Civil Service pension is a much more exact science. Used to work on the IT side of CS pensions and the calculation was very simple: (years service x final salary)/80 = your annual pension. Three times that was your lump sum.
Thatās for Classic (mainly service up to April 2022). After that itās Alpha which is a little more complicated to work out so maybe three lines rather than the one above for Classic.
Iāve been in since March 2020 but I think Iām Alpha. My lump sum isnāt my salary x3 I can assure you!
Hereās my problem. We donāt all get a ālong runā. Itās an absolute gamble. Giving away money you could use right now just in case you might need to use it later.
Donāt sweat it, money geeks. Do what suits you and just donāt worry about it.
Youāll be in Alpha as you started after 2015.
In Alpha the lumpsum is optional. Thereās a calculator on the CSP site which letās you see what reducing the lumpsum will do to your monthly pension and vice versa.
Very broadly speaking Classic and Alpha are comparable. Big difference is that in Alpha the retirement age is the same as that for the state pension. Also, itās a career average scheme so if you get a lot of promotions your pension will be lower than you will likely expect it to be.
Mines Alpha and defined benefit, not sure I can take lump sum though, not really read into it.
Iāll probably die before pension age if we have one, and I find it complicated to understand I just know itās a good one being civil.
In Alpha you choose whether or not to take a lumpsum and how much it is (within some limits e.g. you canāt lift the whole lot as a lumpsum).
Ah thanks.
Thatās what I used on the screenshots. I know I can retire before retirement age in my organisation, though there are penalties for each year under it is.
No you donāt, honestly just donāt worry about it. 34% is huge, itās more than enough no matter how pessimistic the assumptions you make about growth.
This reminds me a bit of the Simpsons episode where Flanderās house is destroyed by a hurricane and he doesnāt have insurance because he considers it a form of gambling.
Most people will need a pension fund of some sort. Itās sensible to think about it when you are younger because by the time you need it, itās too late to save for it. The tax advantages are also huge and it can be used from age 55. The combination of tax advantage and compound interest mean saving a little extra early can result in being a lot wealthier later in life.
Thereās what they call an actuarial reduction for each year in advance of your Normal Retirement Age (NRA) that you take the pension. For Alpha the NRA is the same as your state pension age which you can find out at https://www.gov.uk/state-pension-age. The reduction is roughly 5% per year and applies to the monthly payments and the lumpsum.
So, if your NRA was 68, your retired at 66 and youād normally have received Ā£1000/month then you would actually get more like Ā£900/month. It isnāt exactly that for various reasons including, of course, that youād have two more years service by 68.
Itās changing to 57 soon and the plans are that it will in future move up to be 10 years less than the state pension age.
Apologies, perhaps Iām misunderstanding your point. You are saying that the difference is that with a personal pension you get to keep your pension pot, and have flexibility over how much you draw down at any time.
I agree that these are both true, but I donāt really see how they imply a safe withdrawal rate > annuity rate.
The point of SWR is that itās the rate at which you can withdraw money from your pension safely, i.e. without risk of running out before you die. And this is important because the consequence of running out is extremely bad - you would be out of money at a time when your earning ability is likely to be lowest.
The āadvantageā of retaining your investment pot is surely that you can choose to invest in different things, but as far as I can see this can only mean taking on more risk than an annuity provider can. Which is the thing you donāt want when considering SWR.
The freedom to vary your drawdown allows you to draw more if you need to - but this reduces your pot faster, while if you need less you could still invest the excess annuity payment. (I accept there are some tax implications).
Iām not trying to argue that you should go out and buy an annuity - there are certainly reasons to prefer a pension pot. But I am arguing that when considering an appropriate SWR I donāt think itās obvious how you can justify anything greater than the annuity rate (actually, since the annuity provider can risk-pool, the annuity rate might be better!)
Found this on the ONS (data from 2020).
