SAUL Pension Scheme - APC vs SIPP

purplecrocodile

I’m hoping someone can help me to sense-check my thinking about buying extra pension via an APC from my employer’s pension scheme (and this might be helpful to other people considering the same thing further down the line).

I am considering buying an APC but debating whether I would be better off paying the equivalent amount into my SIPP instead. Here are the key facts:

• 40 years old, no dependents. Basic rate tax-payer.
• In the SAUL defined benefit pension scheme.
• The additional pension is payable from age 65.
• If I pay an APC of £120.25 per month for a fixed period of 10 years, this gives me additional pension of £1750 per year + a lump sum of £5250. Salary sacrifice applies to the payments.
• However, the additional pension won’t increase between the date I stop making payments and the date I start drawing my pension. After that it increases annually in line with the CPI, up to a max. of 2.5%.

The point in bold is my concern. When the APC contract ends I will have another 15 years to retirement age. Am I right to think that this is relatively poor value considering how inflation will eat away at the value of that £1750/year and £5250 lump sum over that period?

And that this type of APC arrangement only makes financial sense if you are taking up a contract that runs until retirement age? (This is not an option for me as the max. term is 10 years)

I think from my rough calculations that I am likely to come out ahead by putting £100/month (+20% tax relief) into my SIPP instead, acknowledging the risks involved in this type of investment. The way I see it, if I buy an APC when I am 57 I'd have the option to draw down from my SIPP at that point to compensate for the reduced income (if I need to and if the APC represents a better return at that point).

But is there anything I am missing?

Dazed_and_C0nfused

purplecrocodile said:

I’m hoping someone can help me to sense-check my thinking about buying extra pension via an APC from my employer’s pension scheme (and this might be helpful to other people considering the same thing further down the line).

I am considering buying an APC but debating whether I would be better off paying the equivalent amount into my SIPP instead. Here are the key facts:

• 40 years old, no dependents. Basic rate tax-payer.
• In the SAUL defined benefit pension scheme.
• The additional pension is payable from age 65.
• If I pay an APC of £120.25 per month for a fixed period of 10 years, this gives me additional pension of £1750 per year + a lump sum of £5250. Salary sacrifice applies to the payments.
• However, the additional pension won’t increase between the date I stop making payments and the date I start drawing my pension. After that it increases annually in line with the CPI, up to a max. of 2.5%.

The point in bold is my concern. When the APC contract ends I will have another 15 years to retirement age. Am I right to think that this is relatively poor value considering how inflation will eat away at the value of that £1750/year and £5250 lump sum over that period?

And that this type of APC arrangement only makes financial sense if you are taking up a contract that runs until retirement age? (This is not an option for me as the max. term is 10 years)

I think from my rough calculations that I am likely to come out ahead by putting £100/month (+20% tax relief) into my SIPP instead, acknowledging the risks involved in this type of investment. The way I see it, if I buy an APC when I am 57 I'd have the option to draw down from my SIPP at that point to compensate for the reduced income (if I need to and if the APC represents a better return at that point).

But is there anything I am missing?

Are your rough calculations based on your SIPP having £120 or £125 added each month?

purplecrocodile

£120 added each month.

I've done various comparisons of how the additional pension value would erode over 15 years based on different average inflation rates, against fairly conservative rates of return (3-4%) for the SIPP.

Dazed_and_C0nfused

purplecrocodile said:

£120 added each month.

I've done various comparisons of how the additional pension value would erode over 15 years based on different average inflation rates, against fairly conservative rates of return (3-4%) for the SIPP.

You need to re work your rough calculations then as it will be £125.

Your contribution has 25% added so £100 becomes £125 in the pension.  £25 is 20% of the gross contribution.

purplecrocodile

Thank you for the correction. That tilts the balance even further towards the SIPP giving a better return then.

WindfallWendy

This is the exact issue I was contemplating which led me to a SIPP. I couldn't get my head around how paying £120/month for ten years would lead to just getting that money back, basically, over ten years (I have low expectations of how long I'll live after retiring!!!). I'd rather invest into a pot and see it grow.