Civil Service Alpha- added pension via lump sum

I am a member of he civil service Alpha scheme and I earn £27,000 a year.

The Personal Allowance is £11,850 in 2018/19. Unless you have other sources of taxable income, you will only get tax relief on £15,150 of pension contributions if you purchase Added Pension.

So if you decide to use the money to purchase Added Pension you would probably be best to do it in two chunks, one in 2018/19 and then the next in early 2019/20.

Note that you would need to reclaim the tax relief from HMRC, as no automatic relief is provided on lump sum contributions. This is fairly easy, although HMRC sometimes struggle to understand their own rules as it is unusual not to get any tax relief on pension contributions from either the provider or through having it deducted from salary and hence not taxed.

a) Is this a good value investment compared to other ways of saving from retirement ?

The obvious options available are:

• Keep in cash saving - very low returns, but flexible and have access to it in case of need. You should ensure you have sufficient available funds to use in case of emergency.
  
• Put in an ISA - either cash (low return but flexible) or investments (investment risk, but higher expected return, still retain access to money in case of need)
  
• Put in Defined Contribution pension - benefit from tax relief, although depending on your income when you withdraw the money tax may be paybale at that point. Given tax relief on the way in is only 20% if you pay tax on the way out there is only a little benefit over a stocks and shares ISA (the 25% tax free lump sum). If you wanted to retire early and use the DC funds for the period between retiring and your Civil Service pension starting you may be able to withdraw the DC funds without any tax being payable.
  
• Added Pension - benefit from tax relief, gives a guaranteed income payable for life, but is inflexible and aside from commencing your alpha pension early (mnimum age 55) you cannot access money if needed and as you need to commence the whole pension you are likely to pay tax on the money as the main alpha pension and maybe the state pension will probably use up your Personal Allowance.

There is no right answer, different approaches will suit different life needs. Consider how well the above things suit you, and whether Added Pension is the most appropriate choice in your circumstances.

Purchasing Added Pension is a very safe choice and is unlikely to be something you will have reason to regret, but equally it will not provide astonishing returns. You effectively get a return of about 4.8% on the money (the scheme discount rate), there are no charges to pay and are guaranteed an income for however long you live.

If you think you need a higher level of certain income in retirement, Added Pension is usually a good choice, as you do not face any cost of purchasing an annuity as you would with a Defined Contribution pension.

But if you think you need more money between age 44 and 55 pensions are less attractive, and if your concern is about an income between 55 and 67, eg early retirement, Defined Contribution pension contributions are well worth considering.

b) Would I pay an Annual Allowance charge ?

The pension input from the pension you are building up through your salary is valued at about £10,000. Purchasing £3,000 of Added Pension would be valued as a pension input of £48,000. That is a total input of £58,000 which exceeds the standard Annual Allowance of £40,000. However, you probably have plenty of carry-forward from previous years to use (you can check this with the scheme administrator, MyCSP, by requesting a Pension Saving Statement) which would mean no charge would be payable.

If you decide to purchase Added Pension your issue is not so much about Annual Allowance as about ensuring you get full benefit from tax relief. Contributing in 2 different years would mean inputs in those two years of about £34,000 which is below the Annual Allowance.