Civil Service Added pension Q&A

hugheskevi

The changes mean the discount rate used to calculate the cost of Added Pension is now CPI+1.7%. This is effectively the rate is return, after costs.

However, that is based on the average member at scheme level. So if you think you will not suffer ill health before retirement and die at a relatively young age, it is less attractive.

A young person investing heavily in equities will have a high probability of returning better than CPI+1.7% over a reasonable period of time. Such a person may prefer a SIPP and then later transferring in to a public sector DB pension (if they join/change employer within public sector), or to use DC to delay receiving public sector or State pension.

An older member who would invest more conservatively may prefer Added Pension, especially is they would take an annuity rather than drawdown, as then they would have to additionally factor in the costs of annuitisation (these will be implicit, within the rate offered, but the member is still paying for admin, profit, cost of capital reserving, etc), which do not have be incurred through Added Pension.

michaels

Personally I would shovel as much into added pension this years as possible 'before the price goes up' next April, bearing in mind the max amount purchasable.  Plenty of time after that to go with a sipp for increased flexibility/early drawdown without reduction.

I would also check your 'number' - unless you plan on spending a lot more post retirement than you do currently, you may find that you can retire a lot younger than 60 if you choose to.  Hopefully your ISA pots would support such a decision for anything before 57, then sipp and then DB and state pension as they become available.

AdamS_CivilServant

Thank you hugheskevi and michaels - it is very very much appreciated! I think we fit into the 'young people, currently fit and healthy, hopefully will not die at young age' category - so I may well go for the (higher-risk, higher-return) SIPP, rather than Added Pension, especially since we have our standard civil service pension as our 'safe investment', along with the S&S ISAs. 

Although as Michaels says, perhaps we do use our Added Pension this year (prior to 'price increase'), and start with the SIPP next year. I had planned to use EPA rather than Added Pension, since I understand that EPA doesn't contribute to the £60000 annual allowance (which would then allow us to put more into SIPP) - does this still make sense, please?

Yes, we will probably still be frugal as retirees, and may well aim to retire earlier than 60 if finances allows. I didn't mention that we have two kids, so I'm sure much will depend on how much financial support they need in their adulthood. 

Thanks again - for your posts - and all the posts in previous threads too

hugheskevi

Yes, using EPA due to zero person input makes sense if you think Annual Allowance will be an issue.

Assuming you have no final salary linked pension, alpha and nuvos can still give surprisingly high pension inputs when the rate of inflation is increasing. This will be a problem again in the future at some point, and will be worse as members have higher career average pension accrued.

Given the children, you have a strong incentive to keep adjusted net income under £50,000 if possible.

Universidad

I remain determined to retire early, and have bought a good amount of Added Pension this year.

I had initially thought that I would continue to buy Added Pension next year, albeit easing off a bit as I've been living more frugally that I could sustain long term.

But now I'm wondering if I scrape together a lump sum later this year, and then buy AVCs instead of more Added Pension next year.

Definitely food for thought.

One advantage of AVCs is that you can change the contributions mid-year, unlike EPA/Added Pension. Makes it a bit easier to fine-tune around the higher rate bracket if your pensionable pay varies a bit, and covers you for surprises like dropping down hours if it becomes necessary.

michaels

I actually need to think about this. 

Currently I do EPA and then 50% of salary to added and remainder was going to a sipp to take advantage of the tax relief without paying tax but on my numbers above it would seem best to instead do more added pension this year via a lump sum and then dial back Added and EPA to only sipp only next year as at that point the sipp return will exceed the alpha pay out (or will it - perhaps that only applies to any contributions where I get tax relief but didn't pay tax because of personal allowance?) 

(I am living off an offset/stoozed mortgage at the moment which I will repay using the pension TFLS from my sipp)

AdamS_CivilServant

Universidad said:

I remain determined to retire early, and have bought a good amount of Added Pension this year.

michaels said:

Currently I do EPA and then 50% of salary to added and remainder was going to a sipp...

Universidad and michaels - how do you ensure you stay below the annual contribution limit? I've only worked at the CS for 5 years and haven't previously used EPA or Added Pension or SIPP, but from 2022-2023 my CS pension went up by £2774 (£1897 from the 2.32%, plus £876 from 10.1% consumer price index), which was slightly over last year's £40k limit (16x2774 = £44384). I won't get taxed because of the '3 year carry over' rule for annual contribution.  But in future years, if I do Added Pension or SIPP to bring me close to the new £60k limit, and then there's surprisingly high consumer price index increase, then this could lead to taxation, right? This is why I'm attracted to EPA instead.

