Early retirement options for civil servant - EPA, SIPP, ISA??

WagathaChristie

Hi all, 

I’d really appreciate some pensions advice please. 

For context, I’m in my early thirties. I work in the Civil Service and pay into the Alpha pension (and have done so since I joined in 2018). I can claim the full Alpha pension at state pension age, which is currently 68 for me, but might increase. 

As well as paying into the Alpha pension, I have a Lifetime ISA. I’m intending to use this for retirement - both to tide me over until state pension age (as I’d like to retire before 68) and to use during my retirement. 

I’ve been looking into whether I could retire before 68 (current state pension age) - e.g. if I could retire at 64 or 65. One way in which I can do this is to pay into an EPA (Effective Pension Age), which is a part of the Civil Service pension scheme. To pay EPA, I can choose to opt in or out each tax year, providing I’m still working in the Civil Service. The idea is that I pay monthly EPA payments, and if I continue making those payments throughout my career, I have the option of retiring either 1, 2 or 3 years before state pension age on my full CS pension. 

I started making EPA payments at the start of this financial year for the option of retiring 3 years before state pension age. I decided to pay EPA payments because they’re flexible and I can opt in and out each year, and they allow me to retire before state pension with my full CS pension. 

Also, my understanding is that paying EPA payments reduces the tax I pay. I could be wrong, but it looks to be the case, from checking my pay slips so far this year. I’m a basic rate taxpayer now, but I may start paying higher rate tax in the next few years. Therefore, I’m wondering if it makes sense to continue EPA payments from both an early retirement and tax efficiency perspective? 

I am still wondering though if paying into an EPA is the best option for me. Are there other better options for me to retire on a good pension before state pension age - especially as I have a long career ahead of me and am not sure if I’ll spend my whole career in the CS? E.g. should I use a SIPP instead? As mentioned, I already have a Lifetime ISA, which I’ll also use for retirement, and I also pay into an ISA. 

Thanks! 

hugheskevi

From the post, you appear to be unduly fixated on the alpha Normal Pension age of 68 (current State Pension age). That is just the age at which the alpha pension is paid without reduction. You can commence it earlier with actuarial reduction and later with actuarial enhancement. Therefore you should consider all options and what works best for your plans.

Buying extra pension is expensive. A few years ago the discount rate (which you can think of as the expected rate of return) was CPI+3%. It was recently reduced to CPI+1.7%. That difference of 1.3 percentage points compounded over 30-odd years has a huge impact. A rate of return of CPI+1.7% for a young individual would be very pessimistic compared to investing in equities.

EPA contributions are a pension contribution, and benefit from tax relief in the same way as any other pension contribution. However, unlike a SIPP or AVC they do not really benefit from a 25% tax free lump sum at retirement, due to the use of a prohibitive commutation rate of 12:1 (unless taking the lump sum at a late age, and maybe being a higher rate taxpayer). So you are purchasing an expensive pension with limited tax benefits as you are a basic rate taxpayer. Whilst there is no investment risk, that is in return for locking in a poor rate of return, and you are also exposed to the risk of State Pension age increase and no benefits for a survivor when you die or if you suffer ill-health.

You should consider saving into a SSISA whilst a basic rate taxpayer, and then when a higher rate taxpayer increasing pension contributions to benefit from higher rate relief, using the SSISA to effectively move funds from the ISA into the pension, via your salary.

You can effectively turn DC pension into alpha pension at retirement by using the DC pension before commencing the alpha pension, and benefitting from an actuarial enhancement (or less of an actuarial reduction).

WagathaChristie

Hi @hugheskevi, thanks for your post. 

I wouldn’t say at all that I’m fixated on the current SPA/alpha normal pension age of 68. I’d like to retire with a decent pension as soon as I can - ideally in my early to mid sixties. I’ve mentioned the current SPA/alpha normal pension age in my OP because I’d like to retire before then with a full alpha pension, if possible, rather than a reduced one.  

I agree I should consider all options, hence my post here, as I’ve only really been aware of the EPA as a way of helping me achieve my aim of retiring early-ish with a good pension. 

Thank you for your advice about the expense of buying extra pension, which I wasn’t aware of. 

In response to your suggestion about investing in a S&S ISA, I already invest in a stocks and shares Lifetime ISA (which I am planning to use for retirement) and another S&S ISA. 

Can I ask you please what you mean by: ‘when a higher rate taxpayer, increasing pension contributions to benefit from higher rate relief’? As far as I am aware, I’m not able to increase my pension contributions as an Alpha pension scheme member, as I pay a fixed rate of contributions. 

Can I also ask what you mean by this please? ‘You can effectively turn DC pension into alpha pension at retirement by using the DC pension before commencing the alpha pension, and benefitting from an actuarial enhancement (or less of an actuarial reduction).’

