Opting out of NHS Pension

Coolrunnings

csgohan4 wrote: »

LOL you got to be having a laugh, I had a colleague with at least 50k tax bill with just under half of that being the AA tax charge/ over tapered allowance, I think your putting things too simplistic.


If you can afford it, remain the pension, as the longer your out means less contributions and less average earnings to get a high enough pension


Have a look at the examples, I wish I could pay 3-4 K for my AA charge


example :

Sorry I thought you were talking about the tapered loss of the annual tax free allowance.

The pension tax allowance isn't relevant if you opt out and save for retirement in an ISA.

Coolrunnings

HappyHarry wrote: »

Ok, let's clarify this.

I'm talking about purchasing an annuity. This is a guaranteed income for life to replace the NHS pension, which is a guaranteed income for life.

Yes, the annuity rate is rubbish, but that is what it is.

I'm illustrating a lifetime annuity, that rises with inflation forever, that pays a 50% spouses pension on death, and guarantees to pay out for a minimum of 5 years even if both parties die before then.

You are disparaging in your comments, and totally ignore the impact of inflation over what could've expected to be 28 years of retirement.

Please, don't try and put people off the NHS scheme, it is the most beneficial pension scheme they will ever have the opportunity to have. You are risking seriously damaging people's financial future with your incorrect assumptions and poor understanding of pensions, longevity and inflation.

Poor understanding of longevity? My calculations assume that the couple both live to 90, far exceeding their actuarial life expectancy for the sake of conservatism.

Poor understanding of inflation? All of my figures are fully inflation adjusted. The 3-5% safe withdrawal rate includes the annual payout (i.e., your self created 'pension') growing at inflation every year.

Granted there is a degree of uncertainty doing it yourself, but even using conservative numbers you are paying 500k extra for that added 'certainty'...and you will be certainly left with 0 when you are dead and gone.

Coolrunnings

HappyHarry wrote: »

Ok, let's clarify this.

I'm talking about purchasing an annuity. This is a guaranteed income for life to replace the NHS pension, which is a guaranteed income for life.

Yes, the annuity rate is rubbish, but that is what it is.

I'm illustrating a lifetime annuity, that rises with inflation forever, that pays a 50% spouses pension on death, and guarantees to pay out for a minimum of 5 years even if both parties die before then.

You are disparaging in your comments, and totally ignore the impact of inflation over what could've expected to be 28 years of retirement.

Please, don't try and put people off the NHS scheme, it is the most beneficial pension scheme they will ever have the opportunity to have. You are risking seriously damaging people's financial future with your incorrect assumptions and poor understanding of pensions, longevity and inflation.

Also want to discuss your 'guaranteed for life' NHS pension comment...

This is far from guaranteed. The NHS and country are in a bit of a mess.

There's a very high likelihood that all of the following will happen over the next 30 years:

- pension age will increase from its current level of 68 to 70+, decreasing the implied returns of the NHS pension and reducing it's value
- the pension plan is again restructured and employees are again forced to accept worse terms
- the lifetime pension allowance will decrease from it's current 1m (effectively just stealing money from people who have had the foresight to save) . Worth noting that this has decreased from 1.8m just 6y ago... A huge impact.

As you can see, this is far from guaranteed

Coolrunnings

HappyHarry wrote: »

Ok, let's clarify this.

I'm talking about purchasing an annuity. This is a guaranteed income for life to replace the NHS pension, which is a guaranteed income for life.

Yes, the annuity rate is rubbish, but that is what it is.

I'm illustrating a lifetime annuity, that rises with inflation forever, that pays a 50% spouses pension on death, and guarantees to pay out for a minimum of 5 years even if both parties die before then.

You are disparaging in your comments, and totally ignore the impact of inflation over what could've expected to be 28 years of retirement.

Please, don't try and put people off the NHS scheme, it is the most beneficial pension scheme they will ever have the opportunity to have. You are risking seriously damaging people's financial future with your incorrect assumptions and poor understanding of pensions, longevity and inflation.

Paul_Herring wrote: »

You're 'wrong' because you're giving far-too-sensible numbers for an annuity to compare with the NHS scheme, when apparently the only thing to do with a pension pot is to use drawdown. Starting at 4%. With inflation.

I don't think you have actually read the Trinity Study or any of the retirement literature.

1. The 3-4% withdrawal rate studied includes annual increases for inflation.
2. The 'drawdown' method as you call it is a bit of a misnomer. In the vast majority of cases using a 3-4% withdrawal rate (increased for inflation every year) will leave a sizeable pot behind when you die (96% chance of leaving greater than 100% of your original pot size after 30y). Whereas buying an annuity is an immediate 100% drawdown and you are left with 0.
3. The Trinity Study is slightly simplistic, yes. If anything you can achieve better / less volatile returns (and therefore a higher SWR) with a more sophisticated (but still very passive / simple) globally divrsified investment strategy.
4. Your 'US focused' point is irrelevant. You can also invest in US bonds and equities. And, as per point #3, a more global strategy would've yielded better results.
5. Opting out gives you the choice to waste your money with the certainty (of losing all of your money) of an annuity or the safe withdrawal rate method. The NHS pension would give this person the 'certainty' of a 3.5% real return...assuming a. the pension age remains the same (no way), b. the pension scheme doesn't change (no way) and c. the lifetime alowace isn't reduced (no way).

