95 & 2015 NHS Pension drawdown at 55

Toptek

Hi,
Hoping for a little help please.
I’m going to be 55 next year and set on leaving my NHS job and drawing my pension.
I have been buying added years for several years of the 95 scheme and will therefore have 28.5 years of the 95 scheme and 5.5 years of the 2015 scheme.
I appreciate the 2015 scheme does not have an automatic lump sum but it isn’t actuarially reduced. Does this mean the figure for the 2015 lump sum option would be a X 12 factor of the reduced or unreduced pension please?

Silvertabby

Toptek wrote: »

Hi,
Hoping for a little help please.
I’m going to be 55 next year and set on leaving my NHS job and drawing my pension.
I have been buying added years for several years of the 95 scheme and will therefore have 28.5 years of the 95 scheme and 5.5 years of the 2015 scheme.
I appreciate the 2015 scheme does not have an automatic lump sum but it isn’t actuarially reduced. Does this mean the figure for the 2015 lump sum option would be a X 12 factor of the reduced or unreduced pension please?

I'm afraid that's not how a commutation rate of 1:12 works.

The link below is for the LGPS, but as that is also 1:12 it will work for the NHS.

Do you mean your 2015 pension will be reduced for early payment if taken at 55? If so, input your reduced pension into the annual pension box on the left, and (in your case) 0.00 into the automatic lum sum box. Then select the %age of tax free lump sum you want, with 25% being the maximum. Press 'calculate' for your revised pension and tax free lump sum.



How much lump sum would you like to take?

Toptek

Thanks for the reply, I’m just a little confused as to why there’s a reduction for the lump sum in the 95 scheme but not the 2015...

jamesd

Don't know about the 95 vs 2015 difference but 1:12 is a horrendously bad commutation rate and you should do your utmost to avoid it. Some possible tools include:

• 0% for purchase credit cards or normal spending to accumulate a lump sum
• investing savings in a personal pension, 00% of gross pay is the limit assuming enough annual allowance is available
• drawing on existing personal pensions
• standard mortgage borrowing repaid from the higher income (1/12 = 8.3% so lots of margin over interest)
• flexible equity relief that allow staged drawing and repaying

Say 50k was wanted, to be repaid out of 8.33% before basic rate tax, 6.67% after tax. That's 277.66 a month available.

For an idea of the mortgage potential consider the Nationwide 10 year fix at 2.80% with 60% maximum LTV. If £50k was borrowed over 20 years the monthly repayment would be £272. Balance would be 28478 at the ten year point. If a 25 year term was used that would drop to £232 leaving £45 a month higher after tax income. Balance at the ten year point would be 34064.

But that misses something important: the pension gets inflattion increases but the mortgage stays the same for at least 10 years. Ten years at 2% increases the 277.66 to 338.46. That's more money to keep as extra income or overpayment or shorter term money.

Once the mortgage is done, all of the 8.33% is extra income.

Twoplus

From the NHS pension site " If you exchange some of your pension for a lump sum the calculation is based on the actuarially reduced annual pension". The can't work out how to post a link on my phone but if you search 2015 NHS pension lump sum early retirement you should be able to find the info.

Twoplus

I think the reason why the tables don't show a reduction for the lump sum in the 2015 scheme is because the lump sum will be calculated on your already reduced pension for taking it early and it's your choice how much pension annual you loose in return for a lump sum the 1995 lump sum are 2 set percentages.

spaniel101

There is no lump sum reduction factor in the 2015 scheme, because there is no lump sum.

The 1995 scheme benefits and 2015 scheme benefits are entirely different schemes to each other, with different calculations in their own right.

The Early Retirement Reduction factors for the 2015 scheme are:

Years Early Pension Reduced by:
1 6%
2 11%
3 16%
4 20%
5 24%
6 27%
7 31%
8 34%
9 37%
10 40%
11 43%
12 45%

For example, if your Normal Retirement Age (equal to state pension) is 67 and the value of your 2015 benefits at aged 55 are £4000, you should expect a 12 years worth reduction of 45% from your 2015 scheme in the first instance.

You do have the 'Option' of taking anything up to 25% as a 'lump sum' (the difference being this is not automatic as in the 1995 scheme). If you do opt to take 25% lump sum, the calculation is your pension of £4000 minus 45% 1800 (early reduction) = 2200 annual pension x 25% lump sum = 550

Silvertabby

spaniel101 wrote: »

There is no lump sum reduction factor in the 2015 scheme, because there is no lump sum.

The 1995 scheme benefits and 2015 scheme benefits are entirely different schemes to each other, with different calculations in their own right.

The Early Retirement Reduction factors for the 2015 scheme are:

Years Early Pension Reduced by:
1 6%
2 11%
3 16%
4 20%
5 24%
6 27%
7 31%
8 34%
9 37%
10 40%
11 43%
12 45%

For example, if your Normal Retirement Age (equal to state pension) is 67 and the value of your 2015 benefits at aged 55 are £4000, you should expect a 12 years worth reduction of 45% from your 2015 scheme in the first instance.

You do have the 'Option' of taking anything up to 25% as a 'lump sum' (the difference being this is not automatic as in the 1995 scheme). If you do opt to take 25% lump sum, the calculation is your pension of £4000 minus 45% 1800 (early reduction) = 2200 annual pension x 25% lump sum = 550

Not quite. The maximum tax free lump sum is 25% of the notional value of the fund - ie, 20 x annual pension. However, the actual figure is then determined by the scheme commutation rate. In this case, 1:12.

Using your example of a reduced pension of £2,200 per year, this would give a further reduced pension of £1,414.29 per year plus a one-off tax free lump sum of £9,428.52.

As Jamesd says, 1:12 is not an attractive rate, especially if taking early retirement.

Again, using £2,200 as the starting pension, and 30 years life expectancy (but excluding cost of living increases):

Commute maximum:

£9,428.52 lump sum.
30 x £1414.29 = £42,428.70

Total = £ 51,857.22

Don't commute:

30 x £2,200 = £66K

Toptek

Thanks for all the advice. The reason for the maximum lump sum was to have cash in hand as the widows pension Is lower than the pension and my state pension (if we still get them) would kick in at 67 and there would be more monthly pension income.
I am now reconsidering just to take it as pension due to the views of the poor value of 12 to 1.

spaniel101

Thanks for the clarification Silvertabby