CS Alpha - early reduction factors

Yorkie1

Thanks everyone for the clarification 

@Wobble101 Yes, I'll be taking Classic at 60, and then Alpha at 65 (EPA / reduced non-EPA). 

Wobble101

I did a back of the envelope calculation to see what this would mean for me last night. The total to pay would be about £65k and it would take 19 years to break even. Obviously both those numbers come down if I get tax relief but that will be limited by when I decide to take the pension - I’d intended to delay this for a couple of years but that would mean I do it at a point when I’m paying little tax. 

But the main reason I’m not that tempted to do it is the fact that if I die before my husband he only gets half of this. As a previous poster mentioned, probably better to do something else with that amount of money. 

hushpuppy

https://forums.moneysavingexpert.com/discussion/comment/81709386#Comment_81709386

If I am reading this correctly there is an option to buy back the reduction, does this work on the Alpha? If so if I retired at 60 and my NRA is 67 any idea what the buyout figure might be please?

hugheskevi

https://forums.moneysavingexpert.com/discussion/comment/81921549#Comment_81921549

Yes, it applies to alpha. The factors are published online.

It would be 6.47 years of the annual alpha payment. Handy if you have higher rate tax in final year of work but will be a basic rate taxpayer afterwards.

michaels

https://forums.moneysavingexpert.com/discussion/comment/81921767#Comment_81921767

What are the annual allowance implications? Thanks

hugheskevi

https://forums.moneysavingexpert.com/discussion/comment/81922153#Comment_81922153

None at all.

The Annual Allowance measures Pension Input, which is based on the change in (real) annual pension entitlement over the course of a year. This has no regard as to whether the pension is payable without reduction from age 60, 65 or 70.

Buying out the actuarial reduction does not change the annual pension entitlement, rather, it changes the age from which the pension is payable without reduction, to which the Annual Allowance is blind.

Hence, you could make a pension contribution of hundreds of thousands if you were retiring very early with a big pension, and it would not breach the Annual Allowance.

adviceisgood

Hi,

Just seen this post and reading with interest, if you were to use the early retirement age of 60 and the 6.47 alpha factor for NRA 67 if the unreduced pension was 8k per year at NRA.

If a higher rate tax payer on 102k per year would this mean a one off payment of 51760 for the unreduced payment of 8k per year index linked for 7 years totalling 56000 (less income tax).

You would then claim the higher rate tax back from hmrc of 20698.

Resulting in effective cost of 31062 to you for 7 years of 8k index linked pension?

Doesn't seem too bad a deal if you are a basic rate tax payer in retirement if my figures are correct or am i missing something?.

hugheskevi

Yep, that's right, albeit a very specific scenario.

In the right circumstances though it can be an excellent option. However, buy-out is incredibly rare other than in paid exit situations - not least as individuals have to pay the full cost of buy-out up front, then claim tax relief back from HMRC and not that many will have that sort of cash lying around.

adviceisgood

Thank you hugheskevi some great information and help you provide to readers on these matters.

michaels

https://forums.moneysavingexpert.com/discussion/comment/81922314#Comment_81922314

But also need to have been paying tax in the final year- so likely to be more effective later in the tax year than for say a May retiree?

I still can't get my head round the AA bit - do the earned income and or the 60k plus roll over allowances apply at all?