Should I transfer my DC pot to my DB scheme?
Discussion
Hi all,
I'm hoping the PH Finance collective can help me with my current situation...
For some background, I am 26 and a higher rate tax payer.
I had a deferred Civil Service Alpha pension scheme from earlier in my career (roughly 3.5 years of service), this scheme is now active again as my former company has been TUPE'd in to the Civil Service. During my time at my former company, I took advantage of their DC pension contributions over my 2.5 years service, accruing £27k in the DC scheme.
Now that I have been TUPE'd and my Alpha pension scheme is active again, I have the (rare?) opportunity to transfer my DC pot in to the Alpha DB scheme... I have just received a transfer valuation of an index linked £3.7k pa from State Pension Age based on my £27k DC pot.
I'm unsure whether or not it is worth transferring and essentially topping up my existing Alpha DB scheme for the guaranteed index-linked returns or transfer it in to a low cost SIPP which I manage myself and add to in years to come (thinking higher rate tax relief). This would allow me to defer the DB scheme as long as possible. I would bridge the gap from early retirement with my S&S ISA, then SIPP from ~57, then DB from ~62-65 (for example).
The SIPP option is very appealing, a modest 5% return each year without contributions would turn my £27k in to ~£200k by the time I'm 68 (like for like comparison), 10% would make it ~£1.5m... But then I think, I could open a SIPP at any point in the future or start a new job in the private sector with a new DC scheme, which will eventually find its way back to a SIPP one day. Whereas I'll probably never get the opportunity to transfer a DC pot in to a DB scheme again, especially the way things are looking... Would it be stupid of me to pass it up? Or would I be stupid to put all of my hypothetical eggs in the DB basket this early in my career?
Thanks in advance - Let me know if there's any further information I can provide that would prove useful!
I'm hoping the PH Finance collective can help me with my current situation...
For some background, I am 26 and a higher rate tax payer.
I had a deferred Civil Service Alpha pension scheme from earlier in my career (roughly 3.5 years of service), this scheme is now active again as my former company has been TUPE'd in to the Civil Service. During my time at my former company, I took advantage of their DC pension contributions over my 2.5 years service, accruing £27k in the DC scheme.
Now that I have been TUPE'd and my Alpha pension scheme is active again, I have the (rare?) opportunity to transfer my DC pot in to the Alpha DB scheme... I have just received a transfer valuation of an index linked £3.7k pa from State Pension Age based on my £27k DC pot.
I'm unsure whether or not it is worth transferring and essentially topping up my existing Alpha DB scheme for the guaranteed index-linked returns or transfer it in to a low cost SIPP which I manage myself and add to in years to come (thinking higher rate tax relief). This would allow me to defer the DB scheme as long as possible. I would bridge the gap from early retirement with my S&S ISA, then SIPP from ~57, then DB from ~62-65 (for example).
The SIPP option is very appealing, a modest 5% return each year without contributions would turn my £27k in to ~£200k by the time I'm 68 (like for like comparison), 10% would make it ~£1.5m... But then I think, I could open a SIPP at any point in the future or start a new job in the private sector with a new DC scheme, which will eventually find its way back to a SIPP one day. Whereas I'll probably never get the opportunity to transfer a DC pot in to a DB scheme again, especially the way things are looking... Would it be stupid of me to pass it up? Or would I be stupid to put all of my hypothetical eggs in the DB basket this early in my career?
Thanks in advance - Let me know if there's any further information I can provide that would prove useful!
I would confirm how the £3.7k is index-linked and when it might be payable.
I've just spoken to MyCSP and they tell me that any pension that is taken before a certain age (age depends on whether you are police, teacher, MoD, whatever) will only be £3.7k. To get all the CPI increases, you need to wait until that certain age to retire.
0300 123 6666 or contactcentre@mycsp.co.uk
I've just spoken to MyCSP and they tell me that any pension that is taken before a certain age (age depends on whether you are police, teacher, MoD, whatever) will only be £3.7k. To get all the CPI increases, you need to wait until that certain age to retire.
0300 123 6666 or contactcentre@mycsp.co.uk
pingu393 said:
I would confirm how the £3.7k is index-linked and when it might be payable.
I've just spoken to MyCSP and they tell me that any pension that is taken before a certain age (age depends on whether you are police, teacher, MoD, whatever) will only be £3.7k. To get all the CPI increases, you need to wait until that certain age to retire.
