Civil Service Pension - EPA

cloud21

Hi, I've been reading several threads about the changes to EPA and early retirement and still at a loss as to what to do next.

I have been in the CS Alpha scheme for 4 years, contributing to -3 EPA for the last 3 years. I understand the EPA is no longer as beneficial since the changes made in the last year.

I'm 34 and have recently increased my salary to £55k. Is it worth me now pulling out of EPA and investing the money elsewhere i.e a SIPP or a LISA or sticking with it for now?

With my salary increase, I can afford to up my saving rates should I save somewhere different to EPA, however my plan would be to only increase this by a small amount, and use the remainder to pay off my mortagage ASAP. I would then contribute heavily towards pension wherever is best in 15-20 years time to allow myself to retire as early as possible. 

Appreciate any thoughts on where to save and my plan.

Universidad

The recent(ish) change in the SCAPE discount rate does mean that the returns on buying extra DB pension, either as Added Pension or by EPA now look very uncompetitive compared to what you can expect to get by investing the money sensibly yourself.

But whether that means you should stop paying EPA is a personal, subjective, and still very open question. 

The EPA you are buying is more defined benefit pension, which gives you certainty about retirement income, in a way that investments do not (regardless of whether they are held in an ISA or behind a pension tax wrapper).

Someone quite risk averse like myself might value knowing that they can retire at, for example, age 60 come what may, and regardless of what happens in the stock markets. DB pension gives you that (with admittedly some risk around changes in early retirement factors, or normal pension age). 

Even though I am quite risk averse, when I started to reach the point where I knew I would have enough income in retirement, I switched to thinking about improving the value of new investments, rather than their security. The discount rate change sealed the deal for me.

I was paying for both EPA and Added Pension until recently. I had planned to continue paying for both until the discount rate change. I do continue to pay for EPA. Even though it's not "good value" it's an indulgence for me in terms of knowing that I'm still increasing my overall security a bit, and it helps that it's a discrete amount so I don't have to worry about "how much" extra pension to pay. 

For a while after dropping the Added Pension payments I paid into AVCs. These are organised through the civil service, but are not part of alpha, and are managed by legal and general currently. It's just a DC pension pot. One advantage of these for higher rate tax payers is that it's easy to get the right tax relief via PAYE, but it's not a huge problem either way.  

cloud21

Universidad said:

The recent(ish) change in the SCAPE discount rate does mean that the returns on buying extra DB pension, either as Added Pension or by EPA now look very uncompetitive compared to what you can expect to get by investing the money sensibly yourself.

But whether that means you should stop paying EPA is a personal, subjective, and still very open question. 

The EPA you are buying is more defined benefit pension, which gives you certainty about retirement income, in a way that investments do not (regardless of whether they are held in an ISA or behind a pension tax wrapper).

Someone quite risk averse like myself might value knowing that they can retire at, for example, age 60 come what may, and regardless of what happens in the stock markets. DB pension gives you that (with admittedly some risk around changes in early retirement factors, or normal pension age). 

Even though I am quite risk averse, when I started to reach the point where I knew I would have enough income in retirement, I switched to thinking about improving the value of new investments, rather than their security. The discount rate change sealed the deal for me.

I was paying for both EPA and Added Pension until recently. I had planned to continue paying for both until the discount rate change. I do continue to pay for EPA. Even though it's not "good value" it's an indulgence for me in terms of knowing that I'm still increasing my overall security a bit, and it helps that it's a discrete amount so I don't have to worry about "how much" extra pension to pay. 

For a while after dropping the Added Pension payments I paid into AVCs. These are organised through the civil service, but are not part of alpha, and are managed by legal and general currently. It's just a DC pension pot. One advantage of these for higher rate tax payers is that it's easy to get the right tax relief via PAYE, but it's not a huge problem either way.  

Are you referring to CS Added Pension? As far as I was aware we can only pick that or EPA, not both together.

Interesting you're still keeping EPA, so you would you say it's still similar value to say a SIPP or LISA, just less risk as it's inflation adjusted?

I'd have to do more research on AVCs, don't know much about them.

hugheskevi

cloud21 said:

Universidad said:

The recent(ish) change in the SCAPE discount rate does mean that the returns on buying extra DB pension, either as Added Pension or by EPA now look very uncompetitive compared to what you can expect to get by investing the money sensibly yourself.

But whether that means you should stop paying EPA is a personal, subjective, and still very open question. 

The EPA you are buying is more defined benefit pension, which gives you certainty about retirement income, in a way that investments do not (regardless of whether they are held in an ISA or behind a pension tax wrapper).

Someone quite risk averse like myself might value knowing that they can retire at, for example, age 60 come what may, and regardless of what happens in the stock markets. DB pension gives you that (with admittedly some risk around changes in early retirement factors, or normal pension age). 

Even though I am quite risk averse, when I started to reach the point where I knew I would have enough income in retirement, I switched to thinking about improving the value of new investments, rather than their security. The discount rate change sealed the deal for me.

I was paying for both EPA and Added Pension until recently. I had planned to continue paying for both until the discount rate change. I do continue to pay for EPA. Even though it's not "good value" it's an indulgence for me in terms of knowing that I'm still increasing my overall security a bit, and it helps that it's a discrete amount so I don't have to worry about "how much" extra pension to pay. 

