Civil Service Alpha Added Pension worth it for 23 yr old?

FrankRizzo

Universidad said:

money_mad_2 said:

New Civil Service starter, salary 30k, want to start good pension habits. Is paying for Added Pension in Alpha a good idea? If so, what percentage would people advise - 5% - more, less? Also has small, but growing SIPP and saving in a LISA. What should priorities be? All opinions and advice welcome, thank you.

Having a (currently) default retirement age of 65 rather than 68 might be more satisfying to you than just seeing the pension amount go up a bit, even if they are almost equivalent financially. 

Could 68 also end up being 71 for DB 'Normal Pension Age' or once the scheme rules are defined they does that mean they can't be changed?

Universidad

FrankRizzo said:

Could 68 also end up being 71 for DB 'Normal Pension Age' or once the scheme rules are defined they does that mean they can't be changed?

Normal Pension Age for Alpha is "your state pension age". 

You should not expect the rules to change in a retrospective way, but the way the rules are written means that your Normal Pension Age will change if the State Pension Age changes, and that will apply to all accrued benefits in Alpha. 

This is an inherent risk in Alpha (and most public sector schemes).

EPA still keeps you 1, 2, or 3 years ahead of the game though, so it's not for nothing.

Gemok

If it were me I'd prioritise in the follow order based on my strong personal desire to retire before 68+

0) Pay off bad debit credit cards, high interest car payments etc
1) Emergency fund.
2a) Big purchases like car, holiday, pay for insurance yearly instead of monthly trying to avoid ending back at 0
2b)  Cash LISA for house purchase if your not in London but keep an eye on the budget to see if the max house price is increased. Rent prices only seem to go up and if you can avoid paying it in retirement I would.
3) SIPP or additional voluntary contributions (AVC) contributions.
4) S&S ISA for things you may want to buy in your 30s, 40s & 50s

Do 0 first then 1 and then others together a bit of each depending on your needs. do a bit of budget maths i.e I want to be able to buy a car worth X in Y years so I need to save Z a month. 

Personally I think added pension and epa are expensive in the Alpha scheme particularly for someone in their 20s with the amount of compounding a portfolio could gain. The main scheme is fantastic because most of itis  paid for by the Gov.

FrankRizzo

Gemok said:

Personally I think added pension and epa are expensive in the Alpha scheme particularly for someone in their 20s with the amount of compounding a portfolio could gain. The main scheme is fantastic because most of itis  paid for by the Gov.

Sorry is stupid question but what do you mean by it being expensive?

Dazed_and_C0nfused

FrankRizzo said:

Gemok said:

Personally I think added pension and epa are expensive in the Alpha scheme particularly for someone in their 20s with the amount of compounding a portfolio could gain. The main scheme is fantastic because most of itis  paid for by the Gov.

Sorry is stupid question but what do you mean by it being expensive?

Basically it costs a lot for the benefit gained.

Universidad

FrankRizzo said:

Sorry is stupid question but what do you mean by it being expensive?

The main Alpha pension that you're paying into costs you something like 5.5% of your salary. For that, you get 2.32% of your salary added to your annual pension, every year. This is an amazing deal, and really adds up.

However, on top of that 5.5% that you're putting in, your employer is also putting in something like 27% of your salary, in order to buy that pension for you.

Now on some level, it doesn't matter to you what it costs your employer as long as they're willing to pay it, because the benefit is defined. What you care about is how much it costs you, and what it buys you.

However, when buying Added Pension, your employer doesn't contribute any extra. 

So you have to shoulder the whole cost yourself - which means that the cost of buying that pension is considerably higher than the main Alpha pension. Something approximating six times the cost to you, for the same amount of pension.

In that sense your main Alpha pension is a bargain, but Added Pension is (comparatively) expensive.

It's an open question as to whether it's worth it.

When you start to pay tax at or above 40% rate, it will very probably be worth making some additional pension contributions, but whether that should be via added pension or some kind of Defined Contribution scheme will be the question then.

However, please note that this is in no way a criticism of the Alpha scheme. It is quite possibly the best open scheme in the UK.

Emmia

Universidad said:

FrankRizzo said:

Sorry is stupid question but what do you mean by it being expensive?

The main Alpha pension that you're paying into costs you something like 5.5% of your salary. For that, you get 2.32% of your salary added to your annual pension, every year. This is an amazing deal, and really adds up.

However, on top of that 5.5% that you're putting in, your employer is also putting in something like 27% of your salary, in order to buy that pension for you.

Now on some level, it doesn't matter to you what it costs your employer as long as they're willing to pay it, because the benefit is defined. What you care about is how much it costs you, and what it buys you.

However, when buying Added Pension, your employer doesn't contribute any extra. 

So you have to shoulder the whole cost yourself - which means that the cost of buying that pension is considerably higher than the main Alpha pension. Something approximating six times the cost to you, for the same amount of pension.

In that sense your main Alpha pension is a bargain, but Added Pension is (comparatively) expensive.

It's an open question as to whether it's worth it.

When you start to pay tax at or above 40% rate, it will very probably be worth making some additional pension contributions, but whether that should be via added pension or some kind of Defined Contribution scheme will be the question then.

However, please note that this is in no way a criticism of the Alpha scheme. It is quite possibly the best open scheme in the UK.

I agree with this, plus at 23 the OP potentially has a long career in the CS ahead, with pension contributions from both themselves and their employer (they're not rapidly approaching retirement and trying to boost the pension) and the extra contributions are only accessible at retirement - 45+ years, that's a very long time to wait for the payout.

I'd put the money the OP is thinking of putting into the extra contributions, into something else that's more readily accessible e.g. for a property purchase, so a LISA, or a S&S ISA (these are long term savings) if they don't want to be tied to LISA restrictions.

hugheskevi

FrankRizzo said:

Gemok said:

Personally I think added pension and epa are expensive in the Alpha scheme particularly for someone in their 20s with the amount of compounding a portfolio could gain. The main scheme is fantastic because most of itis  paid for by the Gov.

Sorry is stupid question but what do you mean by it being expensive?

The discount rate used to calculate the cost of purchasing Added Pension is CPI+1.7%. You can think of this as the rate of return after costs.

For a younger person in particular, you would expect the rate of return on DC over the longer term to exceed CPI+1.7%. Not very long ago the discount rate was CPI+3%, the loss of that 1.3% compounded over many years makes a huge difference to the cost.

Universidad said:

FrankRizzo said:

Sorry is stupid question but what do you mean by it being expensive?

The main Alpha pension that you're paying into costs you something like 5.5% of your salary. For that, you get 2.32% of your salary added to your annual pension, every year. This is an amazing deal, and really adds up.

However, on top of that 5.5% that you're putting in, your employer is also putting in something like 27% of your salary, in order to buy that pension for you.

Average member contribution is 5.6%, with individuals paying 4.6%, 5.45%, 7.35% or 8.05% depending on their pensionable earnings.

The average Exchequer contribution is 23.6% of pensionable earnings (with a lower amount for younger members and a higher amount for older members) - the employer contribution rate contains past service deficit payments, which are not related to the cost of future accrual.