NHS Pension Scheme Question

Squible

Hello,

I am about to start a career in the NHS and want to understand the pension scheme fully in order to get the best benefit from it. I'm sure the answers are fairly obvious but I am having trouble getting my head around the full scheme. I am also aware that as pensions go, although benefits have been cut back in recent years, it is still a very good scheme.

1) I understand that it is a career average earnings scheme and my yearly payout will be based on years contributed and average salary. Will the pension payout be taxed as income? Or are pension payouts tax free?

2) I am currently 24 and although this can't be predicted, I estimate I will be working for the NHS until retirement age. Along with predicted earnings, this would put my pension over the lifetime allowance (based on yearly pension payout x20). With this in mind, would it make sense to not contribute to the scheme in the earlier years of my career, whilst I am in the lower tax bracket? As there will be greater tax benefit if I contribute whilst in the 40% tax bracket?

3) If my pension does exceed the lifetime allowance, how will it be taxed. I understand the tax rates are 55% for lump sum amounts and 25% otherwise for any amount that goes over the lifetime allowance. Is this tax in addition to income tax when withdrawing a pension?

I understand these questions are probably fairly simple but I haven't really thought about pensions until now.
Thank you in advance for the replies!

HappyHarry

Squible wrote: »

Hello,

I am about to start a career in the NHS and want to understand the pension scheme fully in order to get the best benefit from it. I'm sure the answers are fairly obvious but I am having trouble getting my head around the full scheme. I am also aware that as pensions go, although benefits have been cut back in recent years, it is still a very good scheme.

1) I understand that it is a career average earnings scheme and my yearly payout will be based on years contributed and average salary. Will the pension payout be taxed as income? Or are pension payouts tax free?

2) I am currently 24 and although this can't be predicted, I estimate I will be working for the NHS until retirement age. Along with predicted earnings, this would put my pension over the lifetime allowance (based on yearly pension payout x20). With this in mind, would it make sense to not contribute to the scheme in the earlier years of my career, whilst I am in the lower tax bracket? As there will be greater tax benefit if I contribute whilst in the 40% tax bracket?

3) If my pension does exceed the lifetime allowance, how will it be taxed. I understand the tax rates are 55% for lump sum amounts and 25% otherwise for any amount that goes over the lifetime allowance. Is this tax in addition to income tax when withdrawing a pension?

I understand these questions are probably fairly simple but I haven't really thought about pensions until now.
Thank you in advance for the replies!

1. Taxed as income.
2. No. The lifetime allowance will increase with inflation each year. It would be a far bigger risk to not contribute than it would be to contribute.
3. It's additional tax. If your NHS pension in retirement is really going to exceed the equivalent of £50k per year in today's money, then that's the price you will have to pay for having a guaranteed lifetime income far, far in excess of most people's retirement income.

It's a fantastic pension, and you would be mad not to grab it immediately with both hands.

Good luck in your career.

Silvertabby

Further to HappyHarry's answer, your eventual pension will be taxed as income, but you get tax relief on your current pension contributions.

It sounds like you are/will be on a higher than average salary, and I know of some people who have looked at their pension contributions (which are shown on your payslip without the tax relief) and have thought 'eek - I can't afford that!' but opting out of a public sector defined benefit pension scheme must be one of the daftest things anyone could possibly do.

kidmugsy

Squible wrote: »

I am currently 24 and although this can't be predicted, I estimate I will be working for the NHS until retirement age. Along with predicted earnings, this would put my pension over the lifetime allowance (based on yearly pension payout x20). With this in mind, would it make sense to not contribute to the scheme in the earlier years of my career, whilst I am in the lower tax bracket? As there will be greater tax benefit if I contribute whilst in the 40% tax bracket?

That's an entirely logical notion. But will you really stay with the NHS and have the career you expect? Will the pension scheme and tax laws remain unchanged? Can you be confident that you might never wish to retire early and draw your pension after actuarial reduction?

In the light of these uncertainties it's quite likely that the way to bet is to contribute to the NHS scheme even while you are a 20% taxpayer. Not only will it buy you pension rights but also the other benefits - insurance and so on - that DB schemes tend to offer.

I suppose that that is the risk-averse option: if you have a taste for financial risk then you might opt for the policy you described.

If I were in your shoes and had a taste for financial risk I think I might still contribute to the pension and seek the risk in other ways.

crv1963

Squible wrote: »

Hello,

I am about to start a career in the NHS and want to understand the pension scheme fully in order to get the best benefit from it. I'm sure the answers are fairly obvious but I am having trouble getting my head around the full scheme. I am also aware that as pensions go, although benefits have been cut back in recent years, it is still a very good scheme.

1) I understand that it is a career average earnings scheme and my yearly payout will be based on years contributed and average salary. Will the pension payout be taxed as income? Or are pension payouts tax free?

2) I am currently 24 and although this can't be predicted, I estimate I will be working for the NHS until retirement age. Along with predicted earnings, this would put my pension over the lifetime allowance (based on yearly pension payout x20). With this in mind, would it make sense to not contribute to the scheme in the earlier years of my career, whilst I am in the lower tax bracket? As there will be greater tax benefit if I contribute whilst in the 40% tax bracket?

3) If my pension does exceed the lifetime allowance, how will it be taxed. I understand the tax rates are 55% for lump sum amounts and 25% otherwise for any amount that goes over the lifetime allowance. Is this tax in addition to income tax when withdrawing a pension?

I understand these questions are probably fairly simple but I haven't really thought about pensions until now.
Thank you in advance for the replies!

