Accruing DB - other supporting options?

early30sDB

Hi,

My partner and I are in our mid 30s. As of April, we'll have jointly accrued just under £30k DB pa, all linked to SPA (Alpha). Going forward we'll be jointly accruing just over £3k pa, all else equal.

Our minimum retirement target is the NMPA, though we'd like to achieve FI earlier to create more options.

Looking forward, our main plans were to:

1. Continue building up benefits in Alpha. I think if we work to/draw down at e.g. 57 with today's early retirement factors, this currently comes to ~£65k pa joint from 57 in today's money (assuming no reduced hours, Alpha remains in place etc). Option of course to draw this down later, depending on the tax/AVC/state pension position.
2. Start contributing AVCs to get taxable pay below the higher rate and Child Benefit threshold (investing ~£30k pa jointly)
3. Save excess into S&S ISAs - unlikely this would be much more than £6k pa each for the foreseeable with nursery fees/not penny-pinching too much, but shouldn't be a stretch either
4. Not overpay mortgage given we're on a low fix for 1 more year. Already hovering at 60% LTV, outside London
5. Not do anything with our LISA/premium bond accounts (which remain open but negligible amounts in both)

Given the time horizon and uncertainty, rather than get too precise with figures, I wondered if we are generally missing any opportunities today, that could allow us to be more bold later? e.g.

• Will we end up over pensioned? My main concern is that with healthy DB/AVC positions, we're exposed to SPA and NPA increases, and missing opportunities to retire earlier than NPA. I don't think we have any npa55 protection (though I think the CSPS website still gives early retirement factors for 55?). Is there ever any rationale to be less aggressive with AVC contributions despite being in the higher rate today?
• Staying in Alpha rather than Partnership: we're ultimately happy with the certainty that DB gives us (and suspect it won't be available forever), but I do recognise there's been and probably continues to be opportunity cost with the investment time horizon. Our thinking was that starting AVCs alongside would introduce some diversity. We haven't really explored buying further DB.
• I don't know if there's anything we should actively consider e.g. re: TFLS (assuming it still exists) or mortgage, with the aim of smoothing out income

Really interested in thoughts! Thanks

Albermarle

It is unusual for people of your age to give much thought to pensions. Many never think about them at all, even when they are 60 !

So compared to many new posters we get on here you are far ahead of the game.

Normally posters are encouraged by the forum to think more about the future and save up more, but very unusually in your case my feeling is the opposite. 

I wondered if we are generally missing any opportunities today,

Maybe spend more today - YOLO

leosayer

You have said very little about your provision outside of pensions - there is a whole load of life to get through before then.

What existing non-pension provision do you have?

What's your plan for paying off the mortgage?

What major expenses are you likely to have in the future?

What happens if one of you can't work?

Yorkie1

https://forums.moneysavingexpert.com/discussion/6657678/accruing-db-other-supporting-options

If you're in your early 30s now, your state pension age is likely to be 68 (unless changed between now and then). It may be that the Alpha minimum pension age will increase in line with that, so that you can then only claim Alpha from 58 (i.e. 10 years before SPA).

This document sets out the current early reduction factors if you take your Alpha early. Tab x-405 is for SPA age of 68. https://gadfactorguidancehub.co.uk/guidance/csps_gb/factor-workbooks/

I am buying EPA -2 (you would have the option of -3 available to you at your ages), as well as AVCs. My plan is to take Classic at 60 (I'm old enough for that to be a significant part of my pension), and then Alpha at 65 (the pension accrued during the years when I made EPA contributions will be unreduced, and the amount relating to the years when I didn't pay EPA will be multiplied by 0.897 to account for being taken two years early). My AVCs will be used to fill the gap between 60 and 65. I also have a S&S ISA, which I can take from tax free.

@hugheskevi is very familiar with the CS pension schemes and may well have better comments than I do!

hugheskevi

Will we end up over pensioned? My main concern is that with healthy DB/AVC positions, we're exposed to SPA and NPA increases, and missing opportunities to retire earlier than NPA. I don't think we have any npa55 protection (though I think the CSPS website still gives early retirement factors for 55?). Is there ever any rationale to be less aggressive with AVC contributions despite being in the higher rate today?