0300 123 6666 or contactcentre@mycsp.co.uk
I don't think that's correct - It is essentially CPI linked from what I've read and for every year you are active in the scheme the adjustment is added at the start of each scheme year. However, if you leave the scheme it is essentially frozen.I've just spoken to MyCSP and they tell me that any pension that is taken before a certain age (age depends on whether you are police, teacher, MoD, whatever) will only be £3.7k. To get all the CPI increases, you need to wait until that certain age to retire.
0300 123 6666 or contactcentre@mycsp.co.uk
CSPS said:
What about cost of living increases?
Your total alpha pension is adjusted in line with prices every year that you are an active member of alpha. HM Treasury (the government’s economic and finance ministry) decides exactly how much the adjustment should be.
How does an alpha pension build up?
The example below shows the way a Career Average pension, like alpha, builds up. In this example we have assumed a small cost of living increase is applied each year.
If you earned £20,000 in one scheme year, on 31 March of that year you would add £464 to your alpha pension:
£20,000 x 2.32% = £464
The annual adjustment is applied to the total pension balance at the start of the scheme year, in this case it’s a 1% increase:
£464 + 1% = £468.64
If you earned the same amount the following year, you would add another £464:
£20,000 x 2.32% = £464
£468.64 + £464 = £932.64
The annual adjustment is applied to the total pension balance at the start of the next scheme year, again it is a 1% increase:
£932.64 + 1% = £941.97
This continues every year you are an active member of alpha."
From here: https://www.civilservicepensionscheme.org.uk/membe...Your total alpha pension is adjusted in line with prices every year that you are an active member of alpha. HM Treasury (the government’s economic and finance ministry) decides exactly how much the adjustment should be.
How does an alpha pension build up?
The example below shows the way a Career Average pension, like alpha, builds up. In this example we have assumed a small cost of living increase is applied each year.
If you earned £20,000 in one scheme year, on 31 March of that year you would add £464 to your alpha pension:
£20,000 x 2.32% = £464
The annual adjustment is applied to the total pension balance at the start of the scheme year, in this case it’s a 1% increase:
£464 + 1% = £468.64
If you earned the same amount the following year, you would add another £464:
£20,000 x 2.32% = £464
£468.64 + £464 = £932.64
The annual adjustment is applied to the total pension balance at the start of the next scheme year, again it is a 1% increase:
£932.64 + 1% = £941.97
This continues every year you are an active member of alpha."
My pension was "Classic". I started in 1988 and left in 2008. I didn't take the option to move to "Classic Plus" during my last years. I was allowed to do that as I had already opted to take CES.
Classic wasn't career averaged, it was based on final salary. (Number of Years / 80) x Final Salary + (3x that number as a tax free lump sum). You can see why they stopped it
.
I could take my pension when I was 50, but would have lost any CPI additions...
My retirement age is 60. I can take my pension at 55 with CPI additions (with a 5% reduction for every year before 60). The pension would be based on my (Final Salary x Number of Years of Service / 80) x CPI, but if I took it at 54 or less, the pension would not have the CPI addition. I think the CPI addition may kick-in if you start to take the pension, but I'm not sure.
Classic wasn't career averaged, it was based on final salary. (Number of Years / 80) x Final Salary + (3x that number as a tax free lump sum). You can see why they stopped it
.I could take my pension when I was 50, but would have lost any CPI additions...
My retirement age is 60. I can take my pension at 55 with CPI additions (with a 5% reduction for every year before 60). The pension would be based on my (Final Salary x Number of Years of Service / 80) x CPI, but if I took it at 54 or less, the pension would not have the CPI addition. I think the CPI addition may kick-in if you start to take the pension, but I'm not sure.
I'd buy the extra DB pension.
- Like you say the chance to get more secure income, other than an expensive annuity or a state pension that might not exist in 40yrs time is slim.
- £27k isn't a lot to put towards the DB compared to what you're likely to go and save into pension as a higher rate taxpayer this young.
- A DB pension typically has a lower value for lifetime allowance purposes and could leave more headroom for you to build up a substantial DC pot.
