Civil Service pension: alpha v. partnership & voluntary topup

chiefnoodle

DE_612183 said:

On that basis I think I made the right choice - I'm 59 and started with the CS this year after 20 odd years of contracting.

I've got a Final Salary Pension that pays about £9k per year now + about 3 stakeholder pensions that have built up pots, but a re now only being contributed to for a small amount.

I estimate that at the end of 3 years I'll have built up a pension payout of about £320 per month ( minimum ) for an outlay of about £8,500 - for a stakeholder pension I'd need about 70k ( even if 20% comes as tax relief ).

That's why for me I see it as a no brainer - but I'm happy to see if my figures work ( my salary is £60k ).

OK so you fall in the £56,001 - £150,000 band, so Alpha costs you 7.35% of your salary. Because of that, the comparison is slightly less favourable, as if you'd put 7.35% into partnership that would be boosted. However for a 59-year old, it does look like your decision is still definitely right. Here is the plot for your band: 



Interestingly, the additional cost of the pension for you due to being in the higher band is £1,140 (7.35% - 5.45% = 1.9% ; 1.9% * £60k = £1,140). Which is a shame, since you are only £4k into the band.

If I were you, I'd consider reducing your work hours slightly (by a fifteenth). If you are now 37h/week, consider moving to 34.5h/week. Your salary will go down pro-rata to £55,945, bringing you within the 5.45% band. While your gross salary will drop by £4k, your net salary will drop by less than £3k (if I've understood the calculations correctly). So you effectively get those hours off at a discounted rate.

hugheskevi

I'm pretty impressed with the modelling, and the speed at which you have come to accurate conclusions - it usually takes people a lot longer, if they get there at all.

There are lots of things that can be done to refine this (eg using exact State Pension ages rather than 68 throughout) but they won't meaningfully change the conclusions.

chiefnoodle said:

If I were you, I'd consider reducing your work hours slightly (by a fifteenth). If you are now 37h/week, consider moving to 34.5h/week. Your salary will go down pro-rata to £55,945, bringing you within the 5.45% band. While your gross salary will drop by £4k, your net salary will drop by less than £3k (if I've understood the calculations correctly). So you effectively get those hours off at a discounted rate.

The problem there is that the £56,000 band is frozen and it is a cliff-edge rate, ie, £1 over the threshold and you pay the higher rate on the whole of the contribution not just the amount over the threshold.

So with every pay increase you would need to reduce hours.

DE_612183

chiefnoodle said:

DE_612183 said:

On that basis I think I made the right choice - I'm 59 and started with the CS this year after 20 odd years of contracting.

I've got a Final Salary Pension that pays about £9k per year now + about 3 stakeholder pensions that have built up pots, but a re now only being contributed to for a small amount.

I estimate that at the end of 3 years I'll have built up a pension payout of about £320 per month ( minimum ) for an outlay of about £8,500 - for a stakeholder pension I'd need about 70k ( even if 20% comes as tax relief ).

That's why for me I see it as a no brainer - but I'm happy to see if my figures work ( my salary is £60k ).

OK so you fall in the £56,001 - £150,000 band, so Alpha costs you 7.35% of your salary. Because of that, the comparison is slightly less favourable, as if you'd put 7.35% into partnership that would be boosted. However for a 59-year old, it does look like your decision is still definitely right. Here is the plot for your band: 



Interestingly, the additional cost of the pension for you due to being in the higher band is £1,140 (7.35% - 5.45% = 1.9% ; 1.9% * £60k = £1,140). Which is a shame, since you are only £4k into the band.

If I were you, I'd consider reducing your work hours slightly (by a fifteenth). If you are now 37h/week, consider moving to 34.5h/week. Your salary will go down pro-rata to £55,945, bringing you within the 5.45% band. While your gross salary will drop by £4k, your net salary will drop by less than £3k (if I've understood the calculations correctly). So you effectively get those hours off at a discounted rate.

Thanks for that - very insightful - how do arrive at the "alpha costs you 7.35%" of your salary? From my calculations I only pay 5.45% ?

DE_612183

Actually - I've just worked it out - this is my first year so perhaps my annualised pension is less than 56k as it's not a full year - next year it will be contribution 7.35%! Interesting!!!

DE_612183

What is a pain is that the CSP site does not allow you to use the retirement modeller until you have a benefits statement - which won't come out until about August this year 

DE_612183

@chiefnoodle - of course the reduction in hours / pay will work - until the pay rise this year, then I'd either have to reduce hours again or ask to go back up to 37.5!

r6mile

Alpha contribution rates are worked out every month, by multiplying your monthly pensionable gross salary by 12.
Is some of your salary non-pensionable? (ie a non-pensionable allowance, for example)

If your contribution rate is 5.45% then I suspect your pensionable annual salary is below £56,000 (4666.67*12)

DE_612183

yep, sorry I just realised my pensionable pay is £52k - I just automatically add in the final salary pension I get paid to work out an overall gross - so @ £52k - I'm short of the line for 7.35% ( until the pay rise! ).

r6mile

Unfortunately (or fortunately?), unless you get promoted I think it's unlikely that the next pay rise will take you to 56k; that would be a 7.8% pay rise which hasn't been seen in the Civil Service for a while!

chiefnoodle

hugheskevi said:

I'm pretty impressed with the modelling, and the speed at which you have come to accurate conclusions - it usually takes people a lot longer, if they get there at all.

There are lots of things that can be done to refine this (eg using exact State Pension ages rather than 68 throughout) but they won't meaningfully change the conclusions.

Thank you! That is quite a compliment from the MSE forum pension expert. I tried listening to their podcast, but it was one-sided to the point of being an advert, and I quickly realised I wasn't going to get any thoughtful critical discussion there. Then I spent a while going through the CV pension website. It would have been much quicker if they could have included some plots like the one I made on their "Alpha or Partnership" page to give some quick "rule of thumb" intuition about how the two compare. And yes, plenty of scope to improve my model, but as you say I decided to only include factors which would change the outcome.