Confused about how the NHS Pension 2015 Works

Smedders11

I'm really struggling to understand how the NHS Pensions Scheme 2015 works in practice. In case anyone needs background on the scheme details can be found here:

http://www.nhsbsa.nhs.uk/Documents/Pensions/2015_Members_Guide_(V4)_03.2016_-_digital.pdf

It's a CARE scheme, and whilst I understand how the pension creates a pot every year and revalues every year according to a formula, I don't get how the build-up rate and my actual contributions work. To use the example in the document: someone on £18,000 would earn £333 (1/54th of pensionable pay) per year, which makes a single 'pot' and is then revalued every year. I've joined the NHS in the last year, and as it happens my earnings for the remainder of this tax year are just under £18,000 (the difference in to the example is that my contribution is 7.1%), and I've paid just shy of £1,200 in pension contributions.

This obviously doesn't match the £333. Is this because I've misunderstood something? Is it that I build up the 1/54th pot simply by being in the pension (i.e, I don't actually pay in £333), and that my actual contributions are in addition to these yearly 'pots'? To come back to the NHS's example, 20 years of pension pots equals a pension equals £13,500 a year; would the actual pension contributions be on top of this? Say I'd paid £20,000 in direct contributions by year 20, would that be a £20,000 + £13,500 from the pots?

Sorry if this is hard to understand. I'm struggling to actually communicate this!

hyubh

Smedders11 wrote: »

I don't get how the build-up rate and my actual contributions work.

There is no particular connection between the two.

This obviously doesn't match the £333. Is this because I've misunderstood something?

Yes, you have assumed a necessary connection when there isn't one. Currently contribution rates are banded by pay; that doesn't mean higher earners earn, pro rata, more pension for their higher contributions however. (Although, they shouldn't whinge either, given the pension benefits earned are still cheap at the price.)

Is it that I build up the 1/54th pot simply by being in the pension (i.e, I don't actually pay in £333), and that my actual contributions are in addition to these yearly 'pots'?

No, you just have a contribution rate to pay to be an active member of the scheme.

To come back to the NHS's example, 20 years of pension pots equals a pension equals £13,500 a year; would the actual pension contributions be on top of this?

No.

Say I'd paid £20,000 in direct contributions by year 20, would that be a £20,000 + £13,500 from the pots?

No.

Mistermeaner

Dont know details but I think you are confusing what you are paying in vs how much you get PER ANNUM out at the end.

Smedders11

Appreciate the corrections, hyubh. Not really any closer to understanding it though

Mistermeaner wrote: »

Dont know details but I think you are confusing what you are paying in vs how much you get PER ANNUM out at the end.

Seems to be the case.

Hmn. Gonna have to take a renewed look at how pensions like this work in general then!

Smedders11

hyubh wrote: »

No, you just have a contribution rate to pay to be an active member of the scheme.

That makes it quite clearer, I think. Upon retirement, rather than having a pot that is reduced as I use it, do I have something similar to an annuity?

RickyB2000

Correct. The scheme promises to pay you £333 every year from the scheme retirement age.

In exchange, you make a one off payment of £1200. Not a bad deal at all!

Mistermeaner

Amazing deal; no wonder the deficit keeps growing

Some in private sector would typically have too pay in about 10k to get the same out

Smedders11

Thanks for the help! Guess it was a square-peg-in-a-round-hole mindset I'd got myself in.

hyubh

Mistermeaner wrote: »

Amazing deal; no wonder the deficit keeps growing

There is no deficit because the NHS scheme is unfunded/'pay as you go', a bit like the state pension.

Mistermeaner

hyubh wrote: »

There is no deficit because the NHS scheme is unfunded/'pay as you go', a bit like the state pension.

I was referring to the budget deficit

hyubh

Mistermeaner wrote: »

I was referring to the budget deficit

Still excluded (notoriously). Remember when Royal Mail was privatised and George Osborne claimed requisitioning the Royal Mail final salary pension fund and converting the scheme into a pay-as-you-go one was bringing down the deficit? Central government (and certainly the current Chancellor of the Exchequer) loves its cash accounting.