NHS Pension advice

Twoplus

You have not included annual revaluation in your calculation. I quote from the 2015 members scheme booklet. "Your pension earned each year will increase each year by a rate know as revaluation in the period before you leave or retire by 1.5%plus treasury order's. So that first years £633.33 will increase every year by at least 1.5% for 40 years if you work for that long.

tibbles209

Hi Twoplus,

Thanks for your reply. I kept all of the above numbers in today's-money terms to keep it as simple as possible, but you are of course right, revaluation would make the pension more valuable than in my illustration

redlfc

tibbles209 wrote: »

While your pension contributions are calculated as a percentage your basic pay, you pay tax on your entire pay including your banding supplement (personal allowance notwithstanding), and increasing pension contributions would take your overall taxable income down, so if you are a higher rate taxpayer, less of your taxable income would be above the higher rate. I appreciate at 25 you are likely ~FY2 level and may not yet be a higher rate taxpayer, but you will be soon and for the vast majority of your working life.

It is impossible for me to work out exactly what ERRBO will cost me personally vs what I will personally get back as I do not know how much of my career I will work full time (I suspect I will end up working part time for many years) and thus have no idea how much I will earn, but you can use a hypothetical example to demonstrate the cost/value of ERRBO.

I have a basic (pensionable) pay of ~£34,200/yr currently, with an overall pay which takes me significantly above the higher rate tax threshold (I am in Scotland though so this hits me at a lower income than you). If I calculate hypothetically on the assumption that my pay is fixed at this level between ages 25-65;

-I pay £1262/yr = £50,480 over 40 yrs in ERRBO contributions, however as these contributions reduce my higher rate tax obligation (41% in Scotland) these contributions cost me the equivalent of £29,783 in take home pay.
-At age 65 when I take my pension (based on my current state pension age of 68, although this is probably optimistic) it would be worth 34,200/54 = 633.33 x 40 = £25,333/yr. I would get to use my tax-free allowance of £11,850 each of the years I am taking it (assuming I have indeed retired early), and the remainder would be taxed at ~21% (the Scottish tax system is too complicated now so it would actually work out slightly less than this but for simplicity...), resulting in my take home pension being £22,501/year, or £67,504 in total over the 3 extra years I get to take my pension.

The actual numbers, given that I expect my pay to substantially rise over the years, will of course be much bigger, and if I work full time for enough of my career I may even end up paying a bit of higher rate tax on a proportion of my pension, but its unlikely that I would lose out overall.
You may decide that the money would serve you better in your younger years than saving to retire 3 years earlier and that is fair enough, but if you do want to retire early I think you will struggle to find a way of bridging that gap with a similar pension income at less overall cost to you than ERRBO.

this is very interesting thanks for the breakdown

seems a good deal when you explain it that way - i wonder why it gets so much stick in general
do you know many people who are paying into ERRBO?

tibbles209

I think it is a good deal; to achieve a similar income over the 3 years of early retirement via pretty much any other means would almost certainly cost significantly more, especially if you have hit the lifetime allowance.

To be honest I've not discussed ERRBO with many people in real life, It came up with a group of 3 of my friends once (all junior doctors at the same stage as me) and 1 of them had signed up for ERRBO, the others hadn't heard of it. I think typically people around our age are relatively disinterested in pensions (which is a shame because this is the optimum stage in our careers to join ERRBO).

Best of luck with whatever you decide to do

GingerJim

What you need to do is make an Excel spreadsheet, map your age from 25 to 68 down the first column, then list your likely pensionable salary next to each (this is predictable to an extent for doctors and the pay amounts are all on the NHS Pay Circular documents freely available online), remembering as a junior it is just your basic pay which is pensionable, and as a consultant it is your basic pay plus your on call supplement. Then find out the current pension contribution brackets against pay (this isn't needed to work out your likely pension benefits but gives you an idea of what you'll be contributing each year), and then work out one 54th of each years pensionable salary. Add all of these up for 25 to 68 and the end number will be your annual pension (very, very, very roughly). You need to be aware if you take your pension before 68 (or whatever your retirement age is), there will be reductions to your pension as outlined in the NHS Pensions Documents. The ERRBO scheme allows you to take your pension up to three years earlier (minimum age of 65) without then incurring a penalty of taking it before your state pension age, but clearly you have to pay for this. Again there is info on the NHS Pensions Website. The other considerations for the future are life-time allowance (relevant to your NHS Pension and any other pension you may start contributing towards), annual pension benefits growth allowance, and total global income which can subsequently reduce your annual "growth" allowance and mean you encounter a tax bill - most likely if you earn in excess of £130,000 a year at present.

