About to ditch 'Additional' NHS Pension in favour of SIPP

spaniel101

:idea:




Please could someone help me clarify if I have understood this correctly?


Aged 46

Part-Time Salary £12460
Deferred 1995 NHS (15yrs) draw @ 60
Active member 2015 NHS draw @ 64 (early reduction buy-out)
State Pension @ 68

Small HL SIPP




Additional Pension Purchased £6000/annum 2015 NHS section.


I have come to the realization (from plentiful reading of the fantastic insight on this forum!) that since the £6K/annum Additional Pension purchase is significant, its perhaps not the best use of my contribution.



Having other provisions of pension (as above), and taking into consideration the tax liability when hitting 64, all in all the pros and cons of this 'Additional' alone, leave little to my imagination.



The 'Additional' only attracts Treasury Order (not the 1.5% added to 2015 also) and of course being a net pay arrangement, doesn't attract tax relief directly, I pay via monthly installments. More importantly for me, I have one dependant child, no partner (I dont envisage this changing anytime soon). The child (additional) pension is only £4500/annum (24 units @ £187.50/£250) until aged 23... and likely no Lump Sum Death Benefit, as I would have taken it at 64 (god willing) so results in a negative.




The benefits I see of SIPP, are the addition of Tax Relief (and the cumulative effects of this) and ultimately being able to control a fair decent provision for my dependant child, as opposed to the above.



(I still have deferred 1995 and will also remain a member of 2015 nhs taking these benefits/contributions into consideration, upto my salary of £12460).


If I have understood this correctly, would actually the best use of my £6K, be best served realistically by a SIPP ?




Any advice would be very much appreciated, thank you!

hugheskevi

Active member 2015 NHS draw @ 64 (early reduction buy-out)

Early retirement reduction buy out can only reduce the age from which the pension is payable without reduction for early payment to age 65.

Is there any particular significance about age 64, it seems a very specific figure with nearly 20 years to go?

Aged 46
State Pension @ 68

Whilst it would be prudent to prepare for a State Pension age of 68, note that under current legislation your State Pension age is 67.

Perhaps of most significance is that the additional pension will be priced based on a normal pension age of 67, despite the DWP announcement that it plans to increase State Pension age between 2037-39 (from memory) but to review the decision in 2023 before legislating.

and taking into consideration the tax liability when hitting 64

What tax liability? Are you planning on working and drawing your pension and expect to have to pay standard rate tax? Or do you think your pension alone will be more than the Personal Allowance?

Either way, the tax implications of a SIPP and NHS pension in payment would be broadly similar, although the SIPP would have 25% tax free whereas the NHS commutation rate of 12:1 is so bad that the benefit of tax free status is more than offset by the poor value of the exchange.

The 'Additional' only attracts Treasury Order (not the 1.5% added to 2015 also)

This is correct, but the revaluation is built into the price you way - if it attracted 1.5% p/a higher revaluation the purchase price would be higher.

being a net pay arrangement, doesn't attract tax relief directly, I pay via monthly installments

Net pay arrangement is the method which does give tax relief directly, by making contributions before PAYE is applied. I presume from this statement that your taxable income is below the Personal Allowance?

If I have understood this correctly, would actually the best use of my £6K, be best served realistically by a SIPP ?

Aside from the above comments (which if anything would favour SIPP over additional pension), your line of thinking appears reasonable and your conclusion is reasonable.

Thrugelmir

spaniel101 wrote: »

If I have understood this correctly, would actually the best use of my £6K, be best served realistically by a SIPP ?

Are you comfortable relying on the whims of the stock market to provide a decent pension? A SIPP requires management. The risk being that markets will be a low point when you reach the age of 64. You need to plan how you intend to wind down/exit the SIPP. This needs to start well before 20 years is up.

spaniel101

Early retirement reduction buy out can only reduce the age from which the pension is payable without reduction for early payment to age 65. Is there any particular significance about age 64, it seems a very specific figure with nearly 20 years to go?

