SIPP vs ISA/LISA in addition to 2015 NHS Pension

redlfc

hugheskevi wrote: »

A few thoughts/observations:

• As well as higher rate and additional rate tax relief, you can also get higher effective relief if you use pension contributions to reduce your income to benefit from avoiding/mitigating the Child Benefit taper, and also to avoid/mitigate the withdrawal of the personal income tax allowance.

• ERRBO is a way to increase the value of your pension without generating any pension input.

• Once you start to earn around the £100,000 mark you will face Annual Allowance charges each year, and as salary escalates the tapered Annual Allowance will affect you. This significantly reduces the value of voluntary additional pension contributions. This is a particular concern for you as the Annual Allowance thresholds are frozen in cash terms and the NHS pension scheme is set to be improved from 1st April 2019, so you may face these issues relatively early in your career.

• Given the above, if you are planning to make additional voluntary pension saving, there is likely to be an ideal time when you are benefiting from higher rate relief but not yet affected by the Annual Allowance, although remember that with the ability to carry-forward up to 3 years of unused Annual Allowance you may want to review/reduce voluntary pension saving a few years before you think you will be affected by the Annual Allowance.

• Your State Pension age and normal pension age in your NHS pension scheme is already 68, not 67. This is intended to move in line with life expectancy, so would be expected to increase over time.

• The minimum pension age is intended to be state pension age minus 10 years (but not yet legislated).

• Taking Defined Benefit pension early with actuarial reduction can be a way to avoid/mitigate the effect of a Lifetime Allowance breach, as HMRC value a pension paid at age 55 as being worth the same as a pension paid at 70.

• LISAs are fine and I would think using one a good idea, but you can only put peanuts into them, at least at the moment. In a lot of cases the tax position is neutral, as you get a 25% boost from Exchequer contribution in the LISA, which is similar to the benefit from higher rate tax relief (40%) less tax paid on the pension in retirement (20%, or 15% if taking into account tax-free lump sum).

I think LISAs appear to be very suitable for your circumstances.

I think you may want to consider ERRBO more, as not generating a pension input is a very useful feature - I think you will find the scope for making voluntary pension contributions becomes quite limited quite early in your career due to the Annual Allowance.

I would be focusing on LISAs and other ISAs or other investments until you reach higher rate tax, then using Added Pension or personal pensions if you want to make voluntary pension saving to benefit from higher rate relief as salary increases. A key question for you is whether to use pensions without benefiting from higher rate relief. Personally I think with LTA issues and limited tax relief on offer there is no compelling reason to do so - it could easily end up being something you regret. But if policy change goes in other directions it could end up being a sensible decision. For me, there isn't enough on the table in the form of 20% relief to justify the risk.

As salary gets up to about £60,000 or £70,000 you will be hitting the Annual Allowance if you are pensioning all your higher rate salary income, so you will be increasingly limited in your voluntary pension saving. By the time you earn about £100,000 your Annual Allowance will be taken up by your main scheme pension so it is unlikely you will want to be making any voluntary pension saving.

I wouldn't discount taking a large actuarial reduction for early pension payment, as if it avoids/mitigates LTA issues it may be a sensible move. Also, if affected by Lifetime Allowance and also going to be a higher rate taxpayer once the pension is taken, the lump sum becomes a consideration, even at the dire rate of 12:1.

thanks for your detailed response

Trouble with ERRBO is im struggling to workout how much id have to pay across my career in extra contributions to be able to receive my pension 3 years earlier - so have no idea how potentially good/bad it is

not too familiar with Annual Allowance - is that related to the LTA or a seperate entity?

Yes I plan on investing in VLS ISA and then starting a cash LISA for house purchase - then switching that to a S&S Lisa in that case

crv1963

redlfc wrote: »

so does this additional amount effectively increase what basic pensionable pay figure is used - hence the 1/54 multiplied by salary amount will be higher each year? tbh i dont see the benefit of that as I have no aim to earn more when i reach 67, id rather invest elsewhere for money i can access before this age

It can - but it also can be used to take as a TFLS, I hadn't considered the point Hugheskevi has made about the taper on the amount you are allowed to save in a pension once you hit the highest rate of pay. Or its' effect on any future child benefit.