Assuming you joined the Civil Service before 4 November 2021 (but not before 31st March 2012), you will have a protected minimum pension age of 55. Details are set out on this page. It would be very unusual, albeit theoretically possible, to revoke a protected minimum pension, so you can be confident you can access alpha at that age. However, the actuarial reduction factors may change several times over the years until you reach the protected age.

Continue building up benefits in Alpha. I think if we work to/draw down at e.g. 57 with today's early retirement factors, this currently comes to ~£65k pa joint from 57 in today's money (assuming no reduced hours, Alpha remains in place etc). Option of course to draw this down later, depending on the tax/AVC/state pension position.

With frozen tax thresholds, and taking into account State Pension, at least one of you and probably both, are going to be higher rate taxpayers in retirment.

The game is to extract as much income as possible tax-free or taxed at the basic rate. DC contributions are ideal for that.

I think you need to focus your planning more around each individual rather than jointly to optimise the tax position,

Start contributing AVCs to get taxable pay below the higher rate and Child Benefit threshold (investing ~£30k pa jointly)

Very sensible, remember you can change AVC contributions at any time, so you may want to get into the habit of varying March's contribution to ensure you avoid all higher rate, as by that time you will know everything about salary increases, bonuses, etc.

Not do anything with our LISA/premium bond accounts (which remain open but negligible amounts in both)

It may well be optimal to use both the LISA allowances for an investment LISA if you will not be able to extract DC contributions without paying higher rate tax on them. In that case, the uplift from DC contributions is only 17%, whereas the uplift from LISA contributiions is 25%.

I rather doubt Premium Bonds have a sensible role in your financial planning, so worth reviewing those.

Will we end up over pensioned? My main concern is that with healthy DB/AVC positions, we're exposed to SPA and NPA increases, and missing opportunities to retire earlier than NPA…Is there ever any rationale to be less aggressive with AVC contributions despite being in the higher rate today?

Yes, plenty of justification to be less aggressive, if you can't benefit from the pension but you would benefit from an ISA then ISA is far more valuable even if it is less financially efficient.

However, much better is to position the pension as being useful so that you can take advantage of the tax efficiency. The obvious way is a mortgage, and using pension to pay down mortgage.

Staying in Alpha rather than Partnership: we're ultimately happy with the certainty that DB gives us (and suspect it won't be available forever), but I do recognise there's been and probably continues to be opportunity cost with the investment time horizon. Our thinking was that starting AVCs alongside would introduce some diversity. We haven't really explored buying further DB.

That would have been something you should already have done if you were minded to, as the benefits are greatest at the younger ages. If you were going to do it at all, you would do it now, you would not switch to Partnership in the future given the comparative values at different ages.

Not overpay mortgage given we're on a low fix for 1 more year. Already hovering at 60% LTV, outside London

It is important to factor in future moves and aspirations. Once in a pension, money is useless for housing except in the very long-term it can be used to reduce the mortgage - that is a very powerful tool, but it makes it essential to carefully manage the period before age 55.

What you have is a challenge between liquidity and efficiency. The most efficient route will be getting all higher rate tax into a pension and maximising LISAs, but that is also the most illiquid route.

So you need to establish your needs and preferences to inform what you need in terms of liquidity, and then that determines how much you will allocate to efficiency. Most people have far more liquidity than they need, at the cost of efficiency, in my experience.

I don't know if there's anything we should actively consider e.g. re: TFLS (assuming it still exists) or mortgage, with the aim of smoothing out income

Taking alpha at 55 pretty much commits you to not taking a tax free lump sum, unless you want to ravage the value of the pension. But, that does make AVCs much more attractive, as not only do you get the TFLS but you can also use UFPLS or drawdown to ensure you optimise your tax position in each year via both of you drawing an income up to higher rate tax threshold. That should give a healthy amount of spare cash, which will probably go into an ISA.

Something you might want to think about is that you essentially have a number of years you need to work for until you get to FI. It might be best to do all those years as fast as possible and retire as early as possible. Or you might prefer to spread them out via part-time work. Or you might prefer to move them around via unpaid leave to do things very early in life, for example to travel. Unpaid leave can be very useful in managing higher rate tax liability if you spread unpaid leave across two tax years.

You should also scrutinise your employee benefits offer, especially for salary sacrifice opportunities. Whilst pension is not eligible for salary sacrifice, things like bicycles and electric cars might be. Buying and selling of leave might be attractive depending on exactly how it is calculated and your personal circumstances. Every employer offers different things.