7% pa return over 30-40 years

oldtoolie

Although the NHS Pension scheme is not as good as it was, it is still one of the best schemes available. Since the NHS is one of the largest employers and has one of the largest groups of retirees it is extremely unlikely that the beneficiaries would ever be treated unfairly.

The greatest benefit is that the pension scheme bears the investment risk not you.

richyg

yatinsardana,

Surely you are having a laugh. Your NHS pension is guaranteed by the good ole UK tax payer under pain of prison if they don't pay their NI and Taxes.

I don't think it comes more goldplated than that. Agreed that there can be changes but generally they aren't retrospective and compared to average Joe it wins hands down.

Also ignoring it and putting it in ISA's loses the tax breaks and the employers - sorry the UK taxpayer's matching contribution. Also its inflation linked.

You do this and any of your other investments can hedge a bit more with this pension as your backstop.

R.

yatinsardana

CLAPTON wrote: »

is your 7% net of inflation (i.e real return) or in nominal terms?

since 1999 the fts100 has had a negative capital return


what calculation have you done to say it's better than NHS pension?

I didn't take inflation into my calculation. I suppose that would reduce my returns in real terms. Fair point.

My calculations don't necessarily say it's better than pension as the security pension would give to you can't be replaced with anything. I just wanted to consider this option before automatically enrolling for it.

One of my previous posts in this thread gives you an idea of how I've calculated - essentially I have used a 7% return pa for 40 years where I regularly add to my investments the same amount I would if I had pension scheme.

I think not being able to reinvest the lump sum that I get from pension tax free is quite a big disadvantage in my eyes vs having all the money that you've saved and invested in a tax free wrapper.

yatinsardana

Linton wrote: »

I dont think a 7% return is a sensible basis on which to plan your long term future. Some people think the game has changed now and lower returns can be expected in the future. And in any case you dont want to rely on an average prediction that if it truly does represent the long term average has a 50% chance of being optimistic.

You're probably right. That's why I really wanted all your opinions because I think I've probably overthought and been too naive. Investments don't always work out the way you plan for them to. Thanks for that thought!

yatinsardana

Linton wrote: »

In your calculations have you taken inflation into account??? Your salary and therefore your NHS pension will increase with inflation, your investment returns wont necessarily.

I strongly suspect your calculations are wrong.

Calculations haven't taken inflation into account. But like you've said I did sort of assume that salary and pension would increase in line with inflation. So what you're saying is that if investment returns stay the same then the real worth of returns every year would decrease due to inflation. I didn't think of that point.

yatinsardana

richyg wrote: »

yatinsardana,

Surely you are having a laugh. Your NHS pension is guaranteed by the good ole UK tax payer under pain of prison if they don't pay their NI and Taxes.

I don't think it comes more goldplated than that. Agreed that there can be changes but generally they aren't retrospective and compared to average Joe it wins hands down.

Also ignoring it and putting it in ISA's loses the tax breaks and the employers - sorry the UK taxpayer's matching contribution. Also its inflation linked.

You do this and any of your other investments can hedge a bit more with this pension as your backstop.

R.

In an ideal world you'd want both really -ISA and pension. I just wonder that because of the current contribution rates you'd be paying 12-13% of your pretax income into pension. Would you really have a significant free income left for investments outside.

I get the general opinion though - go for pension!

Thank you all for your thoughts and opinions!

Jogle

I did some quick calculations.

Say your starting salary is £25k and you get an average annual increase of 2.5% (which is unlikely to happen over 40 years in the public sector). In 40 years time you would be on £65,489, therefore your pension would be two thirds of that, so £43,660 per year.

If we say your pension contribution is 7% but instead you invested that outside a pension scheme (therefore not getting tax relief so only investing 5.6%) and you do indeed get an average of 7% growth, after 40 years your investments would be worth £409,100. If you then wanted to live off the dividends and we say you get 5% dividend yield (it's about what I'm currently getting), you would then have an income of £20,455 per year.

If, instead, your average growth over 40 years was 5%, your portfolio would only be worth £256,069. The income from that (at 5%) would be £12,803 per year.

(there are lots of assumptions in that; that the pension contribution is fixed and that the tax rate stays at 20% but the general idea is still there).

