Sorry for being a Civil Servant but I would love some help

Howdo folks

Please can I ask for a bit of advice/confirmation re some ideas that have recently formed in my head.
Background: I am 55, over 32 years in Classic scheme, 4 years in Partnership scheme. My wife is nearly 54, has a DB scheme from an old job, payable at 60, a couple of years ago worth about £7k pa, most increased by RPI, some by 6.25% pa. She is already entitled to full SP, I will be when I am 58, both payable currently at 67.

Plan has been to retire at 60, Plan A was about 42 years in Classic, Plan B was Classic and Partnership, 25% tax free at 60 into a savings account, and the rest drawdown before SPA. In April due to caring responsibilities Plan C was invoked. Partial retirement, followed by about 5 years making my money up to still go at 60.

The main difference between Plan B and Plan C is the Classic lump sum and the extra disposable income from paying off the mortgage. Under Plan A and B they were both just a Brucie Bonus, in Plan C they are integral. Classic lump sum is safely tucked away for a year in a fixed rate account at 2.02%.

I am now ready for the "mortgage money". My approach is spend half save half. Spend half: first winter holiday and first one without the kids for 25 years already booked in Jan to celebrate silver wedding. I have a 123 current account paying 1.5% interest up to £20k. Already a few grand in there but happy for the balance to build a bit more if it does. I am very disciplined so I am happy that it won't burn a hole in my pocket; might think different if it was a joint account!!

For the save half part originally I was looking at regular savings accounts but now I have investigated not overly impressed. I was aware that effectively it is only the first month savings that gets full annual rate but now it looks like after a year the money has to be moved so the high interest rates are never compounded.

Thanks to a couple of things I have learned from this forum I am now thinking about extra contributions to my Partnership. Firstly the £5k extra tax free interest on savings for low earners and secondly the way of looking at tax relief on pension conts. Originally I thought of this as 20% on the way in but 20% tax to pay on the way out. But actually the real rate on the way in is 25%. For every £100 going in I will pay £80 so that is 25% extra. In my mind it's all about the denominator used in the calculation. But of the extra that goes in, when it comes out I will get 25% tax free as part of the lump sum and the rest taxed at 20% max. As my annual Classic is about £8.7k if PTA goes up by more than CPI more of it could be tax free. If PTA increase is less than CPI not so good. And because of the extra £5k tax free interest I don''t have to look at the tax position on whatever ends up in savings accounts.

My Partnership has always been low risk, currently invested in a fund aimed at people retiring between 2020 and 2025, but it has grown by about 14% in the 4 years so I am very happy with that.

Interested if anyone can spot major flaws in this revised thinking and if you are still reading sorry for length of post, I wanted to cover all relevant points.
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Comments

  • LHW99
    LHW99 Posts: 4,137
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    As a general idea, pension is usually better than savings accounts, provided you have enough accessible emergency funds elsewhere.
    I don't know the CS schemes, but would be thinking along the lines of:
    how does income stack up between retirement / SPA. Could the mortgage be paid off using TFLS's (more could be added to pension to cover)?

    Would you get a better rate than the 123 account by putting some away in a ficed 3 year / 5 year account? What would each of you be left with when one passes?
  • SonOf
    SonOf Posts: 2,631
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    The lower the investment risk you take, the greater the shortfall risk and inflation risk will be. Investment risk is not the only risk you need to consider.
  • cfw1994
    cfw1994 Posts: 1,860
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    LHW99 wrote: »
    As a general idea, pension is usually better than savings accounts, provided you have enough accessible emergency funds elsewhere.
    I don't know the CS schemes, but would be thinking along the lines of:
    how does income stack up between retirement / SPA. Could the mortgage be paid off using TFLS's (more could be added to pension to cover)?

    Would you get a better rate than the 123 account by putting some away in a ficed 3 year / 5 year account? What would each of you be left with when one passes?

    Even the best 5-year accounts look to be only 2% - just awful really!!
    Plan for tomorrow, enjoy today!
  • mark5
    mark5 Posts: 1,361
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    Wouldn’t the classic scheme have seen you contracted out of the state 2nd pension, so reduce your state pension?

    Sorry if I’m wrong on this one.
  • Thanks to all for the replies. With hindsight by trying to include all relevant info l have just complicated matters really. To answer a couple of the points Partnership is a Civil Service DC scheme and although I was contracted out from 1982 to 2015 by April 2023 I will have enough contracted in for full SP.

    In summary, we have about £16k pa in index linked DB pension, about £17.5k pa SP at 67, hopefully inflation proof, so we have a target of £90k to supplement the DB pensions between 60 and 67. Currently we have £28k savings and £24k in DC pot. Mine and employer conts will add another £18k to the DC pot by August 24 when I plan to retire fully.

    We have now paid off our mortgage so need to add another £20k in the next 5 years or so. For the reasons I mentioned I am now thinking of adding to my DC pot rather than my initial plan of regular savings accounts. I was just wary that I was missing something that would make the revised plan a silly thing to do.

