New lifetime allowance

yatinsardana

This is very early days for me but I wanted to get your opinion on this. Since the lifetime allowance has now changed to 1.25m, I want your opinion as to whether or not I should start putting money into sipp.

I'm on NHS work pension which is a defined benefit. The pension calculation works such that your final pension comes to be roughly 2/3 of your final salary. Going by an average final salary of roughly 90k, pension can be estimated at 60k.
Lump sum allowed is 4.28*pension

Apparently the way to work out lifetime pension for people on DB schemes is 20x Pension + lump sum
Therefore it appears the total pension value in my scenario will be over 1.25m

As a result, do you think that for the moment I shouldn't put any money in sipp (I haven't got a sipp yet but was planning to get one)?

Secondly, in terms of my nhs pension being valued over 1.25m, do you guys suggest that at the moment I continue paying into my pension as I'm only in my twenties right now and closer to my retirement, I can see if the pension rules have changed and if I'm still over the allowance, I can take a few years out of pension?

hugheskevi

I'm on NHS work pension which is a defined benefit. The pension calculation works such that your final pension comes to be roughly 2/3 of your final salary. Going by an average final salary of roughly 90k, pension can be estimated at 60k...I'm only in my twenties right now

So presumably you will be moving to a career average pension in April 2015 with a Normal Pension age of 68 (or more).

Note that you could commence pension early, currently age 55 for most, (with actuarial reduction) to reduce usage of annual allowance.

Secondly, in terms of my nhs pension being valued over 1.25m, do you guys suggest that at the moment I continue paying into my pension as I'm only in my twenties right now and closer to my retirement, I can see if the pension rules have changed and if I'm still over the allowance, I can take a few years out of pension?

The rules will change many times in the next 40 years. Take what is on offer now and worry about changes when they happen or when you have large amounts saved in a pension (at least £500,000).

I wouldn't let the LTA changes dissuade me from SIPP contributions at this time, assuming I was a higher rate or additional rate taxpayer.

jem16

yatinsardana wrote: »

I'm on NHS work pension which is a defined benefit. The pension calculation works such that your final pension comes to be roughly 2/3 of your final salary. Going by an average final salary of roughly 90k, pension can be estimated at 60k.
Lump sum allowed is 4.28*pension

Working on a 2/3 - ie a 1/60ths scheme, the lump sum only comes about through commuting the pension. So should you take the lump sum, you lower the pension.

Apparently the way to work out lifetime pension for people on DB schemes is 20x Pension + lump sum

It's usually 16x pension plus lump sum ( for those with an 1/80ths scheme and automatic lump sum) or it's 20 x pension for those on a 1/60ths scheme with no addition for a lump sum.

Therefore it appears the total pension value in my scenario will be over 1.25m

It wouldn't. It would be £1.2m. Plus I think you're worrying unduly as you're comparing today's LTA with tomorrow's final salary - unlikely.

As a result, do you think that for the moment I shouldn't put any money in sipp (I haven't got a sipp yet but was planning to get one)?

I wouldn't worry about extra contributions just yet, especially starting out as a basic rate taxpayer.

yatinsardana

hugheskevi wrote: »

So presumably you will be moving to a career average pension in April 2015 with a Normal Pension age of 68 (or more).

Note that you could commence pension early, currently age 55 for most, (with actuarial reduction) to reduce usage of annual allowance.

Is the 2015 pension scheme out? I thought it wasn't out yet and that there were just rumours surrounding what it would be like?

If it's out can you give the link where you're getting the info from so I can compare and see how it's changing.

Thanks for your advice! In order to take my pension early, I suppose I'd actually have to retire early. I know at least with the current scheme you lose a lot of money by retiring early - but I take your point on board in that if I'm over limit then it may be a good idea to bring myself within limit

jem16

yatinsardana wrote: »

Is the 2015 pension scheme out?

No as it's not April 2015 yet.

I thought it wasn't out yet and that there were just rumours surrounding what it would be like?

All the details aren't as yet finalised but we have the main idea.

If it's out can you give the link where you're getting the info from so I can compare and see how it's changing.

http://www.nhsbsa.nhs.uk/Pensions/4017.aspx

Thanks for your advice! In order to take my pension early, I suppose I'd actually have to retire early. I know at least with the current scheme you lose a lot of money by retiring early - but I take your point on board in that if I'm over limit then it may be a good idea to bring myself within limit

I would be very surprised if you're over the limit in 40 odd years.

yatinsardana

jem16 wrote: »

No as it's not April 2015 yet.



All the details aren't as yet finalised but we have the main idea.



http://www.nhsbsa.nhs.uk/Pensions/4017.aspx



I would be very surprised if you're over the limit in 40 odd years.

Thank you all for the info, really helped me clarify the doubts.
Gutted that the work pension age will change to 68
I suppose start saving so you can retire early (by early I mean 65)

hugheskevi

It's usually 16x pension plus lump sum ( for those with an 1/80ths scheme and automatic lump sum) or it's 20 x pension for those on a 1/60ths scheme with no addition for a lump sum.

I think you are mixing up Annual Allowance and Lifetime Allowance factors.

The accrual rate doesn't make any difference to the calculations. The Annual Allowance uses factor 16 (reflecting that it is used to value pension contributions, and is based around a 47 year old which was typical of those breaching the £50,000 allowance when it was lowered in 2011) whereas the lifetime allowance is factor 20 reflecting the factor which very roughly reflects the value of a DB pension for someone aged 60 which is broadly when they will be commencing their pension (although this factor is now rather out of date).

In both cases, accrued pension income is multiplied by the relevant factor and any automatic lump sum added to give the valuation.

Gutted that the work pension age will change to 68

Never really understood the fascination people seem to have with Normal Pension ages, which could just as easily be called reference point at which unreduced pension is payable.

With actuarially fair early retirement factors and a right to commence pension earlier than normal pension age, the normal pension age is pretty much irrelevant.

So pretend you have a normal pension age of 60 but a lower accrual rate, then you won't be gutted Whatever you do, don't let the Normal Pension age dominate your expectations and plans - the whole purpose of planning is to achieve what you want, not what someone else suggests you should want.

I suppose start saving so you can retire early (by early I mean 65)

Engaging with these things in your 20s gives you a very broad range of choices, assuming you have average or above average income. There is no reason at all why you couldn't retire at age 55 or even earlier with a bit of planning, discipline and consuming a bit less given the early start to that planning.

Beware of putting too much into a pension at an early age - saving is important, tax efficiency is important, but so is liquidity. If all you would be getting is basic rate relief on personal pension contributions then I'd question whether it would be the right thing to do.

Make sure you have a good balance between what you save in a pension, what you save in your primary dwelling/deposit/mortgage payments, what goes into ISAs and what goes into other investments you may have (unwrapped investments, buy-to-let, or whatever). To have a good balance, you should be understanding why you are choosing to save in whatever you save in, and why you are rejecting the alternatives. It might be right to focus all on one thing, but usually a balance is best which can be a bit hard to work out and optimise. In any event, it will change over time so as long as it isn't ridiculous it doesn't matter too much, particularly in the early days.

Also don't get too obsessed with saving, and remember that 20s and 30s are a good time to have fun which will require some spending