By this, do you mean that, say, if I retired before state pension age, I could use my Lifetime ISA and/or my other stocks and shares ISA to tide me over until state pension age, and then take my Alpha pension at state pension age? 

It sounds like the general advice you’re suggesting here is for me to stop paying into the EPA and to pay that into my Lifetime ISA or ISA instead. Are there any other options you think I should also consider? As I mentioned earlier, I’m not aware of all the options out there, to help me make an informed choice. 

Thank you.  

michaels

Agree with all hughek says above but Alpha does have a 37.5 survivors benefit.  Also because of the rate of return for added pension now being low it might make more sense to buy more alpha when older.

Added and EPA have effectively the same cost for the same benefit - there are some rules on max added alpha pension that means if you want to go down that route it is best buying some of both.

Also, taking alpha early does not result in a loss of benefit, for a normal life expectancy the lower annual amount balances out the extra years of payment so there is no specific need to 'fill the gap' until default alpha pension age via a different sort of pension or isa (unless it is before the minimum retirement age when ISA is the only option).  The same changes mentioned above that make buying added pension or EPA worse value have had the effect of reducing the 'fair' reduction applied when taking alpha before state pension age.

Personally I have a mix of Alpha and DC but will likely take the alpha as soon as I can as it locks in a baseline index linked provision.

Phoenix72

Not sure if you have misunderstood how EPA works when you say you can opt in and out but still take your full CS Pension 1,2 or 3 years early.

You don't say when you started buying EPA but with EPA you would have to start paying it continously  from 2018 to get the full pension at your EPA age. With EPA you effectively have 2 pensions - for any year you did not pay EPA this will be payable at NPA. For the years you did then this will be payable at NPA minus 1,2 or 3.

Personally I would be looking at either a SIPP for added flexibility.

hugheskevi

WagathaChristie said:

I wouldn’t say at all that I’m fixated on the current SPA/alpha normal pension age of 68. I’d like to retire with a decent pension as soon as I can - ideally in my early to mid sixties. I’ve mentioned the current SPA/alpha normal pension age in my OP because I’d like to retire before then with a full alpha pension, if possible, rather than a reduced one.  

This is a common position, but it centres around the emotional response of loss avoidance rather than an objective assessment. People become attached to the concept of a 'full alpha pension' yet that doesn't exist - why focus on what you get at normal pension compared to what you would receive at, say, 67 or 69? Wouldn't 69 also be a 'full alpha pension' and hence accepting the lower value paid at age 68 be unattractive?

WagathaChristie said:

Can I ask you please what you mean by: ‘when a higher rate taxpayer, increasing pension contributions to benefit from higher rate relief’? As far as I am aware, I’m not able to increase my pension contributions as an Alpha pension scheme member, as I pay a fixed rate of contributions. 

Added Pension, EPA, AVC, SIPP, personal pension, Stakeholder pension would all be ways to benefit from higher rate relief.

WagathaChristie said:

Can I also ask what you mean by this please? ‘You can effectively turn DC pension into alpha pension at retirement by using the DC pension before commencing the alpha pension, and benefitting from an actuarial enhancement (or less of an actuarial reduction).’

By this, do you mean that, say, if I retired before state pension age, I could use my Lifetime ISA and/or my other stocks and shares ISA to tide me over until state pension age, and then take my Alpha pension at state pension age?  

For example, say you decided to save additionally into a SIPP and were due an alpha pension at age 58 of £40,000 p/a.

Due to having saved into a SIPP, at age 68 you have a pension pot of £80,000 in the SIPP. So you could decide to use the SIPP to fund age 68 and 69, taking alpha from age 70. That would mean the alpha pension would have an actuarial uplift of around 10% and so be worth £45,000. Doing this you would have effectively converted the DC pot into DB pension over a 2-year period (rather than use both DB and DC throughout retirement).

WagathaChristie said:

It sounds like the general advice you’re suggesting here is for me to stop paying into the EPA and to pay that into my Lifetime ISA or ISA instead. Are there any other options you think I should also consider? As I mentioned earlier, I’m not aware of all the options out there, to help me make an informed choice. 

EPA and Added Pension have become very expensive. That doesn't mean they are bad though, what they provide is very good, but is it worth the cost.

You can basically choose to have guarantees both prior to and during retirement (EPA or Added Pension), no guarantees (simple DC), or a combination of no guarantee prior to retirement but guarantee during retirement (DC followed by effective conversion to DB by delaying commencement of DB).

What is right is an individual decision. Lifetime ISA and SSISA to be eventually moved into pension would be the expected highest value route.

