Early retirement plans on alpha civil service pension

jasperskates

Hi everyone,

I am 32 and it's worried me that I don't really understand pensions and how to prepare for retirement, so I am taking control and hoping to get some advice from wiser MSEs. Thanks in advance!

I pay into the Civil Service alpha scheme on a salary of £58,989. A calculator online suggested that, based on payments starting from this year, I would receive an annual pension of £49,284 if I retire at 68. I have actually been paying into this pension for two years already, but I've had a couple of salary increases (£39,000, £53,000, £56,000) so not sure how to work out accrued pension. I thought it might be simpler to start from now and anything else is a bonus.



If I've understood the calculator results correctly, this would be a very decent retirement amount for me - but it seems a bit too good to be true. Does the calculation look right? I also understand that drawing it early will mean a lower amount per year as I claim it for longer.

It's got me thinking about what else I can do to make retirement more financially secure, and whether I can prepare for earlier retirement. For example, I don't know how much the normal pension age or minimum retirement age might change in the next 35 years.

The alpha website suggests I can buy Added Pension, contribute to an Additional Voluntary Contributions Scheme (CSAVCS) and/or buy an EPA portion to claim my pension earlier than the normal pension age. I've seen other posters suggest that people could have their own savings or private pension as well, and then draw on this at early retirement to tide them over to normal pension age, when they can claim the max annual payment.

I'm not sure how to work out which is best for me. I'm also conscious that I am a higher rate tax payer, and I'm not currently doing anything savvy to potentially save there.

If helpful context, I studied for most of my twenties so my defined contribution pots from previous jobs are pretty small (less than £3,500 total). I'm also not sure what to do with these little pots, but I guess that's a whole other question.

I have a mortgage due to end when I am 64 (joint with partner), and we already have plans in place to overpay. I currently save £1,200 per month.

Does anybody have any advice for next steps? I've been trying to read all the website etc but really struggling to wrap my head around it. Thanks!!

pterri

Don’t know much about the civil service scheme but the “too good to be true” thing? I’m on a DB scheme and yep, it’s so incredibly valuable. It does compensate for the possible difference to a private sector wage as their pension will not be as valuable (probably). For mine, the final estimate is based on my latest salary so previous pay doesn’t factor. 

wiser heads than me will chip in.

Dazed_and_C0nfused

jasperskates said:

Hi everyone,

I am 32 and it's worried me that I don't really understand pensions and how to prepare for retirement, so I am taking control and hoping to get some advice from wiser MSEs. Thanks in advance!

I pay into the Civil Service alpha scheme on a salary of £58,989. A calculator online suggested that, based on payments starting from this year, I would receive an annual pension of £49,284 if I retire at 68. I have actually been paying into this pension for two years already, but I've had a couple of salary increases (£39,000, £53,000, £56,000) so not sure how to work out accrued pension. I thought it might be simpler to start from now and anything else is a bonus.



If I've understood the calculator results correctly, this would be a very decent retirement amount for me - but it seems a bit too good to be true. Does the calculation look right? I also understand that drawing it early will mean a lower amount per year as I claim it for longer.

It's also got me thinking about what else I can do to make retirement more financially secure, and whether I can prepare for earlier retirement. For example, I don't know how much the normal pension age or minimum retirement age might change in the next 35 years.

The alpha website suggests I can buy Added Pension, contribute to an Additional Voluntary Contributions Scheme (CSAVCS) and/or buy an EPA portion of your alpha pension to claim my pension earlier than the normal pension age. I've seen other posters suggest that people could have their own savings or private pension as well, and then draw on this at early retirement to tide them over to normal pension age, when they can claim the max annual payment.

I'm not sure how to work out which is best for me. I'm also conscious that I am a higher rate tax payer, and I'm not currently doing anything savvy to potential save there.

If helpful context, I studied for most of my twenties so my defined contribution pots from previous jobs are pretty small (less than £3,500 total). I'm also not sure what to do with these little pots, but I guess that's a whole other question.

