NHS pension - worth contributing to additional personal pension also?

dynaxdevotee

Hi,

currently working in the NHS and have done so for about last 5 years.

Gross annual salary is about £55000.

Few years ago I met with a financial advisor from Medical Sickness Society (didn't realise at the time that he was a tied agent!).

At that time it was recommended to me that I should open a personal pension plan and pay in the maximum allowed (£3600 per annum before tax relief at that stage - so I ended up paying only £2808 or £234 per month). This was allowable because I had some non-NHS earnings.

Now I'm not so sure that this advice was correct.

1. I only have non-NHS earnings of around £500-750 per annum - is it correct that I can contribute more than this (the extra contributions obviously coming out of my NHS salary)?

2. If I can contribute (and i know that rules have changed since April 2006 so that you can contribute to an additional scheme now) can I claim the extra 18% tax back on my contributions (given that my 'total' salary is well above the 40% bracket)?

3. Do you think it's worth continuing to contribute to this additional scheme given that the NHS scheme itself is pretty good? Given the issues mentioned elsewhere on the board surrounding tax deferment would it not be better to contribute instead to OEICS/investment trusts (assuming that annual ISA allowance has been used up)?

Many thanks in advance for your advice

CardiffScot

Hi there - I see we're both making our first posts!

1. I only have non-NHS earnings of around £500-750 per annum - is it correct that I can contribute more than this (the extra contributions obviously coming out of my NHS salary)?

Yes, you can pay up to 100% of earnings capped at £215,000 in the current tax year, after allowing for the annual value of your NHS pension increase. There's also a lifetime limit as to how large your pension fund (or equivalent value) can be. This is currently £1.5m.

2. If I can contribute (and i know that rules have changed since April 2006 so that you can contribute to an additional scheme now) can I claim the extra 18% tax back on my contributions (given that my 'total' salary is well above the 40% bracket)?

Yes, to the extent that you pay 40% tax.

3. Do you think it's worth continuing to contribute to this additional scheme given that the NHS scheme itself is pretty good?

Whether the 'tied' scheme you have is any good should be reviewed in any case whether you keep paying any pension contributions or not. You may be able to move to lower charging funds and/or a scheme which offer greater choice/potential for performance (no guarantees!)

You could also consider buying added years in the NHS pension scheme. This removes all performance and charging uncertainty at a fixed cost from your pay - and the full 40% tax relief is given to you at source via your payslip. There are pros and cons, which I won't go into now!

Given the issues mentioned elsewhere on the board surrounding tax deferment would it not be better to contribute instead to OEICS/investment trusts (assuming that annual ISA allowance has been used up)?

Quite Possibly. But it depends on a lot of factors.

If you're likely to be a basic rate taxpayer in retirement, then the 40% relief on pension contributions now versus 22% income tax paid in retirement is hard to ignore, plus there's 25% tax free cash from your fund.

That said, you may have years to go to retirement. Who knows how big your pension will be or what tax rates will be then? Pensions as a 'tax wrapper' become less attractive if you pay 40% tax on the income at the other end, notwithstanding the 25% tax free lump sum.

A possible course would be to do as you suggest, to build up funds outside pension arrangments. You would still have the option (under current ever-changing legislation!) to lob in a large lump sum before you retire and still get the tax relief. This would give you the advantage of waiting to see your likely tax position, as well as taking account of other financial considerations.

By the way, one inaccuracy. The NHS is not a pretty good scheme...it's a Brilliant scheme!!:rolleyes: