NHS Pension advice

redlfc

Hello all, just wanted some advice regarding the NHS pension - have done some reading on it but am still slightly confused

Background - 25 year old junior doctor , enrolled in 2015 CARE NHS pension which is from what I understand still a good scheme . I went to medical school post 2012 when tution fees increased to 9k and did not realise interest rates were 6.6% from the moment the loan started - this has left me with a repayment figure of 80k - having done some calculations due to eventually hopefully being a higher earner I will probably pay around 140k in my lifetime due to added interest

I live at home with parents so have tried to save the majority of my salary (net pay is around 1.8k a month) currently I have 28k in Santander 123 account which I know only has an effective interest of 1.2% after taking off monthly fee up to 20k. I also have 2.5k in Nationwide Flexdirect earning 5%, and have a First Direct account which I claimed the £125 switching bonus for. I also have the 5% regular savers for all 3 current account which I am paying £200, £250, £300 a month into (maximum) - I also have just started H2B with 1200 in it which gives me total savings all in all of around 38k


from what i understand you receive 1/54 of annual salary per year and this amount is then multiplied by CPI +1.5% with further revaluation percentage - in reality I have no idea what this means in terms of how much I can expect to receive - I know its very difficult to workout as its based on a career average scheme but a breakdown of rough estimate figures would be helpful.

For example my current salary is 30k (this is basic pay that pension is deducted on - i believe you are not meant to include additional amounts for nights/weekends etc as my pension contribution is 9.3% of the basic (pensionable) pay.

So at 25 years old - if i continue paying into NHS pension how would I use this figure to make any calculations? 1/54 of 30k is 555 pounds a year - this is the equivalent to 2 months contribution for me currently so does not make any sense

I have been reading forums which talk about investing into SIPP to try and bridge the retirement age until i reach SPA - however this is complicated by the LTA which again, im not really sure how I can calculate if i will reach this. If that is not worth it - then I guess investing into S&S ISA/LISA would be more appropariate

Would be very grateful for your help!

NoMore

redlfc wrote: »

For example my current salary is 30k (this is basic pay that pension is deducted on - i believe you are not meant to include additional amounts for nights/weekends etc as my pension contribution is 9.3% of the basic (pensionable) pay.

So at 25 years old - if i continue paying into NHS pension how would I use this figure to make any calculations? 1/54 of 30k is 555 pounds a year - this is the equivalent to 2 months contribution for me currently so does not make any sense

First off in your particular pension scheme there is no direct link between the amount you contribute and the amount you will recieve from the future pension. As its a Defined benefit scheme, not a Defined Contribution scheme.


Also you are missing the fact you get that £555 every year for the rest of your life at retirement, so it wouldn't take long for it to outpace the amount you contributed.


Also you build another 1/54 up each year your in the scheme. So by the time you retire it could be for example you are getting 30/54 of your salary annually. So a simple example assuming you get no career advancement and no inflation adjustment. 30/54 x 30k = 16.6k per year for the rest of your life.

HappyHarry

from what i understand you receive 1/54 of annual salary per year and this amount is then multiplied by CPI +1.5% with further revaluation percentage - in reality I have no idea what this means in terms of how much I can expect to receive - I know its very difficult to workout as its based on a career average scheme but a breakdown of rough estimate figures would be helpful.

For example my current salary is 30k (this is basic pay that pension is deducted on - i believe you are not meant to include additional amounts for nights/weekends etc as my pension contribution is 9.3% of the basic (pensionable) pay.

So at 25 years old - if i continue paying into NHS pension how would I use this figure to make any calculations? 1/54 of 30k is 555 pounds a year - this is the equivalent to 2 months contribution for me currently so does not make any sense

The NHS pension scheme is brialliant, even now it's a CARE scheme.


Ignoring inflation, which just adds confusion, your pension might look like the following;

If you were on £30k for the rest of your life, and you completed 35 years working for the NHS, you could expect a pension of;
35/54 x £30,000 = £19,444 per year

Just to put this in contect, you will be contributing 9.3% of your salary, so;
9.3% x 35 x £30,000 = £97,650


You would be buying an income of £19,444 per year, for as long as you live, for a cost of £97,650. That's a cracking deal.

It's far, far better when you consider then whole thing to be index linked.

To look at your example of adding £555 per year for every year you work;

Work for 1 year - final pension will be 1x £555 = £555 pa
Work for 2 years - final pension will be 2x £555 = £1,110 pa
Work for 20 years - final pension will be 20x £555 = £11,100 pa

The above all gets even better if you get promoted between now and retirement.

GunJack

so, £555p.a. pension earned this year, at CPI+1.5% (if CPI averages 2.5%pa for 30 years), that £555p.a. earned this year will be worth £1800p.a. after 30 years....

say next year you earn £600p.a. pension, after 29 years that would be £1871p.a.

so, for this year and next, your earned pension in 30 years from now would be £3671p.a.

The joys of compound interest (especially over inflation....)

You can't really make use of the 9% contribution rate, defined benefit schemes don't work like that. Just rest assured if you stay in the NHS (and the pension scheme) you'll probably be retiiring early in order to not breach the LTA, but with a guaranteed income for rest of your life

redlfc

GunJack wrote: »

so, £555p.a. pension earned this year, at CPI+1.5% (if CPI averages 2.5%pa for 30 years), that £555p.a. earned this year will be worth £1800p.a. after 30 years....

say next year you earn £600p.a. pension, after 29 years that would be £1871p.a.

so, for this year and next, your earned pension in 30 years from now would be £3671p.a.

The joys of compound interest (especially over inflation....)

You can't really make use of the 9% contribution rate, defined benefit schemes don't work like that. Just rest assured if you stay in the NHS (and the pension scheme) you'll probably be retiiring early in order to not breach the LTA, but with a guaranteed income for rest of your life

thanks so much for the reply! in your example is that also taking into account the 1/54 increase per year?

also in regards to LTA - is this something id be able to monitor/caluclate in anyway once im closer to it? and if I were to breach it - are you saying it would make more sense financially to simply stop working with no income and wait till SPA to receive pension rather than to continue working once LTA is surpassed and take 55% hit on income above 1million limit?

poppy10_2

redlfc wrote: »

also in regards to LTA - is this something id be able to monitor/caluclate in anyway once im closer to it? and if I were to breach it - are you saying it would make more sense financially to simply stop working with no income and wait till SPA to receive pension rather than to continue working once LTA is surpassed and take 55% hit on income above 1million limit?

The lifetime allowance has almost halved (from 1.8 million to 1 million) just over the last 7 years under this government. Future governments will tinker with the allowance too. By the time you retire in 43 years time, the cap and the rules will have changed several times over. No point worrying about this issue now, you can't plan for it.


For those hospital consultants that are near retirement it is a more pressing issue. Many of them are having to reduce their income by going part time, or retire early. Just stopping working without retiring and claiming the pension isn't an option for most people - having no income at all to live on for 5-10 years isn't feasible

Moonwolf

I'm sure someone will correct me if I'm wrong but I think the LTA (£1 million) uses a value of 20x your defined benefit. So equal to a pension of £50k a year. This is better than you would get as an annuity from £1 million, particularly as it includes inflation growth and a widows/widowers pension .

When you reach that you have three choices, stay in but accept heavy tax penalties. Stay working but opt out of the scheme and invest elsewhere, ISAs, property, your own private practice or retire, which would be dependent on your savings.

In the meantime there are likely to be changes, there are campaigns for additional relief for doctors from the LTA in order to keep them in the profession and there will usually be other tax efficient vehicles around.

redlfc

HappyHarry wrote: »

The NHS pension scheme is brialliant, even now it's a CARE scheme.


Ignoring inflation, which just adds confusion, your pension might look like the following;

If you were on £30k for the rest of your life, and you completed 35 years working for the NHS, you could expect a pension of;
35/54 x £30,000 = £19,444 per year

Just to put this in contect, you will be contributing 9.3% of your salary, so;
9.3% x 35 x £30,000 = £97,650


You would be buying an income of £19,444 per year, for as long as you live, for a cost of £97,650. That's a cracking deal.

It's far, far better when you consider then whole thing to be index linked.

To look at your example of adding £555 per year for every year you work;

Work for 1 year - final pension will be 1x £555 = £555 pa
Work for 2 years - final pension will be 2x £555 = £1,110 pa
Work for 20 years - final pension will be 20x £555 = £11,100 pa

The above all gets even better if you get promoted between now and retirement.

thanks so much for the explanation. Whilst it is a very attractive offer, in the example you have provided for instance I would have to outlive SPA by 5 years alone just to recoup the money I invested. That would likely be 75 years old by that time - and whilst I would hope to live past this nothing is for granted - and to have to live past 75 to make any "profit" on my original deposits across lifetime is not ideal.

Also what would happen if I were to die before even reaching SPA/just after?

Other issue is LTA - is there a way I can monitor this during my career and if I do surpass it - would I be better off simply stopping working and waiting for SPA or continuing to work and taking the 55% hit on whatever is above 1 million. I know its roughly 20x firsy year income plus lump sum

From my understanding, you get 25% of total pension pot tax free, then pay income tax on the rest as per normal tax brackets - but some articles suggest higher rate tax payers will immediately get all income taxed at 40% rather than just the amount above usual 46,250 bracket - is this true?

sorry for all the quetions

Moonwolf

Whilst it is a very attractive offer, in the example you have provided for instance I would have to outlive SPA by 5 years alone just to recoup the money I invested. That would likely be 75 years old by that time - and whilst I would hope to live past this nothing is for granted - and to have to live past 75 to make any "profit" on my original deposits across lifetime is not ideal.

To a certain extent you are correct but this is like life insurance in reverse, you are betting you will live longer, this is usually a good bet. A good rule of thumb for how long you live is take the average age all your grandparents died and add 5 years. This gives me 88 which is quite realistic but I could well live into my 90s. Plus there is the partners element, the fact that as a doctor you will be wealthy that has a good correlation with life expectancy.

If you save the money outside a pension you will lose the tax benefit and a your employer's contribution. In real terms, for the NHS scheme, that is probably worth £1.50 extra for each £ invested (very difficult to estimate properly with a DB scheme) so you will almost certainly have saved less. When you have saved that money you still need to spend it at a rate that assumes you will live until your 80s or 90s, you haven't made the problem of having money left go away.

crv1963

redlfc wrote: »

Hello all, just wanted some advice regarding the NHS pension - have done some reading on it but am still slightly confused

Background - 25 year old junior doctor , enrolled in 2015 CARE NHS pension.

I have been reading forums which talk about investing into SIPP to try and bridge the retirement age until i reach SPA - however this is complicated by the LTA which again, im not really sure how I can calculate if i will reach this. If that is not worth it - then I guess investing into S&S ISA/LISA would be more appropariate

Would be very grateful for your help!

For all of the criticism about the 2015 scheme being less generous than previous versions it is still a very good buy. As others have pointed out you cannot match it on the open market for costs vs benefits.

There will no doubt be many changes and variations over course of your career. All you can do is work within the rules as they are at the time. So given current rules and LTA it makes sense for you to keep abreast of any rule changes and adjust your savings goals as you go along.

If rules change over LTA for doctors- many rushing to reduce hours or retire before the LTA penalises them too hard is a current example of unintended consequences of policy to manage one thing (city fat cats as the papers label them, hard workers who know how to work the rules to others) that hits people the papers/ public value (but without the income generated by the financial sector there would be less tax take to pay for the doctors).

I would suggest that the other benefits of the scheme that don't attract as much attention are equally important- the life cover, illness cover and survivor benefits. So for that reason I'd strongly recommend staying in it.

To your situation- you are young and have a career and life to live, I'd suggest direct savings into tax efficient options currently available, maybe Help to Buy ISA, Lifetime ISA to help get on the property ladder, also maybe to build tax efficient options for later life- retire earlier, travel, family etc.

I was advised at 21 by an old charge nurse (probably a few years younger than I am now!)- Spend a bit (here and now, live life), Save a bit (for what I want, home, cars, holidays), Gamble a bit (Long term savings such as what are now ISAs) and remember that it is all underwritten by the knowledge that I have a gold plated pension for security in my old age!

Whatever you do with your life and career keep the NHS Pension and if you marry/ enter long term relationship, encourage your partner to also make pension savings, two is better than one for tax reasons in retirement no point in wasting a partners tax allowance!

Good Luck!

HappyHarry

redlfc wrote: »

thanks so much for the explanation. Whilst it is a very attractive offer, in the example you have provided for instance I would have to outlive SPA by 5 years alone just to recoup the money I invested. That would likely be 75 years old by that time - and whilst I would hope to live past this nothing is for granted - and to have to live past 75 to make any "profit" on my original deposits across lifetime is not ideal.

Also what would happen if I were to die before even reaching SPA/just after?

Other issue is LTA - is there a way I can monitor this during my career and if I do surpass it - would I be better off simply stopping working and waiting for SPA or continuing to work and taking the 55% hit on whatever is above 1 million. I know its roughly 20x firsy year income plus lump sum

From my understanding, you get 25% of total pension pot tax free, then pay income tax on the rest as per normal tax brackets - but some articles suggest higher rate tax payers will immediately get all income taxed at 40% rather than just the amount above usual 46,250 bracket - is this true?

sorry for all the quetions

SPA = 68 / life expectancy = 86 - That's an average of 18 years pension. Why do you think that SPA will exceed 68?

If you die before or after taking your pension, your spouse will get 50% of your pension for their lifetime.

LTA is not going to be a problem unless your pension exceeds £50,000pa. Even then, in most situations with NHS pensions, it is better to get the larger pension and suffer the LTA charge than to opt-out of the scheme. This isn't something you will need to worry about for many, many years, as the LTA is also index-linked.

Pension income is treated as earned income for tax purposes. e.g. if £5k of your pension falls into the higher rate tax bracket, then you pay higher rate tax on that £5k, not on all your pension. Also, pensions are exempt from National Insurance Contributions.

Forgive me if I am wrong, but you appear to be looking for reasons not to be in the NHS pension scheme. I would suggest that opting out of the NHS pension scheme would probably be the worst financial decision that you will ever make.