- The information on the page you linked confirms that even after active service the accrued annual income is revalued each year in line with CPI. Assuming a 2% increase that's over £8kpa at 68. In today's market trying to buy that much secure income from an annuity would cost over £300k.
- Too many people assume everything will be hunky dory. You don't need the £27k for flexibility as you should accrue plenty that will be taking investment risk with flexible access in the future.
- Like you say the chance to get more secure income, other than an expensive annuity or a state pension that might not exist in 40yrs time is slim.
- £27k isn't a lot to put towards the DB compared to what you're likely to go and save into pension as a higher rate taxpayer this young.
- A DB pension typically has a lower value for lifetime allowance purposes and could leave more headroom for you to build up a substantial DC pot.
- The information on the page you linked confirms that even after active service the accrued annual income is revalued each year in line with CPI. Assuming a 2% increase that's over £8kpa at 68. In today's market trying to buy that much secure income from an annuity would cost over £300k.
- Too many people assume everything will be hunky dory. You don't need the £27k for flexibility as you should accrue plenty that will be taking investment risk with flexible access in the future.
pingu393 said:
My pension was "Classic". I started in 1988 and left in 2008. I didn't take the option to move to "Classic Plus" during my last years. I was allowed to do that as I had already opted to take CES.
Classic wasn't career averaged, it was based on final salary. (Number of Years / 80) x Final Salary + (3x that number as a tax free lump sum). You can see why they stopped it .
I could take my pension when I was 50, but would have lost any CPI additions...
My retirement age is 60. I can take my pension at 55 with CPI additions (with a 5% reduction for every year before 60). The pension would be based on my (Final Salary x Number of Years of Service / 80) x CPI, but if I took it at 54 or less, the pension would not have the CPI addition. I think the CPI addition may kick-in if you start to take the pension, but I'm not sure.
Wow haha, yes I can definitely see why they stopped it! I can understand why you would hold out until 60+ too!Classic wasn't career averaged, it was based on final salary. (Number of Years / 80) x Final Salary + (3x that number as a tax free lump sum). You can see why they stopped it
.I could take my pension when I was 50, but would have lost any CPI additions...
My retirement age is 60. I can take my pension at 55 with CPI additions (with a 5% reduction for every year before 60). The pension would be based on my (Final Salary x Number of Years of Service / 80) x CPI, but if I took it at 54 or less, the pension would not have the CPI addition. I think the CPI addition may kick-in if you start to take the pension, but I'm not sure.
PistonHead007 said:
I'd buy the extra DB pension.
- Like you say the chance to get more secure income, other than an expensive annuity or a state pension that might not exist in 40yrs time is slim.
- £27k isn't a lot to put towards the DB compared to what you're likely to go and save into pension as a higher rate taxpayer this young.
- A DB pension typically has a lower value for lifetime allowance purposes and could leave more headroom for you to build up a substantial DC pot.
- The information on the page you linked confirms that even after active service the accrued annual income is revalued each year in line with CPI. Assuming a 2% increase that's over £8kpa at 68. In today's market trying to buy that much secure income from an annuity would cost over £300k.
- Too many people assume everything will be hunky dory. You don't need the £27k for flexibility as you should accrue plenty that will be taking investment risk with flexible access in the future.
Thanks for the response, some good points, especially the 3rd/4th bullets - I hadn't thought about the lifetime allowance aspect nor did I acknowledge the CPI revaluation each year, regardless of active service.- Like you say the chance to get more secure income, other than an expensive annuity or a state pension that might not exist in 40yrs time is slim.
- £27k isn't a lot to put towards the DB compared to what you're likely to go and save into pension as a higher rate taxpayer this young.
- A DB pension typically has a lower value for lifetime allowance purposes and could leave more headroom for you to build up a substantial DC pot.
- The information on the page you linked confirms that even after active service the accrued annual income is revalued each year in line with CPI. Assuming a 2% increase that's over £8kpa at 68. In today's market trying to buy that much secure income from an annuity would cost over £300k.
- Too many people assume everything will be hunky dory. You don't need the £27k for flexibility as you should accrue plenty that will be taking investment risk with flexible access in the future.
I must admit I am swaying towards transferring in and essentially topping up my existing DB so that I'll have a good chunk of reliable income for peace of mind, especially as I doubt I'll be in the Civil Service for the next 40 years - Any future private sector/contracting could always generate a DC pot...
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