Purchasing additional pension?

cloudninety

I have the option of purchasing additional pension in the NHS pension scheme which would cost me £6200 per £1000 of additional pension.

Having put this amount into a growth forecast calculator, it would appear that an estimate of 4% growth per annum would give approx. £25 000 in 35 years' time (time to retirement at 65). This would buy an annuity of approx. £1000 (3% escalation).

Surely long-term S&S growth would be likely to be more than 4%?

So my question is whether it is a good idea to buy the AP or to rather invest the money in a personal pension?

jem16

cloudninety wrote: »

So my question is whether it is a good idea to buy the AP or to rather invest the money in a personal pension?

Have you taken into account that the £1000 AP that you buy now is index-linked for the 35 years too? So basically it will be worth £2373pa based on 2.5% index linking.

Is your £1000pm for an annuity based on the same terms as the NHS pension - ie index linked and spouse pension?

hugheskevi

So my question is whether it is a good idea to buy the AP or to rather invest the money in a personal pension?

Comparisons I have done of Additional Pension show that you would need a return of about CPI+3% (ie about 5% based on CPI of 2%) to match the benefits of Added Pension.

CPI+3% isn't much of an ask for long-term growth of investments

Added Pension doesn't have any investment risk, inflation risk or longevity risk. It does come with more policy change risk than personal pensions though (eg RPI-CPI).

I'd argue Added Pension is a better investment for those close to retirement, and less good the further away from retirement you are and hence have a longer period in which you are likely to be invested in higher yielding investments.

Added Pension may have a role as effectively being the gilts/bonds part of a pension portfolio, but that is about it. Given you already have a decent public service pension (the main part of the NHS pension scheme) the value of Added Pension is questionable - it would be much more attractive for someone with only a personal pension, and who would want a 'safe' part of their portfolio.

But if you are particularly risk averse, it would become more attractive.

cloudninety

jem16 wrote: »

Have you taken into account that the £1000 AP that you buy now is index-linked for the 35 years too? So basically it will be worth £2373pa based on 2.5% index linking.

Is your £1000pm for an annuity based on the same terms as the NHS pension - ie index linked and spouse pension?

No, I didn't think of its being index-linked from now, good point.

I looked at an annuity with 3% accumulation because there wasn't a CPI-indexed option. Didn't look at spouse pension as I am single.

hugheskevi wrote: »

Given you already have a decent public service pension (the main part of the NHS pension scheme) the value of Added Pension is questionable - it would be much more attractive for someone with only a personal pension, and who would want a 'safe' part of their portfolio.

Unfortunately I am only on a fixed-term contract and although I hope to get a permanent job in the NHS in the future that may not happen. Also I am 30 years old with only a small private pension at present.

xylophone

I am only on a fixed-term contract

In your position, I'd still be inclined to go with the purchase of additional years for the reasons outlined above.
You may stay with the NHS whether on fixed term or permanent contract- Even if you don't, a deferred DB scheme is a valuable benefit.
You might not always be single.
Are you transferring the private pension?

TheSandman

As they say a bird in the hand is worth two in the bush.