Again a case of unexpected consequences to knee jerk policy making! Effectively penalising medics for continuing to work and making even taking a hit on pension reduction by taking pension before scheme retirement age.

Of course once you hit the higher rates you could reduce your income in a variety of ways, part time working, charitable donations, expensive lease cars!

hugheskevi

Trouble with ERRBO is im struggling to workout how much id have to pay across my career in extra contributions to be able to receive my pension 3 years earlier - so have no idea how potentially good/bad it is

You should be considering it on a year-to-year basis, as you pay more in a single year to receive the pension accrued in that single year earlier. You don't need to consider across whole career, you make the decision on a year-to-year basis (but if you stop making ERRBO contributions you cannot usually restart).

So all you need to consider is whether it is worth paying ERRBO of £x in a given year to receive the pension benefits accrued in that given year at age 65.

not too familiar with Annual Allowance - is that related to the LTA or a seperate entity?

A separate entity, although Annual Allowance charges can be paid by reducing your pension which in turn reduces Lifetime Allowance exposure.

You should familiarise yourself with the Annual Allowance and the tapered Annual Allowance, it will affect you in the future, and once you start earning above £100,000 the Annual Allowance can easily give you tax charges of several tens of thousands of pounds per year.

crv1963

https://www.nhsbsa.nhs.uk/member-hub/increasing-your-pension/early-retirement-reduction-buy-out-errbo- for your age 3.66%

redlfc

crv1963 wrote: »

https://www.nhsbsa.nhs.uk/member-hub/increasing-your-pension/early-retirement-reduction-buy-out-errbo- for your age 3.66%

seems to be an old link so not working

so i simply just times 3.66% on what my estimated salary would be per year ?

does seem that would be an awful lot - paying an extra 3.66% of my salary every year of my career just to be able to access pension 3 years earlier - im sure that will likely cost me near 100k across my career

Caveat being I assume the pension I receive will be the same at 65 as it would be at 68 - so if say pension is 40k then I would have paid 100k across career but willl earn back 120k - is that right in assuming that?

redlfc

hugheskevi wrote: »

You should be considering it on a year-to-year basis, as you pay more in a single year to receive the pension accrued in that single year earlier. You don't need to consider across whole career, you make the decision on a year-to-year basis (but if you stop making ERRBO contributions you cannot usually restart).

So all you need to consider is whether it is worth paying ERRBO of £x in a given year to receive the pension benefits accrued in that given year at age 65.

A separate entity, although Annual Allowance charges can be paid by reducing your pension which in turn reduces Lifetime Allowance exposure.

You should familiarise yourself with the Annual Allowance and the tapered Annual Allowance, it will affect you in the future, and once you start earning above £100,000 the Annual Allowance can easily give you tax charges of several tens of thousands of pounds per year.

thanks! but do you need to pay the extra 3.66% every year across entire career? If so that would add up to a very high amount - and not sure if id pay more than Id receive by accesing pension 3 years earlier

Twoplus

Don't forget that 1/54th is increased every year by 1.5% plus an additional amount dependent on the treasury. As a GP you should retire on far more than 40k. Not sure the NHS will still exists by then, but there should still be a big demand for your skills. When I started as a newly qualified nurse l was on 8k per year, now 30 years later they get 3 times that.I will receive a pension higher than my starting salary, even though I have worked part time for many years and am only one band higher than when I started. If you Google the 2015 NHS pension booklet it explains how it's worked out and there is an additional document on ERRBO.

hugheskevi

thanks! but do you need to pay the extra 3.66% every year across entire career? If so that would add up to a very high amount - and not sure if id pay more than Id receive by accesing pension 3 years earlier

There is no employer contribution to the cost, unlike for main scheme pension, so you are paying the full cost of the 3 years of pension yourself. Given your pension will be many tens of thousands of pounds each year and you are funding that cost yourself the amount is going to add up to quite a lot.