Only in that I dont relish the thought of working until 67/68. Indeed, they allowed me to purchase 2yrs ERRBO (as you correctly state to 65). My plan, to draw 1995 @ 60, work 4/5 yrs then draw 2015.

Whilst it would be prudent to prepare for a State Pension age of 68, note that under current legislation your State Pension age is 67.
Perhaps of most significance is that the additional pension will be priced based on a normal pension age of 67, despite the DWP announcement that it plans to increase State Pension age between 2037-39 (from memory) but to review the decision in 2023 before legislating.

. My Retirement date is Oct 2039, I thought it best to prepare for it being 68 by the time it comes around. If i've purchased ERRBO to 65, either I'll then be required to purchase 1 further year if its worth it (slim chance they'll let me keep it at 65 maybe) , but would be happy also to take a further 2 years at actual reduction, dependant on the loss v how I feel at that time.

What tax liability? Are you planning on working and drawing your pension and expect to have to pay standard rate tax? Or do you think your pension alone will be more than the Personal Allowance? Either way, the tax implications of a SIPP and NHS pension in payment would be broadly similar, although the SIPP would have 25% tax free whereas the NHS commutation rate of 12:1 is so bad that the benefit of tax free status is more than offset by the poor value of the exchange.

I currently work 2 days per week. I would have in payment, 1995 pension £5.5K (60), 2015 pension £6.5K (64 'ish'), - plus I would in theory have had this 'Additional Pension' in payment of approx £7K reduced (Id like to give up work entirely at this point and in the original plan - thought this may 'mirror' the Personal Allowance by that time) - then 3 years later State pension, approx £15K @ 67/68. A total income of approx £27.5K by this point without the 'Additional Pension' factored in. I would also envisage still making pension contributions 64 - 75 if poss, reducing the tax liability on this income. Against the SIPP, I would like to take 25% lump sum, then the remaining 75% ad hoc as and when needed (as I realise the tax on this would be substantial) however more importantly, keeping it reinvested or ISA's to enable me to leave my daughter something worth while instead of the poor childs pension on offer .

Net pay arrangement is the method which does give tax relief directly, by making contributions before PAYE is applied. I presume from this statement that your taxable income is below the Personal Allowance?

Yes my current salary is £12.5K (less £1200 1995/2015/ERRBO)

Are you comfortable relying on the whims of the stock market to provide a decent pension? A SIPP requires management. The risk being that markets will be a low point when you reach the age of 64. You need to plan how you intend to wind down/exit the SIPP. This needs to start well before 20 years is up.

I hope the above may have answered this in the planning. Indeed, I am new to SIPPs having only a small one currently and realise that more geared up management approach will definately be required (at additional cost!). My one and only start up fund on it currently is First State Asia Focus accumulation (reinvested). I am more than willing to learn as i go along and enjoy doing so, hopefully I can run my thoughts and concerns past you extremely helpful peeps on this forum, your brain storming is invaluable!



If there is anything glaringly obviously wrong with my approach in all of the above ... please do feel free to point it out if ive missed anything, it is very much appreciated before I jump off this cliff ....




TIA

Dazed_and_confused

A total income of approx £27.5K by this point without the 'Additional Pension' factored in. I would also envisage still making pension contributions 64 - 75 if poss, reducing the tax liability on this income

I might be missing some nuance of your situation but unless you are Scottish resident for tax purposes pension contributions won't reduce your personal tax liability.

You would get basic rate relief added to the pension fund but this won't save you any personal tax (unless you are paying the Intermediate rate of tax).

And £15k is nearly double the standard "new" State Pension. Have you checked your forecast on gov.uk as this is very high for someone with what appears to be quite a bit of contracted out employment.

Dazed_and_confused

Yes my current salary is £12.5K (less £1200 1995/2015/ERRBO)

Unless you have any other income in 2019:20 then you will effectively miss out on tax relief on this then. Nil tax payable on £12,500. Nil tax payable on £11,300.

