Buying NHS "Additional Pension" - Good Idea or Not?

djbreeze

Hi all,
Having just started working for the NHS, I have the option to buy additional pension, either for a lump sum or by instalments, for about £10k per £1k of pension up to a maximum of £5k. This, as things stand at the moment, would be index linked (of course now CPI not RPI) between now and when I reach 65. I assume this would be a more efficient way to save towards a pension income than ISAs or anything else for that matter. However, I'm loathe to put extra money into the scheme when the government will almost certainly move the goalposts (again) at some point between now and when I reach 65 (I'm 45 now). So why bother when I'll probably end up with less than I was promised, have to wait longer for it and likely end up just regretting putting extra money into it in the first place. Also, does anyone know whether buying additional pension in this way would be tax deductible? What do the panel think?

For background I will have a pension (about £4k at last forecast) that's index linked & payable from age 60, again as things stand at the moment, from previous local authority service & will have enough NI contributions for the full state pension. No property, no dependants, own and live on a small sailboat, spend very little. Part of me thinks be sensible and make more provision, part of me thinks I will have enough with my £4k plus state pension living on my boat. And I daren't even start thinking about what happens when I get too old to live on a boat...:eek:

Many thanks for any replies,
David.

Koicarp

I considered this for topping up my NHS pension. I'm 42, and for me it works out at 60k lump sum for 5k payout or 96k in instalments between now and retirement. Personally I'm going to use stocks and shares isa's instead.

hugheskevi

I assume this would be a more efficient way to save towards a pension income than ISAs or anything else for that matter.

Due to tax relief, pensions will be more tax efficient than ISAs but in return have more restrictions around access.

However, I'm loathe to put extra money into the scheme when the government will almost certainly move the goalposts (again) at some point between now and when I reach 65 (I'm 45 now).

It is quite hard to move the goalpost on accrued rights. RPI-CPI showed there is legislative risk that needs to be considered, but it should be taken in proportion - the risk is present, but low.

Also, does anyone know whether buying additional pension in this way would be tax deductible?

Contributions get full income tax relief, but National Insurance is payable on the contribution.

For background I will have a pension (about £4k at last forecast) that's index linked & payable from age 60, again as things stand at the moment, from previous local authority service & will have enough NI contributions for the full state pension.

Due to the change to RPI, that £4,000 will become £5,383 p/a at age 60 (assuming CPI of 2% pa). If it had remained linked to RPI it would be £6,605 (assuming RPI of 3.4%, consistent with Office for Budgetary Responsibility long-term forecasts). So you would need to purchase about £15,000 of Additional Pension to put you back in the same position (crudely taking into account that your quote is from age 65, not 60).

Your State Pension age will probably be 68, certainly at least 67. So you have 3 bits of pension income - some at age 60, some at age 65 and some at 68(ish). The total of that might come to something like £10,000 (ish) based on what you say. But, some of it will have come into payment at 60 and 65, and there is an implication that you will work to 68, so there may well be the chance to save a lot between 60-68 to boost retirement income.

What do the panel think?

I wouldn't fancy living on about £200pw. For a single person, that is probably enough to get you clear of most means-tested benefits, but given you don't have a house, Housing Benefit has to be considered. It is possible more pension income could gets means-tested away, but that requires more investigation to ascertain with any confidence.

Firstly work out if S+S ISAs or pensions are suitable for your retirement plans, then if pensions are appropriate, decide between Additional Pension and personal pensions. Calculations I've done show Additional Pension is okay, nothing to write-home about, but a valid contender for pension saving compared to alternatives.

If unclear and you are disciplined with saving (ie wouldn't spend it just because you had it saved and available), you can delay the decision by saving into an S+S ISA for now, and reviewing the position in later years, moving the S+S ISA money into a pension if that is the appropriate thing to do.

chucknorris

I’m not in the NHS but I imagine the teacher's pension fund is reasonably similar, I have just signed up to buy an addition 5.6k of pension by contributing 25.5k of my salary for the next 3 years, I'm 54. I thought that it was quite a good deal and introduced some diversity to my financial portfolio.

djbreeze

hugheskevi wrote: »

...

hughskevi, thankyou very much for taking the time to reply, food for thought & I will investigate ISAs some more...
Regards,
David.

VfM4meplse

I thought it was a no-brainer. I'm not quite as old as koicarp, and by the time I get there, the additional £5k pa will have inflated to £12k pa at least in my estimation - hence investing in this and getting 40% back seemed a good deal.

djbreeze

VfM4meplse wrote: »

I thought it was a no-brainer. I'm not quite as old as koicarp, and by the time I get there, the additional £5k pa will have inflated to £12k pa at least in my estimation - hence investing in this and getting 40% back seemed a good deal.

That estimate might be a bit optimistic, say you're 40 years old and assuming the £5k is CPI linked and assuming 2% rise p.a. in the CPI your £5k would become £8.2k not £12k...

Koicarp

VfM4meplse wrote: »

I thought it was a no-brainer. I'm not quite as old as koicarp, and by the time I get there, the additional £5k pa will have inflated to £12k pa at least in my estimation - hence investing in this and getting 40% back seemed a good deal.

For me it's not such a no brainer. I think I should factor in life expectancy and weigh up whether I'm likely to make anything out of it. As parents died before state retirement age, my guess is I'll do well to get to 70.
For me the figures are : 5k additional pension paid over 7 years, cost is 76k. Compound CPI of 3% would make that 5k today, £8264.24 per year. If I made it to 70 I'd get £82642.40 over the 10 years for my 76k pament in. However that 76k would be tied up for the next 17 years, and of course I lose control.
I think that over the next 17 years I can do better saving and investing that money myself. Of course I could live 'til I'm 110 and that would really muck up the figures!