Civil Service Added Pension Calculator Query

RichLukey

I'm thinking about the options for adding to my civil service pension (i.e. Added Pension, AVC's, or a mix).  One query I have is with the figures I'm getting from the Added Years calculator for 2024/25.

In this Youtube video from Civil Service Pensions Pension Awareness Week 2022, "Day 4: How to Boost Your Pension" there is a demo of the Added Years Calculator (using the 2023 version).  The example is for putting £100 in a month for a year, which yields an additional £97.58 pension per year in retirement.  I have replicated the info entered in the demo into the 2024 version of the Alpha Added Pension calculator and getting a return of £80.86.  The discrepancy is easily big enough to influence decisions.  So I need to understand whether I'm missing something, or have returns actually dropped?  I gather Added Pension is discounted by SCAPE rate (CPI plus a percentage, where the percentage has dropped from 2.4% to 1.7% - but can that seemingly small drop really result in a 17% loss on the return?  Maybe the apparently small drop in this rate has a compounding effect.  Either way, I need to understand what's going on here!

I would have added links to the video and calculator, but seems that's not allowed as a newbie here.

hugheskevi

In this Youtube video from Civil Service Pensions Pension Awareness Week 2022, "Day 4: How to Boost Your Pension" there is a demo of the Added Years Calculator (using the 2023 version). 

For the benefit of others, the YouTube video is at this link, at 29:19.

The Added Pension calculators are at this link.

I have replicated the info entered in the demo into the 2024 version of the Alpha Added Pension calculator and getting a return of £80.86.

Agreed.

So I need to understand whether I'm missing something, or have returns actually dropped? 

As the contract starts at 1/4/24 in the new calculator, compared to 1/4/23 in the old calculator, but in both cases Date of Birth was 1/1/75 you are comparing someone who was 48 in the old calculator to someone who is 49 in the new calculator.

You should move Date of Birth to 1/1/76 to correct the age difference, although this only makes a small difference.

I gather Added Pension is discounted by SCAPE rate (CPI plus a percentage, where the percentage has dropped from 2.4% to 1.7% - but can that seemingly small drop really result in a 17% loss on the return?  Maybe the apparently small drop in this rate has a compounding effect. 

It is compounded, as the discount rate discounts values for all future years until Normal Pension age. Intuitively, I'd expect the difference to be something like (1.017^19) / (1.024^19) = 87.8%.

The difference between the spreadsheets with the Date of Birth moved one year forward is £81.87 / £97.58 = 83.8%

So the difference is a bit bigger than I might have intuitively expected, but not hugely so. 

RichLukey

Thank you hugheskevi.  This doesn't strike me as a particularly enticing use of the money and esp. when it's a significant downgrade over what previous year's contributions would have gained.  But I suppose the problem then is what can I do that would be any better!  This might incline me more toward the AVC option and take my chances there.

Universidad

RichLukey said:

Thank you hugheskevi.  This doesn't strike me as a particularly enticing use of the money and esp. when it's a significant downgrade over what previous year's contributions would have gained.  But I suppose the problem then is what can I do that would be any better!  This might incline me more toward the AVC option and take my chances there.

I find myself in a similar position, having paid heavily for Added Pension this year I had initially thought that I would continue next year, but at a lower monthly amount.

However, I am finding the psychological premise of getting "less" for my money to be quite a strong demotivator.

That said, such instincts aren't always entirely logical, and it might still be the best use of my money, even if it is less attractive than it previously was. 

You maybe have to put your instincts to one side, and do the actual maths.

Personally, I have pretty much decided that I will buy AVCs next year rather than more Added Pension, but I do have some additional reasons for doing this: firstly that I want to start to build up a pot of money that can be taken flexibly to aid in an earlier retirement. Secondly, that your monthly AVC contributions can be changed mid-year if required, and there's some uncertainty in my immediate future that this will help to control.

NedS

Alpha is better value the older you are (the closer to NRA you are).

Rather than throw all my eggs into one basket, I prefer to hedge my bets, and put some into Alpha Added Pension and some into my SIPP. This is also driven by the desire to have sufficient guaranteed income in retirement for basic / essential spending, but also to have a more flexible pot I can draw down upon whilst bridging the gap between early retirement and SP/DBs kicking in. So my own decisions are somewhat driven by achieving or moving closer toward the right balance here.

Age is also a factor - the rate of return for Alpha is now essentially CPI + 1.7%. If I invest in a SIPP, how confident am I about matching or beating that return? Over the long term, I'm fairly confident, but over the short term less so. So the closer I am to drawing my Alpha pension, the better bet it seems. If I were young with 20 or 30 years ahead of me to build up Alpha pension naturally, I'd probably put 100% of any additional pension contributions into my SIPP. If I were within 5 years of NRA, I'd be 100% Alpha Added Pension. Anywhere in between, and I'm tapering my additional pension contributions accordingly.

I also try to factor in what returns I can reasonably expect from a SIPP over the next decade. I look at the last decade, fuelled by very strong growth and a low interest rate / low inflation environment, and contrast that with where we are now and feel CPI + 1.7% for the next 10 years may not be so bad (there could easily be a decade of lost growth). Maybe others are more bullish than me. So yes, Alpha is not as good value as it was last year, but then neither is the outlook for global growth in my opinion, and it's all relative.

RichLukey

Thank you NedS, all food for thought.  At 53 I'm in a bit of middle ground perhaps of whether to play safe or have that bit of risk in the mix.  I might take the view by virtue of being in the Civil Service for 31 years I already have the 'safe as can be' side of my pension covered already, so perhaps a bit of risk on an extra bit is a reasonable balance (via AVCs) overall.  Perhaps I'll hit ebay for a crystal ball!

NedS

RichLukey said:

Thank you NedS, all food for thought.  At 53 I'm in a bit of middle ground perhaps of whether to play safe or have that bit of risk in the mix.  I might take the view by virtue of being in the Civil Service for 31 years I already have the 'safe as can be' side of my pension covered already, so perhaps a bit of risk on an extra bit is a reasonable balance (via AVCs) overall.  Perhaps I'll hit ebay for a crystal ball!

Yes, I agree.

Once your basic spending needs in retirement are covered by your DB+SP, you can afford to take some risk.

Depending on how (and when) you intend to use any DC pension (SIPP), you should maybe view your investment horizon as being 40 years, assuming you may reasonably expect to live to 93, as investments do not stop when you retire (unless you plan to cash in the whole lot and buy an annuity which seems unlikely given how much DB+SP you would have).

On the other hand, if you intend to retire early and use DC pension funds flexibly to bridge the gap to NRA/SPA, your investment horizon may be significantly shorter and far less risk would be appropriate.

Either way, have a plan and allocate contributions accordingly.

helsbels92

NedS said:

Alpha is better value the older you are (the closer to NRA you are).

Rather than throw all my eggs into one basket, I prefer to hedge my bets, and put some into Alpha Added Pension and some into my SIPP. This is also driven by the desire to have sufficient guaranteed income in retirement for basic / essential spending, but also to have a more flexible pot I can draw down upon whilst bridging the gap between early retirement and SP/DBs kicking in. So my own decisions are somewhat driven by achieving or moving closer toward the right balance here.

Hi Ned, 

Can I ask... you've said that Alpha is better value the older you are, but if you do added pension I've been told you buy more pension than you would if you were closer to NRA. So I find myself a bit confused. Are you able to just clarify that bit? I'm 41 so a bit on the cusp I would say, I'm not young, but I do also still have 27 years ahead of me (oh god). I've also only been in CSP for a few years, so haven't got much pension built.

hugheskevi

helsbels92 said:

NedS said:

Alpha is better value the older you are (the closer to NRA you are).

Rather than throw all my eggs into one basket, I prefer to hedge my bets, and put some into Alpha Added Pension and some into my SIPP. This is also driven by the desire to have sufficient guaranteed income in retirement for basic / essential spending, but also to have a more flexible pot I can draw down upon whilst bridging the gap between early retirement and SP/DBs kicking in. So my own decisions are somewhat driven by achieving or moving closer toward the right balance here.

Hi Ned, 

Can I ask... you've said that Alpha is better value the older you are, but if you do added pension I've been told you buy more pension than you would if you were closer to NRA. So I find myself a bit confused. Are you able to just clarify that bit? I'm 41 so a bit on the cusp I would say, I'm not young, but I do also still have 27 years ahead of me (oh god). I've also only been in CSP for a few years, so haven't got much pension built.

The scheme uses a discount rate of CPI plus 1.7%. Think of the discount rate as the rate of return you receive on money you pay to the scheme.

 The cost of Added Pension is calculated actuarially based on your age, and you pay the full cost of that. Due to the discount rate, ie the rate of return, being CPI plus 1.7%. it will cost less for a younger person to purchase a given amount of Added Pension then it would for an older person.

So for Added Pension, cost is set actuarially and takes into account age. It just depends whether you view a rate of return or CPI plus 1.7% as good value or not. But as you can see, the cost for an older person is higher than for a younger person, reflecting the higher cost of providing a pension to an older employee than to a younger employee.

Whereas for main scheme pension there is no difference in cost by age. Every member pays the same contribution rate, despite the cost of providing a pension to an older employee being higher than providing the pension to a younger employee.

This comes about in no small part due to in-service revaluation rate. Schemes such as NHS and Teachers chose in-service revaluation to be CPI+1.5% and CPI+1.6%, other schemes choose earnings (which should be higher than inflation). In return, they have a lower accrual rate. Clearly, the younger you are, the more you value revaluation - at the extreme, a 65 year old barely values revaluation at all. So that person is very happy the scheme chose to have the highest possible accrual rate and lowest possible revaluation rate, favouring older members over younger members.

You can also see the effect by looking at the Partnership employer contribution rates, which are set by reference to the value of the main scheme. Younger Partnership members get an automatic employer contribution of 8% whereas for older members it is 14.75%.

NedS

helsbels92 said:

NedS said:

Alpha is better value the older you are (the closer to NRA you are).

Rather than throw all my eggs into one basket, I prefer to hedge my bets, and put some into Alpha Added Pension and some into my SIPP. This is also driven by the desire to have sufficient guaranteed income in retirement for basic / essential spending, but also to have a more flexible pot I can draw down upon whilst bridging the gap between early retirement and SP/DBs kicking in. So my own decisions are somewhat driven by achieving or moving closer toward the right balance here.

Hi Ned, 

Can I ask... you've said that Alpha is better value the older you are, but if you do added pension I've been told you buy more pension than you would if you were closer to NRA. So I find myself a bit confused. Are you able to just clarify that bit? I'm 41 so a bit on the cusp I would say, I'm not young, but I do also still have 27 years ahead of me (oh god). I've also only been in CSP for a few years, so haven't got much pension built.

Answered by @hugheskevi far better than I ever would have managed :-)

FB13

Hi, I have just read almost all of the discussion that @hugheskevi, @Universidad, @NedS and @michaels have been having over the past several months on this subject. Thank you for posting 

I am 36. I had been buying a relatively small amount of added pension to take me close to the 40% threshold (paid in £4800 this year). I was just promoted to grade 6 and was planning to substantially increase my added pension next year as a result. I have built up around £13,000 in DB pensions through a combination of alpha and LGPS. 

With the discount rate change, I’m now debating switching my additional contributions solely to CSAVC. I was wondering if you still think what you thought above, namely that this might be a sensible thing for someone who is 25 to 32 years away from retirement to do? 

My slightly niggle is that I don’t know if I will stay in the public sector until retirement and even if I do, I think there is a chance that pensions switch to DC or otherwise become less attractive in the next 30 years. I wonder if I should build up additional DB pension while I can even if it is more expensive. On the other hand, I’m aware I can take more risk given the time I have left to retirement.