    In the post above I think Sonof has hit the nail on the head regards the main issue I will have. Essentially I am hoping that interest on savings and investment return will match inflation. I think we could cope with a small loss on that front but if inflation outstripped returns by maybe 2% or 3% pa we might be in trouble. The solution, however unpalatable, would be for me to carry on working another year or two. This issue will be the same whatever option I take so I think I am happy with my decision to go for pension conts rather than regular savings.

    Thanks again for the help.
  • GunJack
    GunJack Posts: 11,669
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    edited 12 October 2019 at 12:11PM
    Increased pension contributions via salsac will also reduce your tax bill on the other income...just sayin' ;)


    Oh, and no need to apologise for being a CS, I was (and still am in my head) for 20 yrs :)
    ......Gettin' There, Wherever There is......

    I have a dodgy "i" key, so ignore spelling errors due to "i" issues, ...I blame Apple :D
  • mapleoak
    mapleoak Posts: 103 Forumite
    Hi German Keeper

    I was reading your post with interest - it’s my 38th anniversary today as a CS - all in Classic thus far due to tapering. Am contemplating partial retirement in 2 years - will have completed 40 years (more than enough working life and you never know what’s around the corner) and will be 58 and a half - so shouldn’t lose too much by going a little early but assume I can take my lump sum and pay a few things off have a nice holiday then decide where to put what’s left. Wife is also a CS but 5 years younger so suspect she won’t go too early as loss would be a lot greater for her. Nice to have options though. Hope all goes well for you.
    something missing
  • hugheskevi
    hugheskevi Posts: 3,784
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    Background: I am 55, over 32 years in Classic scheme, 4 years in Partnership scheme.
    What was the reason for choosing to switch from Classic to Partnership? For a 55 year old, it would be expected that the Defined Benefit scheme would be better value than Partnership (as Partnership contribution rates are capped at age 46).

    You will be getting at most 17.75% employer contribution into your Partnership pension (are you contributing at least 3% already to get the full employer match?)

    It may be that Partnership is better than Classic if you expect your salary to go up by less than inflation (as a deferred classic award will increase by CPI, which could even be higher than an extra year of accrual in classic but at the same or only slightly increased salary), but have you fully considered this?
    and secondly the way of looking at tax relief on pension conts. Originally I thought of this as 20% on the way in but 20% tax to pay on the way out. But actually the real rate on the way in is 25%. For every £100 going in I will pay £80 so that is 25% extra. In my mind it's all about the denominator used in the calculation. But of the extra that goes in, when it comes out I will get 25% tax free as part of the lump sum and the rest taxed at 20% max.
    If you are a basic rate taxpayer when drawing the pension, each £80 of net income you put into a pension produces £85 out, ignoring investment and charges (£80 in, grossed up to £100, 25% tax free, 75% taxed at 20%=£15 income tax, so net £85).
    My Partnership has always been low risk, currently invested in a fund aimed at people retiring between 2020 and 2025
    You plan to use the Partnership pension for the period up to State Pension age. This is key, as the duration to the money being required should influence the investments into which the money is placed.

    With a 13 year horizon on some of the money, there may be scope for a somewhat less defensive position, especially if you plan to use savings first so that the Partnership funds will only be used later.
    I am now ready for the "mortgage money". My approach is spend half save half.
    That doesn't sound very scientific :)

    Presumably your resources are
    • Classic pension, already taken
    • Salary, now working part-time
    • Partnership pension, not yet crystallised
    • State Pension in 13 years
    • Savings
    It would seem sensible to use savings to augment salary and classic pension, then take Partnership when savings are gone, managing date of retirement and rate of drawing on savings and Partnership so as to smooth out your total income up to State Pension age. Ideally that smoothing would generate an income equal to classic and State Pension at State Pension age.
    In summary, we have about £16k pa in index linked DB pension, about £17.5k pa SP at 67
    Is that at least the level the income you think you need after State Pension age? If not, state pension deferral may be considered, and/or returning to the Civil Service Defined Benefit pension arrangements.
    Increased pension contributions via salsac will also reduce your tax bill on the other income...just sayin'
    Civil Service does not offer salary sacrifice pension contributions.
  • Altarf
    Altarf Posts: 2,916
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    hugheskevi wrote: »
    What was the reason for choosing to switch from Classic to Partnership? For a 55 year old, it would be expected that the Defined Benefit scheme would be better value than Partnership (as Partnership contribution rates are capped at age 46).

    Would have been the change in the scheme back in 2015 when Classic was closed and Civil Servants had to choose between moving to Partnership or Alpha (unless you were over 55 when there was a transitional period before they would be moved over).

    So a better question would be why Partnership and not Alpha.
  • Turned_out_nice.
    Turned_out_nice. Posts: 37
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    edited 12 October 2019 at 8:04PM
    I was a CS from August 1980 until March this year, 1 month before I was 55 and didn't join Alpha until February 2018. There was a choice, dependent on age to go straight into Alpha if you wish or stay on classic until you were forced to.
    I stayed on classic even though they got that wrong initially.
    Pension age for Alpha was/is 67 so that was going to be a no straight away.
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