Civil service Alpha pension- EPA and SIPP

lodegrand

Hi all

 

I was wondering if someone could help me understand the Effective Pension Age (EPA) in my Civil Service Alpha pension scheme and also the use of SIPP for further tax relief. I read some previous threads already which are very helpful and the below is my understanding. 

 

Age: 58

Pensionable income: circa £55,000 p/a 

Taxable income:  circa £52,000 p/a (after 5.45% contribution to Alpha)

Scheme: Alpha; I started working in the civil service 2.5 years ago.

Other income: £5,000 saving interests + £5,000 dividends from UK stocks (all in higher tax rates now)

 

As I understand it, I can buy an Effective Pension Age (EPA) of 'state pension age -2 years' i.e. retire at 65 instead of 67. According to the online calculator, if I choose the -2 year option starting Apr 2025, I will build up an EPA portion of 2.32% (£1,276) for 2 years when I am 65 and 66, costing me 4% of my pensionable pay from Apr 2025 to Mar 2026 (£2,200).

 

Am I correct that:

1. Buying EPA will reduce my taxable income (£52,000 - £2,200 = £49,800) 
2. My other income however will still drive me to the higher tax rate band (but is there any benefit from tax by reducing my taxable income from work?)
3. For maximising the tax relief, I should use my savings to buy SIPP (so that I can claim tax reliefs as well as reducing my saving interest income) 
4. Buying EPA will not use up my Annual Allowance
5. The Annual Allowance used by Alpha contribution is calculated by 16 x 2.32% x £55,000 = £20,416 (ignoring the annual CPI adjustment at the moment)
6. The maximum amount I can put into SIPP is £55,000 - £20,416 = £34,584 (ie. I pay £27,667 (80%) and claim £6,917 (20%)) 
7. I can claim additional tax relief through self assessment

Overall, is it worth buying EPA? Thank you very much.

hugheskevi

Taxable income:  circa £52,000 p/a (after 5.45% contribution to Alpha)

Scheme: Alpha; I started working in the civil service 2.5 years ago.

Other income: £5,000 saving interests + £5,000 dividends from UK stocks (all in higher tax rates now)

Remember to include in-year and annual bonus in taxable income, if applicable.

1. My other income however will still drive me to the higher tax rate band (but is there any benefit from tax by reducing my taxable income from work?)

You could contribute an amount to pension such that you are a basic rate taxpayer and get £1,000 savings allowance.

1. The maximum amount I can put into SIPP is £55,000 - £20,416 = £34,584 (ie. I pay £27,667 (80%) and claim £6,917 (20%)) 

Incorrect.

The gross amount you can benefit from tax relief on is £55,000 less your standard Civil Service scheme contribution in £, less any EPA. The net amount is the gross amount multiplied by 0.8.

1. I can claim additional tax relief through self assessment

Or by an in-year Tax Coding adjustment.

Overall, is it worth buying EPA? Thank you very much.

It is certainly worth putting at least some and potentially a lot into pension from what you have said, Do you want more guaranteed pension? Or do you prefer the flexibility of DC? Remember you effectively do not get a tax-free lump sum with EPA but you do with DC.

lodegrand

Hi, thanks for the quick response which is very helpful.

On this:

  You could contribute an amount to pension such that you are a basic rate taxpayer and get £1,000 savings allowance.

I am working out the maximum amount I can contribute to SIPP. I prefer SIPP than added pension for flexibility. 

Incorrect.

The gross amount you can benefit from tax relief on is £55,000 less your standard Civil Service scheme contribution in £, less any EPA. The net amount is the gross amount multiplied by 0.8.

I read from previous threads that EPA does not used up the Annual Allowance, doesn’t it? If it does, how much should I less it? Again 2.32%x£54,000x16?

Most grateful for further advice. 

hugheskevi

I read from previous threads that EPA does not used up the Annual Allowance, doesn’t it?

EPA has no Annual Allowance impact, as the annual amount of pension purchased doesn't change, just the age from which it is payable.

lodegrand

hugheskevi said:

I read from previous threads that EPA does not used up the Annual Allowance, doesn’t it?

EPA has no Annual Allowance impact, as the annual amount of pension purchased doesn't change, just the age from which it is payable.

Thanks, then why my calculations for the amount I can put into SIPP is incorrect? 

hugheskevi

lodegrand said:

hugheskevi said:

I read from previous threads that EPA does not used up the Annual Allowance, doesn’t it?

EPA has no Annual Allowance impact, as the annual amount of pension purchased doesn't change, just the age from which it is payable.

Thanks, then why my calculations for the amount I can put into SIPP is incorrect? 

You are confusing the Annual Allowance limit, which uses pension inputs, with the limit for tax relief, which uses earnings and your individual pension contribution. You are limited by earnings eligible for tax relief.

lodegrand

Thanks again, could you shed some light on how to calculate the maximum amount that I can put into SIPP in case I contribute normal Alpha and buy EPA? 

My understanding is that it should be my annual earnings £55,000 (as it is below the cap of £60k) less the pension inputs. 

hugheskevi

lodegrand said:

Thanks again, could you shed some light on how to calculate the maximum amount that I can put into SIPP in case I contribute normal Alpha and buy EPA? 

My understanding is that it should be my annual earnings £55,000 (as it is below the cap of £60k) less the pension inputs. 

The gross amount you can benefit from tax relief on is £55,000 less your standard Civil Service scheme contribution in £, less any EPA. The net amount is the gross amount multiplied by 0.8.

So that is £55K less about £3k less about £2k=£50K. 

So gross cont of around £50K, net cont of £40K. 

If you went that far you would breach the Annual Allowance of £60K, but for a couple of years would probably have unused Annual Allowance to carry forward.