AVC vs Additional NHS Pension Contribution

pgbear

Dear Forum,

I have an NHS pension but am not currently paying the maximum amount I could.
I have always paid the default amount. What is the maximum percentage contribution I am allowed to take from my monthly pay?

I have recently started paying monthly contributions to an NHS Prudential AVC.

However after reading some comments in this forum, it appears I may have made a wrong decision. Is it definitely a better idea to pay the maximum pension contribution with my NHS pension, rather than save with an AVC.

My AVC allows lump sum payments. Does the NHS Pension Scheme also allow lump sum payments?

I am only slowly realising that I have a LOT to learn, when it comes to pensions. Please go easy on me

Thank you for your time.

nigelbb

The NHS Pension Scheme is based on 1/54 of your basic pensionable salary (no overtime). So in round terms if your salary is £54K after one year of contributions you have earned £1000/year o pension. Likewise if your salary is £27K you will have earned £500/year of pension & if your salary is £13.5K you will have earned £250/year of pension . Your actual contribution varies between 5% & 14.5% depending on how large your salary is. Taking my examples if you earn 54K you pay 12.5% for £27K you pay 9.3% & for £13.5K you pay 5%.

Dazed_and_confused

And before you ask yes that does mean you are paying maybe £2,511 to get £500 of pension (using the £27k example nigelbb provided).

But you are probably paying £502 less tax as a result.

And you pay the £2,511 over the course of one tax year. The £500 is (usually) increased slightly each year by an inflation related increase and is paid for as long as you live after pension age. Could easily be 30+ years.

nigelbb

Dazed_and_confused wrote: »

And before you ask yes that does mean you are paying maybe £2,511 to get £500 of pension (using the £27k example nigelbb provided).

But you are probably paying £502 less tax as a result.

And you pay the £2,511 over the course of one tax year. The £500 is (usually) increased slightly each year by an inflation related increase and is paid for as long as you live after pension age. Could easily be 30+ years.

Plus your widow will get 60% of the pension for their lifetime. If you can arrange a death bed marriage with a 25 year old that could mean another 60-70 years

TheShape

nigelbb wrote: »

Plus your widow will get 60% of the pension for their lifetime. If you can arrange a death bed marriage with a 25 year old that could mean another 60-70 years

If I were to arrange a marriage to a 25 year old I'd want to do it before I was on my death bed. I wouldn't be getting much benefit from the arrangement at that point.

pgbear

Thanks for the helpful replies, but no one has answered my question yet:

"Is it definitely a better idea to pay the maximum pension contribution with my NHS pension, rather than save with an AVC."

I have looked at my payslips and can see that I am paying 9.3 percent as my pension contribution from my monthly pay. Can I request to pay more than this and if so, should I do this in preference to paying into an AVC?

Thank you.

tibbles209

The reason nobody has answered that yet is that there is not a single right answer - which is better depends what you are trying to achieve.

If the aim is just to increase the value of your NHS pension, Additional Pension is exceptionally good value, much better value than AVCs are. Additional Pension can however only be taken at the same time as main scheme pension, so if you are looking to bridge between early retirement and your scheme pension age, then AVCs will give you much more flexibility, as they can be taken any time from (currently) 55, and do not need to be taken at the same time as main scheme pension (the Prudential AVC doesn't need to anyway).

So what is your objective in paying extra into your pension?

zagubov

nigelbb wrote: »

Plus your widow will get 60% of the pension for their lifetime. If you can arrange a death bed marriage with a 25 year old that could mean another 60-70 years

Indeed; the last American Civil War pensioner only stopped getting her widow's pension in 2008.

tibbles209 wrote: »

The reason nobody has answered that yet is that there is not a single right answer - which is better depends what you are trying to achieve.

If the aim is just to increase the value of your NHS pension, Additional Pension is exceptionally good value, much better value than AVCs are. Additional Pension can however only be taken at the same time as main scheme pension, so if you are looking to bridge between early retirement and your scheme pension age, then AVCs will give you much more flexibility, as they can be taken any time from (currently) 55, and do not need to be taken at the same time as main scheme pension (the Prudential AVC doesn't need to anyway).

So what is your objective in paying extra into your pension?

