Buy Added Alpha Pension or ISA/Stocks and Shares

Roamy_127

I'm 52. Civil Servant.
Currently accrued 12 Yrs in Classic Pension and 3 years in Alpha (affected by Remedy/McLeod).
I'm hoping to retire at 60 but not sure it's affordable.
I can manage to save extra £800-£1000/month to enable me to do this. My question is what option should I choose? 
Buy added pension (this confuses me),  or ISA (saving £90k by time i retire if I keep up payments) or Stocks and Shares ISA. Or mixture of these. Its a minefield!
Can anyone advise please.

El_Torro

Buying additional pension will most likely give you the best return. Depends what the stock markets do of course. While you aren't supposed to access your DB pension until state pension age you can take it early, with a penalty. 

It also depends on what you want to have: A bigger guaranteed monthly income or a lump sum in your ISA. 

Another option would be to pay into a SIPP. This will be more tax efficient than paying into an ISA. The return in the DB pension will probably still be better though.

Dazed_and_C0nfused

El_Torro said:

Buying additional pension will most likely give you the best return. Depends what the stock markets do of course. While you aren't supposed to access your DB pension until state pension age you can take it early, with a penalty. 

It also depends on what you want to have: A bigger guaranteed monthly income or a lump sum in your ISA. 

Another option would be to pay into a SIPP. This will be more tax efficient than paying into an ISA. The return in the DB pension will probably still be better though.

It really isn't a penalty, it's a reduction to reflect the fact that someone has asked for their pension to be paid for a longer period.

@Roamy_127 do you mean adding extra Alpha pension or starting a personal pension/SIPP alongside the Alpha pension?

Universidad

A lot might depend on when you actually decide you can afford to retire. 

7 years is not a long investment window for either an ISA or a SIPP, so you'd probably want to be relatively conservative about how it was invested, if retiring at 60. That, in turn, would mean you'd expect comparatively low returns. 

However, Alpha will be quite expensive to purchase as Added Pension, and on top of that whatever you're buying will be actuarially reduced by ~30% if you take it at 60. 

Try running the numbers through the Added Pension calculator on the Civil Service website, and see what you can buy for 800 per month, then compare it to how much you'd expect to be able to save over that time. I wouldn't go too far into the world of calculating expected gains on investments, I'd just work on the basis you'd be able to keep up with inflation in the way that Alpha would.

Assuming a birthday of 01/01/1972, the calculator above suggests to me that a year of buying pension at 800 per month would buy just 600 pounds of added pension per year. If you took that at 60, with current ERFs that would work out at 600 x 0.7 = 420 per year. 

That's just 35 pounds more each month, but of course you do get it for the rest of your life. If you live to 84, then you'll get back just over 10,000 in real terms... for the 9600 you put in that year. 

That's not a great return, but it is pretty secure, and guranteed for life. If you live to 100, you're quids in. 

The cost of Added Pension is likely to go up each year as well, I think. (It could reduce if the SCAPE discount rate changes favourably, but the general direction of travel is the older you are, the more it costs). 

Just in case you're really confused: Added Pension is specifically the way you can buy extra "defined benefits" Alpha pension, which is a guaranteed income for life, like an annuity. But you also have the option through the civil service of making "Additional Voluntary Contributions", which is a Defined Contribution "pot" of money, and currently managed by L&G. You could also do that through a private company if you like. Going through the Civil Service AVCs is easier in some ways, in that it comes directly out of your paycheck, so it has that going for it, but that doesn't mean it's better. When comparing DC pension to ISA, you can usually make roughly the same investments, the ISA and Pension themselves are just tax wrappers. With an ISA you pay no taxes on withdrawals, no matter how well your investments do - but in theory, that money was taxed before it went in. With a pension you're investing untaxed money, so it does get taxed on the way out. (You tend to get 25% of the money out tax free, but pay income tax on the rest). The pension therefore has a small tax advantage over the ISA if you pay the same rate of tax in retirement as you did while earning. The gap is wider if you you're in a lower tax bracket in retirement.

Yorkie1

In addition to Added pension and SIPP, you could also put money into AVCs in the Civil Service, which builds up funds like a SIPP but I find is easier to administer (it comes out of your salary before tax and - I think? - NI).

Added pension is basically buying an increased amount of pension income in Alpha, which you take at the same time as the rest of your Alpha pension. There is one window per year for doing this - often in about January. You can't change it for the rest of that financial year, I think.