GingerJim

For me, aged 45, two years of ERRBO will cost me about £250 a month. Looking at the likely predictions, I need to live to 77 to make it financially viable - ie for it to pay for itself in terms of lump sum and annual pension.

redlfc

GingerJim wrote: »

What you need to do is make an Excel spreadsheet, map your age from 25 to 68 down the first column, then list your likely pensionable salary next to each (this is predictable to an extent for doctors and the pay amounts are all on the NHS Pay Circular documents freely available online), remembering as a junior it is just your basic pay which is pensionable, and as a consultant it is your basic pay plus your on call supplement. Then find out the current pension contribution brackets against pay (this isn't needed to work out your likely pension benefits but gives you an idea of what you'll be contributing each year), and then work out one 54th of each years pensionable salary. Add all of these up for 25 to 68 and the end number will be your annual pension (very, very, very roughly). You need to be aware if you take your pension before 68 (or whatever your retirement age is), there will be reductions to your pension as outlined in the NHS Pensions Documents. The ERRBO scheme allows you to take your pension up to three years earlier (minimum age of 65) without then incurring a penalty of taking it before your state pension age, but clearly you have to pay for this. Again there is info on the NHS Pensions Website. The other considerations for the future are life-time allowance (relevant to your NHS Pension and any other pension you may start contributing towards), annual pension benefits growth allowance, and total global income which can subsequently reduce your annual "growth" allowance and mean you encounter a tax bill - most likely if you earn in excess of £130,000 a year at present.

Yes thank you thats a good summary! Having done a fair bit of reading Ive decided to continue to pay into NHS pension but not take up ERRBO. Also as I am likely to be a high earner and encounter LTA at some point - ive decided not to invest in SIPP which will be included in LTA amount and instead invest in LISA/ISA as a retirement bridging strategy

redlfc

GingerJim wrote: »

For me, aged 45, two years of ERRBO will cost me about £250 a month. Looking at the likely predictions, I need to live to 77 to make it financially viable - ie for it to pay for itself in terms of lump sum and annual pension.

yeah it does not seem worth it - also if the worst were to happen then any ERRBO contributions are not included in survivors pension - I feel youd be better off investing that extra contribution in a ISA/spending it elsewhere

GingerJim

redlfc wrote: »

Yes thank you thats a good summary! Having done a fair bit of reading Ive decided to continue to pay into NHS pension but not take up ERRBO. Also as I am likely to be a high earner and encounter LTA at some point - ive decided not to invest in SIPP which will be included in LTA amount and instead invest in LISA/ISA as a retirement bridging strategy

I don't think anyone knows how long ERRBO will be offered for. At present one can apply for it up to the age of 66, so if it is still around in 40 years, you could always apply in the last few years and just take a larger hit over a shorter period of time, and still potentially claim your pension at 65 without penalty. I'm actually surprised the costs of ERRBO post-60 are not higher than the quoted values on the fact sheet.

tibbles209

GingerJim wrote: »

I don't think anyone knows how long ERRBO will be offered for. At present one can apply for it up to the age of 66, so if it is still around in 40 years, you could always apply in the last few years and just take a larger hit over a shorter period of time, and still potentially claim your pension at 65 without penalty. I'm actually surprised the costs of ERRBO post-60 are not higher than the quoted values on the fact sheet.

ERRBO cannot be applied retrospectively; only pension accrued after joining the ERRBO scheme can be taken early without actuarial reduction. Any pension accrued before the date you joined the scheme will still be reduced. Therefore if you join ERRBO at 60, and retire early at 65 (3 years before normal retirement age) then you will still be hit by most of the usual actuarial reduction, it would only be the part you accrued after age 60/ after joining ERRBO that would be unreduced. This is why it appears so cheap and why, if you are going to join the ERRBO scheme the ideal time to do so is at the beginning of your career.