I have a mortgage due to end when I am 64 (joint with partner), and we already have plans in place to overpay. I currently save £1,200 per month.

Does anybody have any advice for next steps? I've been trying to read all the website etc but really struggling to wrap my head around it. Thanks!!

Your "salary" might be £58,989 but as Alpha pension contributions are made using the net pay method your taxable earnings will be £54,653.

So you have already avoided plenty of higher rate tax but could avoid a bit more with some additional contributions, whichever option you end up going for.

Alpha seems a very generous scheme so £49k doesn't seem that unrealistic.

On your current salary your contributions will be 7.35%, so £4,335/year.

In return you accrue a pension of £1,368.54 😀.

Another 35 years of that is just shy of £48k.  And thats before the inflation protection is applied.

TheSpectator

As has been said the Alpha scheme is pretty generous and is index linked. Your accrued pension up to 31 March 2024 will be shown on your Annual Benefit Statement on the MyCSP Portal.

Just remember that if state pension age increases your Alpha normal pension age will increase with it.

Your immediate goal should be to make contributions to get you under the higher rate threshold although you may want to wait and see what this months budget brings first. How you do that depends on your appetite for risk. You could make a separate SIPP provision, or add to your civil service pension via added pension or EPA.

hugheskevi

jasperskates said:

A calculator online suggested that, based on payments starting from this year, I would receive an annual pension of £49,284 if I retire at 68.

That looks a lot like salary x accrual rate x year to State Pension age, or £58,989 x 2.32% x 36 = £49,268

I have actually been paying into this pension for two years already, but I've had a couple of salary increases (£39,000, £53,000, £56,000) so not sure how to work out accrued pension.

Why can't you just use the figure on your Annual Benefit Statement, available in the Civil Service Pension Portal?

If I've understood the calculator results correctly, this would be a very decent retirement amount for me - but it seems a bit too good to be true. Does the calculation look right? I also understand that drawing it early will mean a lower amount per year as I claim it for longer.

It looks like a very decent retirement amount as you are comparing it to your salary today. You still have 36 years to State Pension age, and in that time the accrued alpha pension will increase in line with CPI. Hopefully your earnings will increase considerably more, so today the pension looks like 84% of your salary, but that will go down over the years as your earnings hopefully outpace CPI.

If you draw it early you both don't accrue pension for the years between when you take it and State Pension age, and also have an actuarial reduction. Those are on top of the decline relative to earnings described above.

You should play with a spreadsheet to compare various earnings growth assumptions against CPI assumptions, when you take DB pension, DC pension, State Pension, etc, to what you will have under different assumptions, and whether that is good or not. As a rule of thumb, you will be wanting between 50-67% of your final salary as pension income. Don't use calculators, alpha is easy to work out, and doing it yourself will give you much better insight to how it all works and can be planned/supplemented.

The alpha website suggests I can buy Added Pension, contribute to an Additional Voluntary Contributions Scheme (CSAVCS) and/or buy an EPA portion to claim my pension earlier than the normal pension age. I've seen other posters suggest that people could have their own savings or private pension as well, and then draw on this at early retirement to tide them over to normal pension age, when they can claim the max annual payment.

I'm not sure how to work out which is best for me. I'm also conscious that I am a higher rate tax payer, and I'm not currently doing anything savvy to potentially save there.

If helpful context, I studied for most of my twenties so my defined contribution pots from previous jobs are pretty small (less than £3,500 total). I'm also not sure what to do with these little pots, but I guess that's a whole other question.

I have a mortgage due to end when I am 64 (joint with partner), and we already have plans in place to overpay. I currently save £1,200 per month.

Does anybody have any advice for next steps? I've been trying to read all the website etc but really struggling to wrap my head around it. Thanks!!

As a minimum, putting income that would be subject to higher rate tax into a pension is likely to be very financially advantageous, certainly moreso than overpaying a mortgage. The cost of extra DB pension is high relative to what you can expect to receive from DC so that favours DC contributions over extra DB, but you may think the risk and guarantees involved make it attractive nonetheless. 

