Civil Service Added pension Q&A

hugheskevi

The issue with inflation adjustment for the calculation of pension inputs is that there is a mismatch between the inflation adjustment applied to the starting value and the inflation increase applied just before the end of the period.

For 2022/23, the inflation adjustment just before the end of the year was 10.1% (September 2022 CPI) but the starting value used to calculate pension input was adjusted by 3.1% (September 2021 CPI). Hence there was a pension input arising from the inflation mismatch. For 2023/24 this will work in opposite direction, with the starting value adjusted by 10.1% but the annual inflation uplift applied just before the end of the period being 6.7%.

The NHS changed the scheme rules to deal with 2022/23 but the Civil Service scheme has not changed its rules in a similar way. You can look at the NHS change at this link for more details.

AdamS_CivilServant

Aha - thanks a million hugheskevi - this makes perfect sense now - and explains why you said that this can affect those with high pension when "rate of inflation is increasing" (i.e. it's times with rapid increase of inflation which can cause problems, rather than stable high inflation from year to year). Thanks again

michaels

adamshlong said:

Aha - thanks a million hugheskevi - this makes perfect sense now - and explains why you said that this can affect those with high pension when "rate of inflation is increasing" (i.e. it's times with rapid increase of inflation which can cause problems, rather than stable high inflation from year to year). Thanks again

hugheskevi has given you all the info you need but not sure anyone understands why this system was put in place in this way.  Common sense would say you should not tax the inflation increase of the existing pension pot, some will be getting away with big contributions this year because inflation is falling - how does that make any more sense than people being clobbered last year?!  It is thought this is part of the reason why they increased the AA.

hugheskevi

michaels said:

adamshlong said:

Aha - thanks a million hugheskevi - this makes perfect sense now - and explains why you said that this can affect those with high pension when "rate of inflation is increasing" (i.e. it's times with rapid increase of inflation which can cause problems, rather than stable high inflation from year to year). Thanks again

hugheskevi has given you all the info you need but not sure anyone understands why this system was put in place in this way.  Common sense would say you should not tax the inflation increase of the existing pension pot, some will be getting away with big contributions this year because inflation is falling - how does that make any more sense than people being clobbered last year?!  It is thought this is part of the reason why they increased the AA.

The HMRC methodology is quite sensible, ie, value of benefits at end of period less value of benefits at start of period adjusted by inflation, and choosing the preceding September CPI is fine. The most irrational part of the system is actually the factor 16 multiplier, which is laughably inaccurate. If anyone wants to amuse themselves reading about how inaccurate it is, the Govt. Actuary's Department wrote a report on it back in 2010. For example, a few of the findings were:

• The report notes that if the assumed discount rates were 0.5% higher, then the valuation factor would be 14.0, if the assumed discount rates were 0.5% lower, then the valuation factor would be 18.6 - since then the SCAPE discount rate has been reduced by 1.3 percentage points.
• If the assumed average actual retirement age were 61 instead of 59, then the valuation factor would be 14.8 - since then Normal Pension age has been increased by up to 8 years
  
• The report noted that if there were any material changes to pension provision for a significant proportion of affected individuals, then that might also justify a review of the factor (noting, for example, the work of the Independent Public Service Pensions Commission) - since then every public service pension scheme has been closed to further service accrual and replaced with career average schemes.
  

The public service pension uprating is also sensible - uprate in March/April based on preceding December figures.

It is only when the two systems meet that the problems arise. Back in the days when the Annual Allowance was very generous, it wasn't really an issue. Then fiscal drag and reductions to the Annual Allowance took things too far and all the cracks in the system were exposed. Last year was the first time this particular crack caused damage, and schemes such as the NHS took action to address it.

So it is just one of those things caused by making policy up as you go along, changing things at each Budget as you think will look good, rather than having a coherent, well-designed system that gets updated every 10-20 years by technical experts as you would expect to be the case, but sadly isn't. 

NedS

adamshlong said:

I've seen some very useful points from hugheskevi and others, in other threads. One that resonated with me said "The main consideration is what annual income you will need after State Pension age, and whether you think you will have at least that amount when you retire. If not, Added Pension becomes very attractive. Once that point is achieved, the SIPP is very attractive." Based on that, our plan was to both get an EPA (minus 3 years), and then to put any leftover savings (beyond the £40k per year in ISA) into SIPP (paying attention to annual pension allowance). Then, if we retire at 60, we can hopefully use ISA and SIPP savings, until the CS pension kicks in at 65yo (if 68 years old is retirement age, and I have the minus 3 years EPA).

This has been the basis for any decision each year for me and hits the nail squarely on the head. I wanted to achieve a good base income that is inflation-linked. I wasn't quite there, so I've been purchasing Alpha added pension over the last few years. I'm now happy with my balance of DB to DC pension provision, so given the changes for 2024/25 I shall now be diverting additional pension contributions into my SIPP rather than taking out another contract to buy more added pension next year. I would normally make this decision in January each year, but my decision for 2024/25 is now made, and that will be my final tax year of contributions from employed income before retirement.

pathsofdarkness

I understand that it is possible to make a purchase of Alpha Added Pension by lump sum payment via a bank transfer (i.e. not from my salary). 

Question: If I were to do this, does that mean that I would have to ask HMRC to reclaim the 20% tax relief or does MyCSP do that automatically? My annual salary is £50,990 and so my normal Alpha pension contributions keep me  below the £50,270 higher rate threshold and thus I'll be a basic rate tax payer.

