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Alpha Added pension with actuarial reduction - how to calculate

Hi, I am wondering how Alpha added pension is uplifted until it is taken early at say 60 (scheme age/SPA 67). I am not after exact figures but just the basic way of working it out.

Eg.

600 added pension per month from payroll (7200pa) in 2025-26 with MyCSP AP calculator giving 500.

Assuming CPI uplift is 2% every year between 2026 - 2030 inclusive, is 2% added to the 500 from 2026, then 2% is added each year thereafter until 2030 (so compounded) when it is taken 7 years early. The figure at that point in time is x.

Then assuming an annual 5% actuarial reduction, is it x minus an annual 5% for 7 years and the result is the added pension you get at 60?

Thanks.

Comments

  • hugheskevi
    hugheskevi Posts: 4,351 Forumite
    Part of the Furniture 1,000 Posts Photogenic Name Dropper
    edited 2 January pm31 7:04PM
    £600 added pension per month from payroll (£7,200pa) in 2025-26 with MyCSP AP calculator giving £500.
    To note that each year is independent of future years in relation to Added Pension purchases. So the £7,200 of contributions made in 2025/26 will purchase £500 of alpha Added Pension in 2025/26, but in future years the same contribution will purchase less each year (assuming you continue to contribute £7,200) as the factors are age-related and the older you are the more it costs to purchase Added Pension. You can see the effect of this by changing your date of birth in the calculator to make yourself one year older and see how much less Added Pension the same contribution would purchase in 2025/26.

    The actuarial factors are also reviewed from time to time (about every 3-5 years), and the cost may change as a result of that, becoming either cheaper or more expensive. The key thing that determines the change is any change to the discount rate. The discount rate is set based on expected future GDP growth, and is currently set at CPI+1.7%.
    Assuming CPI uplift is 2% every year between 2026 - 2030 inclusive, is 2% added to the 500 from 2026, then 2% is added each year thereafter until 2030 (so compounded) when it is taken 7 years early. 
    Yes, noting that the assumed 2% uplift in April 2026 would be applied in full to the £500 of Added Pension accrued in 2025/26.
    Then assuming an annual 5% actuarial reduction, is it x minus an annual 5% for 7 years and the result is the added pension you get at 60?
    The actuarial reduction is not the same rate for every year taken early, although it usually works out at about 4% reduction per year taken early under the current factors, which like Added Pension are reviewed from time to time and may improve or deteriorate.

    There is a a single factor applied to the accrued pension payable from Normal Pension age to calculate the actuarially reduced amount, which in the case of this example would be the reduction for taking alpha with a Normal Pension age of 67 a total of 7 years prior to Normal Pension age.

    The factors are published in this spreadsheet at sheet x-404 for this example, and the reduction would be 30%
  • Fab -many thanks.
  • michaels
    michaels Posts: 28,796 Forumite
    Part of the Furniture 10,000 Posts Photogenic Name Dropper
    The 2% (or whatever) annual increment is equal to CPI inflation so easier just to work in real terms, you are getting £500pa of current spending power value for your contribution.
    I think....
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