You could move the small legacy DC pots into a Civil Service AVC scheme, especially if you decide to make DC AVC additional contributions, or you could bring them into a personal pension if you decide to make personal pension contributions (or just bring them together even if you don't make additional contributions).

You can save extra amounts after putting higher rate income into a pension into a Stocks and Shares ISA, and later increase pension contributions as your earnings increase, drawing down the SSISA if necessary.

So based on the limited information available, I'd suggest considering something like:

• Putting £4,383 (gross) into the Civil Service AVC plan, and regularly reviewing this (eg each January so there is time to adjust contributions before year end) to ensure you put all higher rate tax income into the pension. In practice, it will probably be higher than this, as you may have bonus payments, taxable interest, etc, also subject to higher rate tax
• Considering transferring in past pension pots to the AVC, although check if any have a protected minimum pension age first as that could be very useful to retain.
• Consider not overpaying mortgage, or only doing so down to about 60% LTV so you will be eligible for all best deals
• Surplus savings can go into a Stocks and Shares ISA, whilst keeping a reasonable amount for emergencies, shorter-term expenditure plans, etc
• You might be well placed to take advantage of Stoozing (borrowing interest free and with no fees on credit cards), which you can either use in the traditional way of saving in ISAs, or to accelerate your wider financial plans such as increasing AVCs/SSISAs 
• Maybe open a LISA with a trivial deposit, just for the opportunity value, contributing higher rate income to a pension will be better value at the moment, but who knows how things might change
• Ensure Gift Aid charity contributions are reflected in your Tax Code

That is pretty simple but efficient savings strategy, but efficiency isn't everything, so it is just a starting point. The Reddit personal finance flowchart is quite useful to start with.

Yorkie1

The CS pension schem website has useful resources: https://www.civilservicepensionscheme.org.uk/knowledge-centre/resources/

It also runs webinars to explain some of the basic principles. And there's pensions awareness week too: https://www.civilservicepensionscheme.org.uk/knowledge-centre/resources/pension-awareness-week-2024/

There are also half-day sessions on planning for your retirement. Although obviously aimed at people older than you, there isn't a minimum age to attend, and you'll probably find them really helpful to get you started thinking about your plans.

jasperskates

Just wanted to say a huge thank you to everybody that has posted such thoughtful advice.

I have a few follow-up Qs but I’m going to digest the info and try and research what I can first to build my understanding. It’s so helpful to have some starting points! Thanks!! 

jasperskates

hugheskevi said:

So based on the limited information available, I'd suggest considering something like:

• Putting £4,383 (gross) into the Civil Service AVC plan, and regularly reviewing this (eg each January so there is time to adjust contributions before year end) to ensure you put all higher rate tax income into the pension. In practice, it will probably be higher than this, as you may have bonus payments, taxable interest, etc, also subject to higher rate tax

Thanks again! Please could I ask a few questions?  

1. Please can I check my understanding of the £4,383 figure? So that I can calculate in future years...
   My salary = £58,989 but I pay 7.35% into my DB pension before tax is applied
   My DB scheme payments = £4,335.69 (£58,989 x 0.0735)
   My taxable income =  £54,653.31 (£58,989 - £4,335.69)
   Higher tax threshold = £50,271
   So I am paying 40% tax on £4,382.31 (£54,653.31 - £50,271)
   Therefore I should pay £4,383 (rounded up to nearest pound)
   
   
2. I will start putting £366 into AVC each month, to make up the £4,383 per year (4383 / 12 = 365.25). I haven't been doing that so far for this financial year, so it is it worth increasing the payment amounts until April 2025? I can't afford to spread the full £4,383 over the next five months (£876.60), but I could pay in a bit more than £366 to save some of the tax.
   
   
3. I like the idea of putting the £4,383 in the Civil Service AVC plan, as it is easy to set up through my work. The provider is Legal & General. Should I be shopping around to find the best DC pension scheme or do you have to go with your employer's provider/are they all quite similar anyway? I'd like to just go with Civil Service AVC for simplicity but good to check I'm not missing anything here. Thank you so much!!
   
