date of birth on this modeller to see what the current contribution rates are.
EPA (Effective Pension Age) - Civil Service Pension Scheme

john798

Yorkie1 said:

Note that the % for EPA goes up as you get a bit older. If memory serves right, my EPA -2 started at 3.3%, then 3.6%, and it will go up to 3.7% next year and 3/8% the following year. I think you can play around with date of birth on this modeller to see what the current contribution rates are.
EPA (Effective Pension Age) - Civil Service Pension Scheme

ok, my % rises would likely be on the same trajectory. do they peak, i.e. will your stop at 3.8%?

hugheskevi

The factors are in the this spreadsheet, on sheet x-731.

For a member with a NPA of 67 buying a 2 year reduction, the cost peaks at 4.6%.