Have you checked how flexible the Pru AVC is? I don't know if they have any drawdown provision (ie the ability to take your pension flexibly) without seeing a financial adviser who you may have to pay for.

On the other hand, it may be fully inheritable which may be better for your family.

I can't tell if it would be better to look around for another pension provider.

Oliver1191

I've pondered this question, but with regard to teachers pensions for years.

I think you need to make a spreadsheet showing how much your guaranteed pensions (nhs, state, etc) are worth. Do the same for your other assets e.g. avc. Update this monthly.

Then, work out your monthly costs assuming mortgage is fully paid. I always assume a lean figure of 1k (in reality i spend less than this).

This is an important process as it will begin to help you make an informed strategic decision of where to put your future investments i.e. avc, additional pension benefit, ot something else.

Because i do this, i know my teachers pension and state pension combined give 1.3k income a month already. So i know, i've already started to exceed what's called a lean FIRE from 68...in short i'm already financially independent from this date...anything else is a bonus / luxury.

Now, with you avc (or isa, sipp, lisa) the rule of thumb is that when invested in say a global tracker, you can withdraw 4% every year and never run out of money. Once 4% equals 1k for me, i'm financially independent earlier than 68...ie i can retire early.

So, you need to work out you avc safe withdrawal rate / whether or not your nhs and state pension cover your basic costs as a percentage. If you invest in a isa you can retire super early, so work out the safe withdrawal rate for this too.

Once you have this data, your objectives will become clearer.

As a result, there is no 'right' answer, just a well inforned one.

pgbear

Thanks everybody. Lots to think about. Much appreciated.

Moonwolf

I am in the 2015 scheme and these are my un-expert and non-professional thoughts. You should read the factsheets.

As I understand you pay for 1/54th of your salary added to your pension as a defined benefit each full year. You can't change that directly and the percentage you pay depends on your salary range. A lot of your final pension is free money and very good value.

There are then three ways (in the 2015 scheme) of getting additional pension.

1. Additional purchase - using a lump sum or regular payment you can increase your pension by up to £6500 a year. There are some funny rules on this which you should read, the cost of living increases are not the same as your main pension and you have to decide if you are giving some to your dependants.

Pros: Good value for money compared with other similar risk investments.
Cons: For regular payments, you need to keep in the NHS to get the benefits. Lump sum payments might cause annual allowance issues. If you don't have a dependant cover then you lose it if you die early. Personally I found the rules complicated but you might not be as thick as me.

2. ERRBO - (Early Retirement Reduction Buy Out) This allows you to take your pension 1-3 years earlier without actuarial reduction. This can be valuable if you think you will retire early and live a long time (unless you know different you probably will but nothing is certain). You pay a fixed percentage extra from your salary which is higher the closer you are to retirement. If you leave the NHS it applies to the pension you have accrued.

Pros: Good value for money compared with other similar risk investments. No impact on lifetime allowance (as it doesn't change the value of your final scheme, just when it is paid).
Cons: No benefit to dependants, all benefit lost if you die before retiring. Committed to regular increased payments for the rest of your career, messy if you cancel and difficult to suspend.

3. Discounted AVC scheme with one of two providers. I think both offer 0.4 percentage point reduction in the annual management charges on the funds you choose which is quite good. Otherwise they are just standard pension investment funds that result in a DC scheme.

Pros: Can be more flexible when you take and use the fund, for example, draw down to use to bridge between retirement and taking your NHS pension. Might be transferrable if you leave the NHS into another pension or be consolidated later. Pot is payable to dependants if you die.
Cons: You would probably need better than average fund growth to beat the long term value of the other two.

You could also save additional pension separately or save into e.g. ISAs but you don't get the input tax benefits (but you don't pay tax when you take the money out)

I was unable to find cost effective professional advice when I looked at this back in 2015 when I joined. Basically fixed fee advice would have cost me 5 years of what I was going to save. I (was) only planning to work for another 10. I decided my worst decision would cost less than that.

I went with ERRBO (which I had problems with but are now sorted) and AVCs with some savings in ISAs as well. This means that I have a good secure pension and extra that can be used more flexibly.

For what its worth, my opinion of the ERRBO is that it is a bit too inflexible but favours those in my position with an older partner who probably won't need to benefit from it directly, but as a couple we hope to benefit from me being able to retire on full pension earlier.