   Thanks so much to everybody that has helped, and anyone who can help me with these questions.  

hugheskevi

jasperskates said:

1. Please can I check my understanding of the £4,383 figure? So that I can calculate in future years...
   My salary = £58,989 but I pay 7.35% into my DB pension before tax is applied
   My DB scheme payments = £4,335.69 (£58,989 x 0.0735)
   My taxable income =  £54,653.31 (£58,989 - £4,335.69)
   Higher tax threshold = £50,271
   So I am paying 40% tax on £4,382.31 (£54,653.31 - £50,271)
   Therefore I should pay £4,383 (rounded up to nearest pound)

Yes, that is right, adding on any bonus received, as well as interest over £500 and any other taxable income you may have.

There isn't any particular benefit in getting it precisely accurate, there are no cliff edges to be concerned with unless you are going to be receiving £500+ of interest in which case you might want to contribute down to £1,000 below the higher rate threshold so that you can get £1,000 of interest tax-free.

jasperskates said
I will start putting £366 into AVC each month, to make up the £4,383 per year (4383 / 12 = 365.25). I haven't been doing that so far for this financial year, so it is it worth increasing the payment amounts until April 2025? I can't afford to spread the full £4,383 over the next five months (£876.60), but I could pay in a bit more than £366 to save some of the tax.

You will likely be able to take the money out of the AVC with a 25% tax free lump sum and paying basic rate tax on the remainder. You receive 40% relief on the money going into the AVC, so every £1 into the AVC costs you 60 pence and when drawn will be 85 pence (25% tax free, 75% taxed at 20%). 

You can therefore view the amount you put into the AVC as getting a 42% boost (85/60) compared to receiving the income subject to higher rate tax. That is a powerful incentive to put money into a pension. If not, and the money out will get taxed at higher rate, the incentive is weaker at 17% (70/60). There is also the risk that policy might change in the future - it is hard to see things getting more generous, and a lot easier to see them becoming less generous so there is a good case for making hay whilst the sun shines. The more of your higher rate liability you contribute this year, the more efficient your saving is. The flip side is, the less liquid your assets are.

Personally, I viewed the contribution incentives as being so strong that I made sure to contribute all my higher rate tax every year. That was initially a struggle in the early days when buying a house, car, etc, and I used 0% balance transfer, nil fee, credit cards to borrow costlessly to facilitate the pension contributions. That can still be done today.

jasperskates said:
I like the idea of putting the £4,383 in the Civil Service AVC plan, as it is easy to set up through my work. The provider is Legal & General. Should I be shopping around to find the best DC pension scheme or do you have to go with your employer's provider/are they all quite similar anyway? I'd like to just go with Civil Service AVC for simplicity but good to check I'm not missing anything here. Thank you so much!!

'Best' is very subjective and depends a lot on individual preferences. You are free to go with the employer pension or can choose any of a huge number of personal pension arrangements of many different types. They all ultimately do the same thing - invest your money, but the options will be different, the level of support you receive to make choices, the charges will vary, etc. They are all very different in those regards.

The Civil Service AVC is far more modern than most public sector AVCs, using the Legal and General Mastertrust which is also used by a large number of employers. The charges are very low. There is a choice of investments, but much lower than available in SIPPs where you can invest in just about anything. Unless you are keen to be very engaged in selecting and managing your investments, the AVC scheme is likely to meet your requirements at least as well as other pensions on offer.

Littletinks

Hello @jasperskates I’ve just read your thread with great interest, as a fellow CS. I’ve not seen that particular Alpha pension calculator that you showed above before. I was wondering if you might be able to copy a link to it please? Many thanks. 

jasperskates

Hi @Littletinks - sorry for the really late reply, I didn't see the notification. It was from here: https://civilservicepensioncalculator.co.uk/ - hope it helps. I first found it on a reddit thread so not sure of its legitimacy but found it easy to use.  

Also wanted to say a huge thanks to @hugheskevi - I really appreciate your advice! This really helped me understand it and I've set up AVCs based on your advice.