I think you have mentioned all the most likely investment choices that will probably be suitable.

Universidad

So another perspective - but not one that disagrees with any of the answers so far, just a different way of looking at the same facts.

I am the kind of person who wants to know what they will be living on in retirement, so I'm very attracted to DB schemes. I also want to retire early, and have been working towards this, focussing on my DB pensions. Until recently, I didn't really have any DC investments.

However some time on this board has led me to the conclusion that the best approach for me is to ensure that I have at least the minimum pension that I can hope to live on as a DB pension - because having the confidence a DB scheme provides is really important to me.

But from then on, to put any extra money into the place where there is the most value. For me value starts with knowing that I have enough to live on in retirement. But after that point, value is about maximising likely returns.

And the other posters in this thread are essentially answering this part of the value question, which is why "more Alpha" isn't necessarily their answer.

Alpha is one of the best value-for-money schemes out there. However, as stated, the value diminishes when buying extra amounts of it because you have to assume the whole cost of the pension.

So I'm no longer paying for Added Pension. Extra contributions go towards Additional Voluntary Contributions (AVCs), which is a DC pot associated with the civil service. I'm paying in there because it's still covered by PAYE and as a higher rate tax payer it's more convenient than having to claim back additional tax from HMRC. However there isn't much more benefit to it than this (some schemes do have additional benefits for AVCs).

All that said, I am still paying for EPA. I fully recognise that this is not an approach likely to maximise financial gain. But it still has a lot of value to me: it's a neat, affordable figure that makes it easier to reach the amount of safeguarded benefits I want in order to retire before I'm 60 - so I've got no regrets.

Another side of the value proposition is that while a DC pot (or other forms of savings) give you less certainty than a DB pension, they do give you more flexibility. You can use them to delay the point at which you take your DB pension. You can use them to bridge the gap until you reach the state pension age. You can use them to pay off large, unexpected costs more easily than with a consistent annual pension amount. 

So "value" has a lot of components, and I hadn't been seeing many of them beyond "certainty" until I spent some time here. Certainty is still the most important thing to me. But I'm now a lot more confident about the whole picture.

pterri

Universidad said:

So another perspective - but not one that disagrees with any of the answers so far, just a different way of looking at the same facts.

I am the kind of person who wants to know what they will be living on in retirement, so I'm very attracted to DB schemes. I also want to retire early, and have been working towards this, focussing on my DB pensions. Until recently, I didn't really have any DC investments.

However some time on this board has led me to the conclusion that the best approach for me is to ensure that I have at least the minimum pension that I can hope to live on as a DB pension - because having the confidence a DB scheme provides is really important to me.

But from then on, to put any extra money into the place where there is the most value. For me value starts with knowing that I have enough to live on in retirement. But after that point, value is about maximising likely returns.

And the other posters in this thread are essentially answering this part of the value question, which is why "more Alpha" isn't necessarily their answer.

Alpha is one of the best value-for-money schemes out there. However, as stated, the value diminishes when buying extra amounts of it because you have to assume the whole cost of the pension.

So I'm no longer paying for Added Pension. Extra contributions go towards Additional Voluntary Contributions (AVCs), which is a DC pot associated with the civil service. I'm paying in there because it's still covered by PAYE and as a higher rate tax payer it's more convenient than having to claim back additional tax from HMRC. However there isn't much more benefit to it than this (some schemes do have additional benefits for AVCs).

All that said, I am still paying for EPA. I fully recognise that this is not an approach likely to maximise financial gain. But it still has a lot of value to me: it's a neat, affordable figure that makes it easier to reach the amount of safeguarded benefits I want in order to retire before I'm 60 - so I've got no regrets.

Another side of the value proposition is that while a DC pot (or other forms of savings) give you less certainty than a DB pension, they do give you more flexibility. You can use them to delay the point at which you take your DB pension. You can use them to bridge the gap until you reach the state pension age. You can use them to pay off large, unexpected costs more easily than with a consistent annual pension amount. 

So "value" has a lot of components, and I hadn't been seeing many of them beyond "certainty" until I spent some time here. Certainty is still the most important thing to me. But I'm now a lot more confident about the whole picture.

Agree, I’ve got a DB which will be worth circa £40k when I plan to retire at 57 (I won’t claim it until 60, it will increase by RPI until then). I’ve got a SIPP and isa to bridge the gap from 57 and 60 and the DB has an associated AVC fund that I can access once I start the DB. Like you say, an excellent base in the DB and a separate pot that I can use flexibly. Not sure whether to turn the AVC fund into a SIPP or take it as a TFLS and feed it into an ISA. I’ve got a little while to decide 

Security is everything and I feel very grateful that I lucked out with a job that has am excellent DB, days are numbered on those