If you take it before your Normal Pension Age (which is the same as State Pension Age - currently 67 for you but may change by a month or few) then it is reduced by a certain amount to account for longer payment. There are tables to say how much the reduction is (for example, taking it 2 years early = multiply the alpha amount by 0.892).

S&S ISAs, SIPPs and AVCs are all invested in the stock market. With a SIPP and S&S ISA, you make a choice about what to invest in. There is a default fund in the AVCs, which basically reduces the volatility (risk of big swings in value) by changing what it's invested in, depending on when you would reach state pension age. But you could change what fund the AVC uses.

If you pay into a SIPP (i.e., outside the CS schemes) or into AVCs (i.e., within the CS - can do it from your salary, starting at any point during the year and the amount can be varied), then you essentially you don't pay tax on the amount. The mechanics vary between the SIPP and AVCs and also depending on whether you are a higher rate tax payer (or above), or basic rate.

With an ISA, you can invest in the same funds as with a SIPP or AVC in principle. But there's no tax relief on the amount you've paid in, so any payments you invest are from your income after it's been taxed.

At 60, you have a range of options. If you wanted and could afford to fully retire then, for example:

- Take Classic. It's a no-brainer as you're entitled to it then. You'd need to decide overall whether it's better for you, given your personal circumstances, to use the 7 years from McCloud (2015 -2022) as Classic or Alpha pension. You need to make that decision when you take your first bit of the pension. Remember that you get a lump sum of x3 annual pension with Classic

- Possibly use some of the AVCs as income, or spend some or all of the amount to buy an annuity (guaranteed income for a certain or indefinite period of time, either with payments increasing with inflation or not, and either just based on your life or also a spouse / civil partner). Ditto with SIPP. If taking it as income, you could either take 25% cash free immediately (and the rest of the pot would always be taxed), or take a series of withdrawals at whatever intervals, each of which comprises 25% taxed cash and 75% cash

- Take Alpha, reduced as described above, or delay taking Alpha until some future date when the reduction would be lesser. You don't need to decide this at 60.

- Spend money from an ISA (either cash, or selling stocks and shares, or taking dividends/ income from retained shares). Any money you take from an ISA will not be subject to tax

hugheskevi

Roamy_127 said:

I'm 52. Civil Servant.
Currently accrued 12 Yrs in Classic Pension and 3 years in Alpha (affected by Remedy/McLeod)

You have been part-time, or had periods out of service, given classic closed to new members in 2002? 

I can manage to save extra £800-£1000/month to enable me to do this. My question is what option should I choose? 

The first thing to do is to determine your objective. To do this, you need to consider all of your post employment income and assets. 

You will have a Civil Service pension and a lump sum from whenever you choose to commence it, and a State Pension. If you retire significantly before State Pension age you will probably want to smooth your income, ie, have other sources of income prior to State Pension age. The Civil Service pension lump sum will help with that, but may not be enough on its own.

Enhancing Civil Service pension is great if you want a higher permanent future income. AVCs or SIPP are great if you want to pull out more funds early in retirement.

Yorkie1 said:

In addition to Added pension and SIPP, you could also put money into AVCs in the Civil Service, which builds up funds like a SIPP but I find is easier to administer (it comes out of your salary before tax and - I think? - NI).

AVCs are simply net pay, not salary sacrifice, so NI is still payable on contributions.

Roamy_127

Dazed_and_C0nfused said:

El_Torro said:

Buying additional pension will most likely give you the best return. Depends what the stock markets do of course. While you aren't supposed to access your DB pension until state pension age you can take it early, with a penalty. 

It also depends on what you want to have: A bigger guaranteed monthly income or a lump sum in your ISA. 

Another option would be to pay into a SIPP. This will be more tax efficient than paying into an ISA. The return in the DB pension will probably still be better though.

It really isn't a penalty, it's a reduction to reflect the fact that someone has asked for their pension to be paid for a longer period.

@Roamy_127 do you mean adding extra Alpha pension or starting a personal pension/SIPP alongside the Alpha pension?

@Dazed_and_C0nfused i was meaning adding to Alpha pension. Would seperate/SIPP be more beneficial?

GunJack

Or, might a swap to Partnership work for the op, with his extra money going into that, or is that not salsac?

hugheskevi

GunJack said:

Or, might a swap to Partnership work for the op, with his extra money going into that, or is that not salsac?

Partnership is relief-at-source, not salary sacrifice. It would also probably not be a good idea for a 52 year old to forego alpha for Partnership.