SIPP vs ISA/LISA in addition to 2015 NHS Pension

redlfc

hugheskevi wrote: »

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.

That’s very helpful - thank you!

So essentially only the years you contribute to the ERRBO scheme will be able to be access early without any reduction I.e if I were to start paying into ERRBO every year from 30 till 65 - then the years pension I paid from 25-30 I would not be able to access at 65 without the usual heavy reduction

My feeling is as you are putting this extra contribution across your prime years makes the scheme not worth it - who knows what could happen in the future - I think I’d rather put that extra contribution into a LISA/ISA

hugheskevi

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?

You need to be very clear about what counter-factual situation you are comparing EPA purchase with.

Assume you purchase EPA. Whenever you choose to take your pension, eg, at age 60, 65, 68 or 70, your pension with the benefit of EPA will be higher than a pension without EPA. That is where the Lifetime Allowance issue arises.

If you compare a 3 year EPA purchase retiring at 65 with a scenario under which you did not purchase EPA, worked to age 65, left the pension scheme but commenced your pension at age 68 then the LTA effect would be the same - but that is a very particular scenario.

My feeling is as you are putting this extra contribution across your prime years makes the scheme not worth it - who knows what could happen in the future - I think I’d rather put that extra contribution into a LISA/ISA

This isn't a ERRBO aspect, but part of the general pension investment vs other investment decision. This is the first decision you should make, then if it involves extra pension you decide what type of pension to invest in.

The decision is made trickier by the Annual Allowance, as you will probably find that when you are past your prime years (eg in your 40s and 50s) you won't have any Annual Allowance available to use due to pension input arising from your main scheme pension, so extra pension investing is effectively off the table at that point.

redlfc

hugheskevi wrote: »

You need to be very clear about what counter-factual situation you are comparing EPA purchase with.

Assume you purchase EPA. Whenever you choose to take your pension, eg, at age 60, 65, 68 or 70, your pension with the benefit of EPA will be higher than a pension without EPA. That is where the Lifetime Allowance issue arises.

If you compare a 3 year EPA purchase retiring at 65 with a scenario under which you did not purchase EPA, worked to age 65, left the pension scheme but commenced your pension at age 68 then the LTA effect would be the same - but that is a very particular scenario.

This isn't a ERRBO aspect, but part of the general pension investment vs other investment decision. This is the first decision you should make, then if it involves extra pension you decide what type of pension to invest in.

The decision is made trickier by the Annual Allowance, as you will probably find that when you are past your prime years (eg in your 40s and 50s) you won't have any Annual Allowance available to use due to pension input arising from your main scheme pension, so extra pension investing is effectively off the table at that point.

Ive just re-read all your posts after further personal reading as some of the terms you used were beyond the scope of my knowledge - they all now make a lot of sense and very helpful - thank you!

Essentially my conclusion is that the NHS pension alone is likely going to see me hitting LTA fairly early on in my career especially if I stay in training /dont take years out. For me thats the crucial factor which makes both ERRBo/SIPPs off the table for me. They will both increase my LTA and so the tax relief provided + the opportunity to retire on same pension 3 years earlier are negated by this.

The additional points regarding AVC I considered but came to the conclusion that his is yet more money I will have at 68 (or later) which i dont need - i suspect by the time i get to SPA i will have a far bigger annual pension than I need to live on so my plan is to invest in things which will give me income before this age and allow me to retire 55-60 with enough to tide me over until NHS pension kicks in so that I dont need to take acturial deductions.

I have decided I would be best off putting this monthly contribution to S&S ISA+LISA instead - thus not effecting LTA . The added benefit of the LISA is that it gets both the 25% bonus (i.e not too dissimilar to basic rate tax relief at 20%) + also the tax free element when coming to access the cash after 60 - whcih does not apply to SIPP as id have to pay income tax on anything after the 25% tax free lump sum

Anyway thansk for your details help and advice in this matter!