Private pensions:
25th percentile
| All persons | 16-24 | 900 | |
|---|---|---|---|
| 25-34 | 2,000 | ||
| 35-44 | 5,000 | ||
| 45-54 | 9,700 | ||
| 55-64 | 13,500 | ||
| 65+ | 18,000 | ||
| All persons | 3,900 |
50th percentile
| All persons | 16-24 | 2,400 | |
|---|---|---|---|
| 25-34 | 7,900 | ||
| 35-44 | 24,700 | ||
| 45-54 | 47,700 | ||
| 55-64 | 68,800 | ||
| 65+ | 70,000 | ||
| All persons | 20,600 |
75th percentile
| All persons | 16-24 | 8,200 | |
|---|---|---|---|
| 25-34 | 24,900 | ||
| 35-44 | 85,800 | ||
| 45-54 | 184,700 | ||
| 55-64 | 245,000 | ||
| 65+ | 171,000 | ||
| All persons | 91,000 |
Employees with active occupational (defined benefit and defined contribution) pension schemes
25th percentile
| Public sector | 16-24 | 1,300 | |
|---|---|---|---|
| 25-34 | 7,000 | ||
| 35-44 | 22,400 | ||
| 45-54 | 32,600 | ||
| 55-64 | 58,100 | ||
| 65+ | 25,300 | ||
| All public sector | 15,100 | ||
| Private sector | 16-24 | 500 | |
| 25-34 | 1,200 | ||
| 35-44 | 3,000 | ||
| 45-54 | 4,000 | ||
| 55-64 | 4,000 | ||
| 65+ | 6,000 | ||
| All private sector | 2,000 |
50th percentile
| Public sector | 16-24 | 4,000 | |
|---|---|---|---|
| 25-34 | 20,000 | ||
| 35-44 | 72,900 | ||
| 45-54 | 137,200 | ||
| 55-64 | 216,200 | ||
| 65+ | 104,300 | ||
| All public sector | 65,400 | ||
| Private sector | 16-24 | 1,900 | |
| 25-34 | 5,000 | ||
| 35-44 | 13,400 | ||
| 45-54 | 25,000 | ||
| 55-64 | 32,900 | ||
| 65+ | 30,000 | ||
| All private sector | 10,300 |
75th percentile
| Public sector | 16-24 | 10,300 | |
|---|---|---|---|
| 25-34 | 49,100 | ||
| 35-44 | 159,300 | ||
| 45-54 | 365,200 | ||
| 55-64 | 517,300 | ||
| 65+ | 231,500 | ||
| All public sector | 215,800 | ||
| Private sector | 16-24 | 6,100 | |
| 25-34 | 17,400 | ||
| 35-44 | 48,000 | ||
| 45-54 | 100,000 | ||
| 55-64 | 130,100 | ||
| 65+ | 150,000 | ||
| All private sector | 46,600 |
Donāt forget the other side of the coin. Financial advisors rightly concentrate on trying to ensure your pension doesnāt run out before you die. However, you equally donāt want to underspend and die leaving a whole lot of money in your pension either (unless youāre intending to leave it to your children).
Also, if you end up in a nursing home then you wonāt need the money anyway. In fact, youād be better spending it all before you reach that point as then your local authority will pay for your nursing home.
It probably is a gamble but I think the major benefits come in if youāre a higher or additional rate taxpayer, you get to defer taxation until later in exchange for some tax relief now - that makes it well worth It. On higher incomes the taxes can eye watering especially when the personal allowance tapers out and your rate is effectively 60%. Definitely a fortunate position to be in, but pension contributions are really the only lever you can pull to reduce that unless you want to donate lots to charity.
Worth noting that if you buy an annuity, the insurance takes your money and keeps it i.e. you lose 100% of your capital. Also worth remembering Equitable Life where they were forced to cut annuity payments by around 50% (going by what happened to my Dadās pension).
You donāt need to take on more risk as itās possible to construct a portfolio reflecting what an annuity would give you. In fact, if you put the whole lot into the 2060 Treasury Gilt youād get a guaranteed income of 4% up to 2060.
I donāt think this is a particularly relevant consideration - yes, you might stop needing money sooner. But what if youāre wrong? This is actually one of the key issues, I think, that makes your individual planning harder (i.e. more costly). As an individual, your retirement planning has to be sufficient to account for the āworstā (actually best) scenario - you live for a long time and remain relatively active and healthy until the end. Average stats arenāt especially helpful to you. Whereas annuity providers etc can risk pool - they can rely on average payouts corresponding closely to average life expectancy.
On your second post: yes, you exchange your capital for the guaranteed income. But thatās essentially what the SWR is doing as well - itās the answer to the question āwhat level of income can I maintain for the unknown length of time I will require?ā
And yes, I agree that you can replicate something similar on your own (again, I am not arguing for annuities, Iām arguing itās hard to have swr > annuity rate). But your example of a 4% guaranteed for 30 years is worse than best buy annuities! https://www.hl.co.uk/retirement/annuities/best-buy-rates suggests for a 55 year old, without inflation protection, youād get 5.8% in perpetuity, and your tail risk is protected. So
I take your point that an annuity is supposed to guarantee your income for life. However, that presupposes that the annuity company lives longer than you do. Equitable Life died well before my Dad did and halved his āguaranteedā pension. Iād like to think thatās a one-off occurrence, but because it might not be, I would never consider handing my cash over to an insurance company and hope that they would actually continue to payout. Donāt forget too that Equitable Life was a major league insurance company until it went bust.
With the 4% Treasuries, you get all your money back in 30 years. With the 5.8% annuity, you lose it all.
I take your point that averages are no use. As a rough guide for guys, Iād say consider how long your Dad lived and how long his Dad lived and add maybe 10 years assuming that youāll know what they died of and be doing something about it. I figure that if youāre going to die you should at least learn from what killed your parents and grandparents and at least die of something different 