At 24 years old and starting out in the NHS, I'd definitely advise stay in the scheme, going over the LTA at some future point will be dependant on several factors, namely profession and progression. You also need to factor personal things, marriage/ divorce/ children/ career breaks and all the other lifes curved balls scupper/ change and modify goals and dreams.


I'd also think about planning for and funding early retirement not scheme/ state pension age. I'd open a LISA and put a bit by for that, look at other savings vehicles to save tax/ form a pot to give you options for when you reach late 40s/ 50s and beyond.


If you have a partner/ spouse get them to put a bit away too. At 24 with a little planning and saving you can make a real difference to your older self. Believe me do you need that Costa coffee every day? Over 8 years I spent 16k in Costa, oh if only I'd saved half of that we could retire at least 6 months earlier with the power of compound interest.


Edit- There are steps you can take to reduce your pensionable pay, maybe not appropriate to your situation now as they also reduce the earnings taken into account for a mortgage. You could get an expensive/ fancy lease car, pay a charity through payroll and of course childcare vouchers (if applicable of course!) all reduce your pay of course so may be worth considering at some point.


Well done for thinking about your future now!

Squible

Thank you all for your very helpful comments and wishes. I definitely understand the scheme a lot better now. I know it is a great scheme and will definitely contribute to it. My plan was to opt out for the first 3-4 years of working and then contribute for the remainder of my career until I hit my lifetime allowance. I understand the argument that we can't predict what will happen in the future, that is why I am still a little bit on the fence with the idea. However, based on the past and the nature of my job my career path and salary progression is fairly secure and it is highly likely that I will reach the lifetime allowance. I have also modelled the data on excel and not contributing in the first few years only has a very small impact on the pension. One of the reasons for opting out in the first few years is that it will allow me to get a better mortgage and onto the property ladder quicker. I have lived fairly frugally as a student and am going to try to keep this up whilst working in order to save up as much as I can for a deposit (having a slightly higher income by not contributing to the pension scheme would also help with this).

So, to sum it up, the way I see it is that not contributing in the first few years will only have a small impact on my pension but having the extra income would feel like a lot more as I am just starting to work, it would also allow me to save up more for a house deposit and allow me to get a bigger mortgage. Obviously, on the other hand there is no way of knowing for certain how the future will play out. Do you still think it is more sensible to contribute to the pension from the beginning and just wait a little bit longer for a house? I am not dismissing your advice but I am trying to understand why you think it is better to contribute from the beginning. Once again, I am very grateful for all the advice and replies!

stoozie1

For what it's worth, everyone including my DH (age 42) would have expected him to hit the LTA by retirement age when he first qualified, as a dental surgeon working within the NHS and privately. But he won't. This is fine with us as we know this and are topping up with a SIPP, but I agree with CRV above, that you can't always predict your earnings or career trajectory at your age. (not said in a patronising tone of voice )

TARDIS

Welcome to the NHS!

Personally I'd say join the scheme now and wait a little longer for the house.

Not many people choose to work in the NHS for over 40 years. I don't know your role, but physical and mental burnout seems quite common in this sector. I also don't think job security is quite as good as it used to be either - not uncommon now to read about services being transferred to private companies where staff may have to move onto other terms and conditions (including pensions) if they want to progress further.

As others have said, contributing early on gives you more options later eg working part time then leaving early (my personal escape plan and I've not even completed 20 years of service yet!). Under current rules you can significantly reduce your lifetime allowance tax liability by taking the pension early with actuarial reduction.

You can be pretty confident that pension rules will be different in 40 years time, but exactly how is anyone's guess.

jscol

I suspect that we are in a similar line of work.
I'm 44 and may hit the LTA but I just don't know. I may or may not I suppose it depends when I retire and how the lifetime allowance increases. However I have 16 years of 1995 scheme (final salary) pension which was more generous than the present 2015 scheme. Despite this i can't be sure if the life time allowance will affect me (and I have worked full time since graduation) and therefore I suspect you can't predict either.

Points I would make:
1. The NHS pension gives you death in service benefits if you are contributing. These might seem much more important if you have dependents in a few years.
2. The NHS pension scheme could change again and a 2030 scheme could be considerably less generous again.
3. You may really not wish to be retiring at 67. Or not be physically able to carry on working until that age.

crv1963

Stay in the scheme! You have other benefits, like death in service, ill-health retirement so it would be foolish to come out. Besides which who is to say you don't get used to having the percentage you save towards a house and so dither about re-joining for years, until you are too close to retirement to make a difference?


Example my wife for years "I've got a bit going into pension so I'll be ok, then nothing going into pension but what I have will grow, to divorce of husband and subsequent marriage to me- oops do I really now need to put almost every penny into a pension so I can retire before SPA?" Me- "Yes and that will only be enough to keep you with the NHS Survivors Pension if I pre-decease you!"


Save now and get used to it, save more outside of it so you can retire when your older OH does so you can enjoy quality time together!

resilie

24 year old who thinks he will hit LTA is a junior doctor in my book... if you are a she remember "natural career breaks" such as maternity leave or LTFT working... even if you are a he you might end up working LTFT for some time as, you know, society is changing that way...looking around at how many junior doctors take career breaks, go to Oz for a bit or take the scenic route in training I really wouldn't be too worried about hitting the LTA...
but even more importantly I can almost guarantee you that you will no be working full-time till official retirement age (currently 67 but by the time you get to retire probably past 70). It is physically impossible to do this job for 40 years going full throttle... and if you truly are finding yourself approaching LTA towards the end of your career than for goodness sake retire! What's the point of having a good pension if you retire at 72, enjoy it for 8 years and then spend another 15 years in a nice nursing home... retire when you still have time to enjoy yourself..

My vote is start paying in now!