Or, is the input linked to consumer price index not included in the annual allowance? In which case I don't understand this comment from hugheskevi.

 hugheskevi said:

Yes, using EPA due to zero person input makes sense if you think Annual Allowance will be an issue.

Assuming you have no final salary linked pension, alpha and nuvos can still give surprisingly high pension inputs when the rate of inflation is increasing. This will be a problem again in the future at some point, and will be worse as members have higher career average pension accrued.

 Sorry if I'm being slow here, or misinterpreting one of you!

michaels

adamshlong said:

Universidad said:

I remain determined to retire early, and have bought a good amount of Added Pension this year.

michaels said:

Currently I do EPA and then 50% of salary to added and remainder was going to a sipp...

Universidad and michaels - how do you ensure you stay below the annual contribution limit? I've only worked at the CS for 5 years and haven't previously used EPA or Added Pension or SIPP, but from 2022-2023 my CS pension went up by £2774 (£1897 from the 2.32%, plus £876 from 10.1% consumer price index), which was slightly over last year's £40k limit (16x2774 = £44384). I won't get taxed because of the '3 year carry over' rule for annual contribution.  But in future years, if I do Added Pension or SIPP to bring me close to the new £60k limit, and then there's surprisingly high consumer price index increase, then this could lead to taxation, right? This is why I'm attracted to EPA instead.

Or, is the input linked to consumer price index not included in the annual allowance? In which case I don't understand this comment from hugheskevi.

 hugheskevi said:

Yes, using EPA due to zero person input makes sense if you think Annual Allowance will be an issue.

Assuming you have no final salary linked pension, alpha and nuvos can still give surprisingly high pension inputs when the rate of inflation is increasing. This will be a problem again in the future at some point, and will be worse as members have higher career average pension accrued.

 Sorry if I'm being slow here, or misinterpreting one of you!

I did go over the AA last year due to the unexpectedly high inflation (I did my figures based on 8%) so will have to pay a charge (no carry forward left but for specfic reasons this still makes sense for me).  Not being able to adjust added during the year is a pain though. 

I also do EPA for the reason you state - no annual allowance implication.  This year the 60k limit means I am fine, especially with the lower inflation rate and hopefully the same will be true for next year.

AdamS_CivilServant

Thanks Michael. So is the annual increase of one's total pension related to Consumer Price Index definitely counted towards the AA? In 2023 my annual alpha pension was £9559 (after 5 years in CS), so if all goes well I could be around £20000 5 years from now.  If, in 5 years, there is another year with 10.1% consumer price index for example, then my annual pension will increase by ~£2020 due to CPI alone! And then if you add my pension contribution from that year (which could be another £1897 if I never get a pay rise) I'll be over the £60k limit even without any Added Pension or SIPP ((2020+1987) x16 = £64112). And 10, 15, 20, 25 years from now the situation will be even more extreme. Obviously the £60k limit will probably have increased by then, but it makes me nervous to add Added Pension or SIPP at this stage, if there's a future risk of taxation even without these additions. Am I being unreasonable here? Were there many civil servants who were in this situation this year (those with good salaries and long-term service), who were taxed despite not Adding Pension or SIPPing? 

Or perhaps the total increase related to Consumer Price Index does not count towards the AA? See this worked example: https://www.civilservicepensionscheme.org.uk/your-pension/yearly-pension-update/pension-saving-statement/annual-allowance/ , which seems to adjust the BASELINE value for CPI too (Step 3). Applying this to my example, maybe I'd only need to consider the £1897 and the CPI related to this £1897 (i.e. £191.60) when calculating AA (i.e. (1897+191) x 16 = 33408), in which case I have LOT of wiggle-room to do SIPP and Added Pension, now and in the future. 

Universidad

adamshlong said:

Universidad said:

I remain determined to retire early, and have bought a good amount of Added Pension this year.

michaels said:

Currently I do EPA and then 50% of salary to added and remainder was going to a sipp...

Universidad and michaels - how do you ensure you stay below the annual contribution limit? 

In my case I was a member of the increasingly poor USS scheme up until 2022. I have plenty of carry over left.

I wasnt expecting USS to significantly feature in any AA calcs in future now that I'm deferred, but I wonder how their proposed one off uplift in 2024 should be tracked...