If you are married though it would open up the possibility of you applying for Marriage Allowance and your spouse saving £250 (you would end up paying a very small amount of tax in return).

spaniel101

No other earnings at all, purely this salary and not married. So if I've understood this correctly, if I invest say the £500/m into my SIPP instead of the 'Additional Pension', i'll receive the same 20% tax relief (every 6 weeks), even though im under my personal allowance? There would be no tax to claim back at the end of the year as my employment 'contributions' currently take me under the PA threshold anyway. There would be nothing owed to the tax man at the end of the year, as 'tax relief' is a different entity. I assume my tax code wouldn't change either?

spaniel101

I might be missing some nuance of your situation but unless you are Scottish resident for tax purposes pension contributions won't reduce your personal tax liability. You would get basic rate relief added to the pension fund but this won't save you any personal tax (unless you are paying the Intermediate rate of tax).

Im a UK resident, occupational pension contributions reduce personal tax currently, albeit on my 'relevant salaried earnings'. Would this not be the case in a SIPP / during retirement?

And £15k is nearly double the standard "new" State Pension. Have you checked your forecast on gov.uk as this is very high for someone with what appears to be quite a bit of contracted out employment.

I was attempting to pre-empt the 'State Pension' figure in around 2039 - although the £15K, by that time, will hold the same value (if not less) as that of today? Yes I have the HMRC personal tax account, showing 30 years full NI contribution and likely another 18 or so years of employment in the NHS (although it says I only need to formally contribute another 5 years for completeness). The forecast currently shows £164.35/w. Should I take it this is not accurate?

Dazed_and_confused

No other earnings at all, purely this salary and not married. So if I've understood this correctly, if I invest say the £500/m into my SIPP instead of the 'Additional Pension', i'll receive the same 20% tax relief (every 6 weeks), even though im under my personal allowance? There would be no tax to claim back at the end of the year as my employment 'contributions' currently take me under the PA threshold anyway. There would be nothing owed to the tax man at the end of the year, as 'tax relief' is a different entity. I assume my tax code wouldn't change either?

Basically yes. If you are allowed to pay £500/month into a SIPP/personal pension then then the provider will add £125 basic rate tax relief giving you £625 in your pension fund. As you are not an intermediate rate (Scottish taxpayer) or higher rate taxpayer there would be nothing to claim yourself from HMRC and the fact you hadn't paid any income tax wouldn't prevent you getting basic rate tax relief at source.

You would only owe HMRC if you had some other income which took you above your Personal Allowance and you hadn't paid sufficient tax. Or made Gift Aid contributions and had to pay the tax relief the charity claimed direct to HMRC.

But you need to weigh up if you want to go down the SIPP/personal pension route, with the exposure to stock markets this usually brings, rather than getting a guaranteed return from the NHS additional pension. Possibly something for professional advice?

Dazed_and_confused

Im a UK resident, occupational pension contributions reduce personal tax currently, albeit on my 'relevant salaried earnings'. Would this not be the case in a SIPP / during retirement?

Paying into a SIPP/personal pension won't save you any personal tax unless you are a higher rate payer. You get basic rate relief added to the pension fund but that is a separate thing to your personal tax liability.

I was attempting to pre-empt the 'State Pension' figure in around 2039 - although the £15K, by that time, will hold the same value (if not less) as that of today? Yes I have the HMRC personal tax account, showing 30 years full NI contribution and likely another 18 or so years of employment in the NHS (although it says I only need to formally contribute another 5 years for completeness). The forecast currently shows £164.35/w. Should I take it this is not accurate?

Going off the threads on here for most people the forecast seems to be accurate. The thing is if you were to contribute the additional 5 years you apparently need them you will only get the standard "new" State Pension of £164.35/week. This is roughly £8.5k which is why your reference to £15k seemed surprising.

spaniel101

Thank you Dazed and Confused, everyone and all for such helpful advice which is greatly appreciated. Your right, rather sensibly, I should source an IFA to put my mind at rest. All such great food for thought. I will report back to you on my progress.