To me, I can't see why you would choose to not join the NHS pension scheme

dunstonh

yatinsardana wrote: »

Well I have a few thoughts on the pension scheme:
Advantages - it's fairly safe and secure (I hope!), it's guaranteed income after retirement, tax benefits as it's taken out before pay, NHS contributes 14%

Disadvantages - the contribution proportion by the NHS staff seems to be increasing. In fact for 2014/2015 the maximum contribution will be over 14% (14.5%).
Saving 40% tax right now or paying tax later doesn't really make much of a difference to me. It appears that in all likelihood I'd still be paying 40% tax on my annual pension!
The NHS contribution doesn't seem to make much of a real difference to me as as far as my understanding goes NHS pension (2008 scheme) is based on the reckonable pay (average of 3 highest consecutively paid years in the last 10 years of working), number of membership years and 1/60th value. If the scheme was the kind where all the contributions were being invested into a pension fund and over long term it would grow, then yes the 14% NHS contribution would make a lot of difference but here, I already know how much I'll be getting as long as I remain in the pension scheme (I know thre advantage of this is the security of knowing).
Lastly the lump sum that you get tax free (according to the 2008 scheme, roughly 4.28*annual pension) is great but if I wanted to invested that money then I'd have to pay taxes on it as I won't be able to put all that money straight into an ISA.

So, alternatively if I invested my "pension" money (albeit after tax it would be a smaller amount pa) into ISA funds and stocks and cash and with dividends re invested I get a 7% return on average over 40 years, not only would my investments be much higher by retirement age, I would be able to live off dividends and capital growth every year whilst preserving capital. I won't have to pay any tax! So my equivalent " lump sum" if I wanted to invest would already be in an ISA.

My thinking may be naive or even wrong but any thoughts would be appreciated

You have got it all wrong. £ for £, what you pay into the NHS pension would beat every alternative option going. To get equivalent benefits using investments would cost you about 3 or 4 times per month than NHS pension would cost you.

The scheme is a defined benefit. You buy benefits in exchange for a monthly cost. There is no investment element. The contribution level by the employer is irrelevant.

An S&S ISA at 7% p.a. return would not come close to matching the NHS pension You would probably end up with something like half the benefit, it not less. it would be a totally crazy decision. Probably the worst financial mistake of your life.

bowlhead99

A few potential flaws in your thinking (I don't have any specialist knowledge of the NHS scheme other than like nearly all final salary / defined benefit schemes it is reputed to be a good one)

yatinsardana wrote: »

Saving 40% tax right now or paying tax later doesn't really make much of a difference to me. It appears that in all likelihood I'd still be paying 40% tax on my annual pension!

What you contribute is saving you tax off the highest-taxed part of your current salary. For example in 2014/15 if you earn 45k you get (roughly) 10k personal allowance then 32k at 20% and the last 3k you pay 40% on. If you don't contribute that 3k and take the cash instead you are paying 40% tax and a chunk of national insurance (effectively, more than 40%) on it before you can put it in the ISA.

When you retire, lets say that optimistically you are on high rate tax as you suggest. I say optimistically because only 15% of the country pay high rate tax and the massive majority of those are in gainful employment. To be a higher rate taxpayer without a job, you need a large amount of investments or a very good pension. (clearly there are some people here who are doing it, but are not your typical pensioner - this is an investment board and not a normal crossection of the UK). But perhaps your final salary is good enough to get you there.

So, having avoided 40+% tax on your contributions today, what % tax do you really pay on the money when it reaches you in retirement as a 'high rate taxpayer'? Well, if current rules remain (as they have done for a very long time), 25% of the pot is entirely tax free. Then let's say what you have left: the 75% to deliver an annual taxable income, gets you a similar level to the 45k we were looking at before (i.e. just into high rate tax). You pay 40% on 3k of it, 0% on 10k of it, 20% on most of it. So you are paying on average, less than 20% on the annual pension income. And that annual pension income is only 75% of the value; the other 25% is tax free to clear your mortgage or give you several years' income at once, or whatever. So the blended average rate of what you get out is somewhere between zero and less-than-20%, while it was 40% saved when going in.

So, it's flawed reasoning to say I'm saving 40% now but pay 40% in retirement; the maths doesn't stand up. You are saving >40% now and will pay <20% in retirement. Of course if you are only saving 20% now to pay <20% in retirement it is less useful but hopefully you will cross into being a high rate salary band at some point, it sounds like you are planning that already.

The NHS contribution doesn't seem to make much of a real difference to me as as far as my understanding goes

If the scheme was the kind where all the contributions were being invested into a pension fund and over long term it would grow, then yes the 14% NHS contribution would make a lot of difference but here, I already know how much I'll be getting as long as I remain in the pension scheme

You are right that the absolute amount of cash they put in now is not your concern. They will perhaps put more in if the overall pension pot is getting low and less in other years if the returns are extraordinarly above target. As you get a guaranteed payout you don't care how much they have to put in to get you there. However, there is a big mistake in assuming that because you can ignore that percentage it is not much of a benefit to you.