Consider your pension as a series of individual blocks you build up each year. The 3.66% you pay in the first year means the block of pension you build up that year is payable unreduced 3 years earlier. You can cancel the arrangement if you wish, which would then mean future blocks have the usual normal pension age. When you retire the scheme administrator calculates the value of your pension based on the amount of pension due from each block and the age at which it is payable unreduced.

So if you want all of your pension you accrue in future to be payable 3 years early, you need to pay the extra every year. The cost increases over time, as shown at this link, due to having less years to retirement for the discount rate to reduce the cost.

The discount rate used in future to calculate the cost of ERRBO will be CPI+2.4%. That means by purchasing ERRBO you are locking in an expected return of CPI+2.4%. If you remain in the NHS to retirement it is likely to be a better rate of return than that, as the actuarial assumptions used to set the cost will assume some members purchasing ERRBO will leave before retirement and so lose the enhanced revaluation.

Bimbly

redlfc wrote: »

thanks! but do you need to pay the extra 3.66% every year across entire career? If so that would add up to a very high amount - and not sure if id pay more than Id receive by accesing pension 3 years earlier

Remember, you'll get tax relief on this. As a higher rate tax payer, that's 40%. So instead of foregoing 3.66% of your salary, you're forgoing just 2.196% (my maths) of your salary -- the government effectively contributing 40%. That's a good deal.

So, year one you buy a pension worth 1/54th of your salary at retirement. With this little bit extra you buy three extra years, allowing you to retire earlier on the same money. Each year, this little but you've put by increases with inflation.

Year two you buy another 1/54th of your salary as retirement, which is added to year one. You also pay the little but extra ERRBO so you can get this money three years earlier. At a younger age when you can appreciate it more.

The only reason not to take out ERRBO would be if you expect to earn so much that you will hit the lifetime allowance and would take your pension early with reductions (as described above). This kind of depends on when you would like to retire. If it were me, I'd want to buy the three years, then maybe retire early at 60 and take the extra rediction. Maybe that's not you.

Have a think. Imagine yourself a lot older and what you might like to do.

redlfc

Bimbly wrote: »

Remember, you'll get tax relief on this. As a higher rate tax payer, that's 40%. So instead of foregoing 3.66% of your salary, you're forgoing just 2.196% (my maths) of your salary -- the government effectively contributing 40%. That's a good deal.

So, year one you buy a pension worth 1/54th of your salary at retirement. With this little bit extra you buy three extra years, allowing you to retire earlier on the same money. Each year, this little but you've put by increases with inflation.

Year two you buy another 1/54th of your salary as retirement, which is added to year one. You also pay the little but extra ERRBO so you can get this money three years earlier. At a younger age when you can appreciate it more.

The only reason not to take out ERRBO would be if you expect to earn so much that you will hit the lifetime allowance and would take your pension early with reductions (as described above). This kind of depends on when you would like to retire. If it were me, I'd want to buy the three years, then maybe retire early at 60 and take the extra rediction. Maybe that's not you.

Have a think. Imagine yourself a lot older and what you might like to do.

How does using ERRBO affect LTA though as surely the actual pension amount does not increase - just the number of years you receive it for? My understanding is that you are paying an extra 3.66% each year in order to access the same pension amount you would at 68 but at 65 instead - which if you did without contributing to ERRBO you’d have to pay the heavy reductions . Therefore the actual pension amount received per year would be the same - so LTA will also be the same?

The other downside of ERRBO is you are paying extra contributions whilst young and throughout your career with the aim of retiring at 65 - but if the worst were to happen or situation were to change for whatever reason - that extra contribution is lost and would not be returned or Included in survivor benefit

For me, the actual cost of what you’d end up paying would be a significant amount and I’m not sure it would be worth it just to access the same pension pay per annum 3 years earlier - however your point regarding the 40% tax relief is very helpful and I had not considered that