The reason I'm asking is that I'm planning on getting a mortgage next year (first time buyer) and there's conflicting advice about whether or not regular pension contributions are taken into account. My thinking is if I pay my lump sum from my current account to purchase Alpha Added Pension then there shouldn't be an issue. I'm thinking of putting in around £12k from my current account at some point in 2024/2025.

hugheskevi

pathsofdarkness said:

I understand that it is possible to make a purchase of Alpha Added Pension by lump sum payment via a bank transfer (i.e. not from my salary). 

Question: If I were to do this, does that mean that I would have to ask HMRC to reclaim the 20% tax relief or does MyCSP do that automatically? My annual salary is £50,990 and so my normal Alpha pension contributions keep me  below the £50,270 higher rate threshold and thus I'll be a basic rate tax payer.

The reason I'm asking is that I'm planning on getting a mortgage next year (first time buyer) and there's conflicting advice about whether or not regular pension contributions are taken into account. My thinking is if I pay my lump sum from my current account to purchase Alpha Added Pension then there shouldn't be an issue. I'm thinking of putting in around £12k from my current account at some point in 2024/2025.

You would pay the full cost of the Added Pension to MyCSP and then reclaim basic rate relief from HMRC. This is in theory straightforward, but in practice it is an unusual tax reclaim and HMRC are terrible at understanding it and incorrectly say no relief is due. They get there eventually though.

Given the freezing of income tax thresholds, would you not be better to wait until you are a higher rate taxpayer before making the purchase?

pathsofdarkness

hugheskevi said:

You would pay the full cost of the Added Pension to MyCSP and then reclaim basic rate relief from HMRC. This is in theory straightforward, but in practice it is an unusual tax reclaim and HMRC are terrible at understanding it and incorrectly say no relief is due. They get there eventually though.

I had this marginal hope that the reclaimed amount would happen automatically but good to know that I would have to contact HMRC myself to make it happen.

My thinking was I could purchase Alpha Added Pension by doing one of the following options:

1. Pay directly from my salary £12k net (£15k gross) over the course of a year by monthly contribution, or 
2. Pay directly from my current account £12k as a single lump sum payment and then reclaim £3k from the HMRC which I think gets added on top of my contribution to take it up to £15k.

The benefit of option 2, I think, is that my payslip won't show a monthly contribution when I make my mortgage application.

hugheskevi said:

Given the freezing of income tax thresholds, would you not be better to wait until you are a higher rate taxpayer before making the purchase?

Sorry I don't really understand? I think this is where my knowledge falls apart and fear this is something to do with "fiscal drag" which I think is where I really get out of my depth.

Do mean not paying my intended contribution until a future year when my full contribution would be eligible for the 40% tax relief (or some majority of it)? 

By the end of 2023/24 I'll have accrued £6,800 of Alpha Added Pension (this does not include cost of living increases) and so can purchase another £2,200 more before I hit the £9k limit. I was thinking of closing that gap in the next 3 years before moving to EPA-3.

Dazed_and_C0nfused

pathsofdarkness said:

hugheskevi said:

You would pay the full cost of the Added Pension to MyCSP and then reclaim basic rate relief from HMRC. This is in theory straightforward, but in practice it is an unusual tax reclaim and HMRC are terrible at understanding it and incorrectly say no relief is due. They get there eventually though.

I had this marginal hope that the reclaimed amount would happen automatically but good to know that I would have to contact HMRC myself to make it happen.

My thinking was I could purchase Alpha Added Pension by doing one of the following options:

1. Pay directly from my salary £12k net (£15k gross) over the course of a year by monthly contribution, or 
2. Pay directly from my current account £12k as a single lump sum payment and then reclaim £3k from the HMRC which I think gets added on top of my contribution to take it up to £15k.

The benefit of option 2, I think, is that my payslip won't show a monthly contribution when I make my mortgage application.

hugheskevi said:

Given the freezing of income tax thresholds, would you not be better to wait until you are a higher rate taxpayer before making the purchase?

Sorry I don't really understand? I think this is where my knowledge falls apart and fear this is something to do with "fiscal drag" which I think is where I really get out of my depth.

Do mean not paying my intended contribution until a future year when my full contribution would be eligible for the 40% tax relief (or some majority of it)? 

By the end of 2023/24 I'll have accrued £6,800 of Alpha Added Pension (this does not include cost of living increases) and so can purchase another £2,200 more before I hit the £9k limit. I was thinking of closing that gap in the next 3 years before moving to EPA-3.

You have misunderstood the tax benefits of making such a contribution.

As a basic rate taxpayer contributing £12,000 will only save you £2,400 (based on your taxable income being ~£50k).

Any tax relief comes back to you, it has no impact whatsoever on the amount of your pension contribution.

pathsofdarkness

Dazed_and_C0nfused said:
You have misunderstood the tax benefits of making such a contribution.

As a basic rate taxpayer contributing £12,000 will only save you £2,400 (based on your taxable income being ~£50k).

Any tax relief comes back to you, it has no impact whatsoever on the amount of your pension contribution.

Thank you, that's really good to know! I didn't realise HMRC return the relief amount to the individual rather than putting it into the pension itself. So as a lump sum contribution from my current account I would have to pay £15k but then HMRC would eventually return £3k back to me.