For a while after dropping the Added Pension payments I paid into AVCs. These are organised through the civil service, but are not part of alpha, and are managed by legal and general currently. It's just a DC pension pot. One advantage of these for higher rate tax payers is that it's easy to get the right tax relief via PAYE, but it's not a huge problem either way.  

Are you referring to CS Added Pension? As far as I was aware we can only pick that or EPA, not both together.

Interesting you're still keeping EPA, so you would you say it's still similar value to say a SIPP or LISA, just less risk as it's inflation adjusted?

I'd have to do more research on AVCs, don't know much about them.

Members can purchase both Added Pension and EPA at the same time if they wish.

EPA has a lower expected value than a SIPP, with the return after charges effectively being the scheme discount rate, which is CPI+1.7%. You would expect a higher return than that from a SIPP over a medium to long term. You also don't really get a tax free lump sum from Added Pension or EPA, as the commutation rate is so poor. Whereas with a SIPP you would get 25% tax free.

But EPA and Added Pension do not carry any longevity or inflation risk (beyond change to State Pension age), so arguably the risk-adjusted return brings the expected returns from EPA/Added Pension and a SIPP closer together.

There is nothing special or very different about AVCs, they are just a DC pension, like a SIPP but with less choice and very low charges.

I'm 34 and have recently increased my salary to £55k. Is it worth me now pulling out of EPA and investing the money elsewhere i.e a SIPP or a LISA or sticking with it for now?

With my salary increase, I can afford to up my saving rates should I save somewhere different to EPA, however my plan would be to only increase this by a small amount, and use the remainder to pay off my mortagage ASAP. I would then contribute heavily towards pension wherever is best in 15-20 years time to allow myself to retire as early as possible. 

I'd make sure you put all higher-rate tax income into a pension in all future years, wherever you choose to save. 

michaels

We don't know what equities will return long term or what an annuity might cost in future but in almost every past period you would have had a higher annual income using as SIPP then an annuity than you would get from putting the same amount into CS Alpha - especially as there is effectively no TFLS for alpha DB.

Paying down a mortgage brings security but the tax treatment of pensions means it may well be better financially to retain the mortgage and put the overpayment funds into a sipp and use the TFLS to pay off the mortgage when it becomes available.

cloud21

michaels said:

We don't know what equities will return long term or what an annuity might cost in future but in almost every past period you would have had a higher annual income using as SIPP then an annuity than you would get from putting the same amount into CS Alpha - especially as there is effectively no TFLS for alpha DB.

Paying down a mortgage brings security but the tax treatment of pensions means it may well be better financially to retain the mortgage and put the overpayment funds into a sipp and use the TFLS to pay off the mortgage when it becomes available.

Even since the Liz Truss episode? I still have a mortgage at 1.5% which ends in 2 years so I feel the likely increase after that could beat the tax savings from pension investment.

From the other posts, I'm definitely leaning towards contributing to a SIPP, either in addition to EPA or pull out of that and go all in for a SIPP. Althought higher risk, do the benefits most likely outweigh the interest and £1k bonus from a LISA?

QrizB

cloud21 said:

Even since the Liz Truss episode? I still have a mortgage at 1.5% which ends in 2 years so I feel the likely increase after that could beat the tax savings from pension investment.

Imagine you have £100k outstanding on your mortgage and £100k in the bank. You could pay off the mortgage early, job done.

Or you could remortgage. Today, per moneyfacts, a hypothetical mortgage-seeker can get a 10-year fix at 4.59%. Borrowing £100k over 10 years at that rate will cost £25k (ie. repayments total £125k, £1041 a month x 120 payments).

You could then put the £100k into a SIPP. It'll immediately turn into £125k after tax relief, so you've already broken even in nominal terms. If your SIPP returns the same 4.59% pa for ten years, it'll be worth almost £157k at the end. You'll get £39k tax-free and £118k you can draw down at your marginal rate. Assuming you can spread it over enough years to only pay 20% income tax, that's another £94k, for a total of £133k. A net gain to you of £8k.

The 20-year annualised return on the FTSE100 is closer to 7%, and the FTSE100 is often said to have underperformed other indices.

HouseMartin567

Are you able to purchase both Added Pension and AVCs at the same time? At the moment I just buy Added Pension but I’m wondering whether to split between the two options.

Universidad

HouseMartin567 said:

Are you able to purchase both Added Pension and AVCs at the same time? At the moment I just buy Added Pension but I’m wondering whether to split between the two options.

Yes, I was purchasing both AVCs and EPA earlier this year. I stopped the AVCs when I had to drop my hours for family reasons.

Worth noting that Added Pension and EPA as monthly payments have to be in place from April-April and you can't opt in or out mid-year. AVCs you can take and leave as you like.

michaels

Avcs are effectively just a sipp so might be worth shopping around for providers rather than just using the cs scheme

HouseMartin567

michaels said:

Avcs are effectively just a sipp so might be worth shopping around for providers rather than just using the cs scheme

Being purely lazy (and possibly not in alignment with a money saving website), I’m attracted to AVCs because, as far as I understand, it will be deducted by PAYE and I won’t need to fill out s self assessment to claim back the extra tax (I’m in the 40% tax bracket). However, I will look into the options available.