At the end of the day the IRR of this incredibly uncertain, inflexible option is 3.5%. Can you do better in the market? Absolutely. Even if you could only obtain 3% in the market it may be worth opting out to avoid the a.b. and c. discussed above.

Please don't respond until you have read and understood some of the retirement literature. If you come back with another 'yeah but inflation...' point which is clearly addressed I cba responding.

mgdavid

If you're going to quit the NHS pension scheme wouldn't it be better to replace it with Bitcoin?

HappyHarry

Coolrunnings wrote: »

I don't think you have actually read the Trinity Study or any of the retirement literature.

1. The 3-4% withdrawal rate studied includes annual increases for inflation.
2. The 'drawdown' method as you call it is a bit of a misnomer. In the vast majority of cases using a 3-4% withdrawal rate (increased for inflation every year) will leave a sizeable pot behind when you die (96% chance of leaving greater than 100% of your original pot size after 30y). Whereas buying an annuity is an immediate 100% drawdown and you are left with 0.
3. The Trinity Study is slightly simplistic, yes. If anything you can achieve better / less volatile returns (and therefore a higher SWR) with a more sophisticated (but still very passive / simple) globally divrsified investment strategy.
4. Your 'US focused' point is irrelevant. You can also invest in US bonds and equities. And, as per point #3, a more global strategy would've yielded better results.
5. Opting out gives you the choice to waste your money with the certainty (of losing all of your money) of an annuity or the safe withdrawal rate method. The NHS pension would give this person the 'certainty' of a 3.5% real return...assuming a. the pension age remains the same (no way), b. the pension scheme doesn't change (no way) and c. the lifetime alowace isn't reduced (no way).

At the end of the day the IRR of this incredibly uncertain, inflexible option is 3.5%. Can you do better in the market? Absolutely. Even if you could only obtain 3% in the market it may be worth opting out to avoid the a.b. and c. discussed above.

Please don't respond until you have read and understood some of the retirement literature. If you come back with another 'yeah but inflation...' point which is clearly addressed I cba responding.

Correct me if I'm wrong, but are you suggestig that NHS workers opt out of their pension scheme, and instead put their contributions to a personal pension that constantly delivers 3% above inflation growth.

Then, by retirement, they will be better off than they would have been by remaining in the NHS pension.

If so, you are terribly deluded.

Paul_Herring

Please don't respond until you have read and understood some of the retirement literature.

May I suggest you do that instead, since given your posts on this thread, you may have done some (but clearly not enough of) the first, but not a lot of the second.

Or, to repeat myself, you're simply trolling - you cannot directly compare contributions into the NHS scheme with a simplistic drawdown of a pension fund otherwise funded by contributions that would have gone into the NHS pension scheme, based on Trinity or anything similar to it.

Yet that's exactly what you're doing, and you're telling people to ditch the NHS scheme based on that exact comparison.

As a tax payer, I should probably thank you for it, but I'm fairly certain those working in the NHS certainly wouldn't.

Paul_Herring

Correct me if I'm wrong, but are you suggestig that NHS workers opt out of their pension scheme, and instead put their contributions to a personal pension that constantly delivers 3% above inflation growth.

Then, by retirement, they will be better off than they would have been by remaining in the NHS pension.

They're either very bad at getting their point across, or that's exactly what they're doing.

I'm leaning towards the latter.

Coolrunnings

HappyHarry wrote: »

Correct me if I'm wrong, but are you suggestig that NHS workers opt out of their pension scheme, and instead put their contributions to a personal pension that constantly delivers 3% above inflation growth.

Then, by retirement, they will be better off than they would have been by remaining in the NHS pension.

If so, you are terribly deluded.

3.5% is the break even rate - the rate implied by the NHS pension in the case of the OP, assuming they live to 90.

You may be able to stomach lower than this - depends on your views on likelihood of :

- Increase in state pension age (currently 68 for OP but likely to be 70+)
- Deterioration of NHS pension (has been downgraded twice in the last 13 years...looks likely to continue)
- Reliability of government set CPI

Coolrunnings

Paul_Herring wrote: »

May I suggest you do that instead, since given your posts on this thread, you may have done some (but clearly not enough of) the first, but not a lot of the second.

Or, to repeat myself, you're simply trolling - you cannot directly compare contributions into the NHS scheme with a simplistic drawdown of a pension fund otherwise funded by contributions that would have gone into the NHS pension scheme, based on Trinity or anything similar to it.

Yet that's exactly what you're doing, and you're telling people to ditch the NHS scheme based on that exact comparison.

As a tax payer, I should probably thank you for it, but I'm fairly certain those working in the NHS certainly wouldn't.

So many words, such little thought.

The IRR is c.3.5%. This is a direct comparison.

Confounding factors (which I believe weigh in favour of opting out):

- Any potential tax benefits (not applicable if you are investing in an ISA)
- Spouse benefit (above assumes you both live to 90)
- Life / sickness insurance benefit in event of early death / sickness
- Lack of liquidity in NHS pension vs. opting out, and severe penalties for early withdrawal
- "Certainty" of NHS pension payouts vs. the markets
- Views on future of NHS / state pension and retirement age (not looking good)

Given the above (3.5% IRR and all of the above factors), how is staying in the scheme such a slam dunk?

!!!!!! the scheme doesn't even invest its money! It is literally a (rapidly shrinking) ponzi scheme!