The bit that you are missing is that the 14% employer contribution does make a lot of difference. Your nominal contribution (5%, 10%, 15%, whatever) PLUS their 14% is what allows them to grow the pot enough to a big enough level. If you give them 11% and they give them 14% there is 25% at work.

That level of total reward gets you the kind of return enabling you to giving up a small fraction of a salary now for 40 years... a small fraction of a junior doctor salary and later the same small fraction of a mid-tier doctor salary and later the same small fraction of an executive senior consultant salary... and then receive back a very large fraction (40/60ths = 67%) of an executive senior consultant salary for the next 40 years without doing any more productive work for the second half of your life. It is a staggering return.

Part of that is the miracle of compound investment returns but part of it is that half the investment and the compounding on the investment - or just call it a guarantee of a huge return - comes from the employer's money. Which you are turning away if you ignore the scheme and simply try to self-invest.

Sure, you can give up that 14% that they are willing to spend on you to enhance your returns and simply invest 28% rather than 14% of your own money. Assuming you are young now, and expect your pay rises to beat inflation over the years (i.e. you are not just doing the same junior job with inflationary payrises at 2% here and there, but you are moving up the ranks to double or triple or quadruple your salary in real terms over the course of your career): have you looked into what fraction of your salary you would need to start putting away now to deliver 40 years of an inflation-linked earning stream at 2/3rds of your final salary? You might find it's 25-30%+.

Dunstonh is correct on this. But you don't need to be a financial advisor like he is, to see it.

[ISA wrapper vs pension wrapper stuff]
My thinking may be naive or even wrong but any thoughts would be appreciated

The argument of pension vs ISA has been done before.

Whether to pay income tax now and grow it tax free in an ISA wrapper, then take out the final amount tax-free ; or to not pay income tax now, grow it tax free in a pension wrapper, then take out the final amount taxable - has been done before.

Consider £100 of gross salary.
- Take it and pay 20% tax, invest the £80. Have the £80 increase 60x over the next 60 years with a great investment performance. You're left with £4800.
- Alternatively don't pay the tax and invest the £100 in a pension. Have the £100 increase 60x over the next 60 years with a great investment performance. Take it out of the wrapper and you have £6000 less 20% tax = 4800.

So the net or gross investment argument gets you to the same place. It is a wash if your marginal rate is literally the same number on the way in or the way out. But as shown before, the rate at each end of the time period is not going to be a flat 20%. The rate at the end, for most, will be considerably less than the average rate when you were employed, because you have an annual allowance at 0% and a low rate band before getting to the high band. Even if you don't consider the tax free lump sum.

If you do consider that tax free lump sum, you're getting access to a quarter of the cost and investment returns that didn't pay tax on the way in or the way out. That is why people like the pension wrapper, the tax savings usually make up for the loss of flexibility of having it tied up until you reach pension age.

And if you don't think the tax savings are enough on their own to make up for the loss of flexibility, what about the 14% of FREE MONEY from the employer. That is what is buying you high returns. Sure, their contribution rate is irrelevant to you because you just get a fixed (high) return. But one way to think about that 14% is to say 5% of it is adding to your pot to hopefully deliver a high return, another 5% is added in lower risk assets to buy you a guarantee of that high return come rain or shine, and then as a cynic, the last 4% is lost in the general inefficiency of any civil service / government organisation.

Whether the 14% this year really gets you the same return enhancement as putting aside another 14% of your own money, is not quite clear. But given you are young and have other priorities it is likely very much better for you to just enrol and give them the minimum you have to, to stay in the game and get the guaranteed free money and a safe retirment, than to not enrol and instead put aside 20-30% of your gross salary for personal investments and hope they all work out well. Especially while it is a relatively low salary for the first X years of your career.

yatinsardana

dunstonh wrote: »

You have got it all wrong. £ for £, what you pay into the NHS pension would beat every alternative option going. To get equivalent benefits using investments would cost you about 3 or 4 times per month than NHS pension would cost you.

The scheme is a defined benefit. You buy benefits in exchange for a monthly cost. There is no investment element. The contribution level by the employer is irrelevant.

An S&S ISA at 7% p.a. return would not come close to matching the NHS pension You would probably end up with something like half the benefit, it not less. it would be a totally crazy decision. Probably the worst financial mistake of your life.

Clearly the pension scheme is something that's too good to pass on. Thanks for your thoughts and for clarifying everything.