NHS pensions explained

Jonny6598

Hi all, I'm 25 and relatively new to the NHS pension scheme (3 years in) and can't seem to work out the net benefit behind the scheme.

From what I can gather online, I am paying 9.3% of my salary pre-tax to be a part of the scheme. However, my actual contribution to my pension pot is 1/54th of my salary that year, plus a correction due to inflation. This 1/54th contribution increases with inflation annually until I retire. And then repeat this process for every year of service, resulting in a potentially large number of 1/54th pots that undergo a various number of inflation corrections. 

The money doesn't add up in my eyes. If I'm earning £30k, then 9.3% is paid into the scheme, costing me £2790. My pension contribution is 1/54th of my salary (£555) multiplied by the inflation correction (estimated around 3.5%) for a possible remaining 40 years of service giving a total pot when collecting my pension of £2200. This 'net loss' only gets worse approaching retirement, as I hope I'll be earning more and hence paying more to be a part of the scheme, yet my pension contributions will result in being smaller due to the relatively low growth of the inflation correction.

I'm just struggling to see the financial benefit in the scheme. Everyone online seems to say how good a scheme it is, so would someone be able to please highlight where I'm going wrong with it all?

Thanks!

kuratowski

You don't just get £2200 (to use your own figures), you get £2200 inflation-adjusted every year from normal pension age until death.  If you retired at 68 and lived until age 90, that would mean you receive £2200 x 22 years which is £48,400 (ignoring the annual increases).

Jonny6598

Thanks for the quick reply. Oh, so the single year's contribution to the pension (£2200) is payable each year from pension age until death, rather than just a single payout. That certainly is a large benefit! It's not very clear in the NHS pension document. Thanks a lot for replying.

Grabs39

I think you’re assuming you get the 1/54th once, for every year you paid in?

you don’t, you get the 1/54th for every year you paid in, every year until you die.  So if you live for 25 years after you retire you’ll get paid each of those 1/54ths 25 times.

Dazed_and_C0nfused

The money doesn't add up in my eyes. If I'm earning £30k, then 9.3% is paid into the scheme, costing me £2790

And it isn't really costing you £2,790.

Although that is the amount deducted from your salary the NHS pension is a "net pay" scheme so you are paying £558 less tax as the taxable salary (the amount on your P60) from your example would only be £27,210, not £30,000

hyubh

Jonny6598 said:

I'm just struggling to see the financial benefit in the scheme. Everyone online seems to say how good a scheme it is, so would someone be able to please highlight where I'm going wrong with it all?

Typical usage of the term 'pot' in relation to pensions is in the context of a DC scheme, i.e. where the 'pot' is a set of investments with your name on it. The NHS scheme is DB however (specifically, CARE). Use of the term 'pot' in such a context is a radically different thing - a CARE 'pot' is an annual income for life.

As it happens, there are so-called 'cash balance' schemes that do fit your mental model, i.e. technically DB not DC, but where you are accruing a defined one-off pot at retirement. These are fairly rare however.

nigelbb

The NHS scheme is effectively index-linked deferred salary paid in retirement. Average lifespan at retirement is over 20 years so you will receive over 20 x 1/54 of your salary as pension ie an extra 40%.

JoeCrystal

Jonny6598 said:

I'm just struggling to see the financial benefit in the scheme. Everyone online seems to say how good a scheme it is, so would someone be able to please highlight where I'm going wrong with it all?

Yes, it is still a generous pension scheme, and it also includes the element of ill-health retirement, pensions for the spouse and dependents, and so on (The value of the DB pension scheme tend to be a quarter to a third of your salary). Another benefit is that you know what you have accrued in pension benefit in today's terms (plus 1.5% on top during the active membership) and have no worries at all unlike so many in the DC plans. After all, the NHS pension will be topped up by HM Treasury if there is any shortfall.

Let assume that you will be able to work in the NHS until 68. A single block for this year (based on £30,000) would be £555 per year, however, because the NHS will add on 1.5% on top of CPI in today's term. After 43 years, it would be worth £781.65 per year in today's money term, assuming you stayed in the NHS pension scheme for all that time. So you probably will get the contributions you paid back for that year in less than four years. Afterwards, it is free money that doesn't require any more managements. 

andy001

Imagine small 'virtual pot' of £555 increased by (1.5%+cpi) each year and compounded till you retire!
You build similar virtual pots each year and these all are combined at retirement. (Increased after retirement as per CPI)
Death in service, survivor's pension (half the pension) and tax benefits when adding EE contributions are few other benefits too..
Downsides- it's virtual pot and controlled by UK Government and controlled by 'politicians'.. They can change rules many times till you retire and like Irish public sector-can reduce pension to 'help' balance the wider economy.. 
As virtual pot- once you die and survivor dies- pot is gne in Government's custody unlike 'DC' pension where it becomes part of family ..and not Government after death

nigelbb

andy001 said:

Imagine small 'virtual pot' of £555 increased by (1.5%+cpi) each year and compounded till you retire!
You build similar virtual pots each year and these all are combined at retirement. (Increased after retirement as per CPI)
Death in service, survivor's pension (half the pension) and tax benefits when adding EE contributions are few other benefits too..
Downsides- it's virtual pot and controlled by UK Government and controlled by 'politicians'.. They can change rules many times till you retire and like Irish public sector-can reduce pension to 'help' balance the wider economy.. 
As virtual pot- once you die and survivor dies- pot is gne in Government's custody unlike 'DC' pension where it becomes part of family ..and not Government after death

NO!!!  You do not build up a virtual pot because there is no pot of any kind. You build up a pension of 1/54 of your pensionable salary payable every every year from retirement until death. If your salary is £54K your pension will be an index linked £1000/year. Average lifespan at retirement age is over 20 years so the pensioner will receive over £20K in pension over their lifetime. It's effectively deferred salary paid by instalment in retirement.

saucer

nigelbb said:

andy001 said:

Imagine small 'virtual pot' of £555 increased by (1.5%+cpi) each year and compounded till you retire!
You build similar virtual pots each year and these all are combined at retirement. (Increased after retirement as per CPI)
Death in service, survivor's pension (half the pension) and tax benefits when adding EE contributions are few other benefits too..
Downsides- it's virtual pot and controlled by UK Government and controlled by 'politicians'.. They can change rules many times till you retire and like Irish public sector-can reduce pension to 'help' balance the wider economy.. 
As virtual pot- once you die and survivor dies- pot is gne in Government's custody unlike 'DC' pension where it becomes part of family ..and not Government after death

NO!!!  You do not build up a virtual pot because there is no pot of any kind. You build up a pension of 1/54 of your pensionable salary payable every every year from retirement until death. If your salary is £54K your pension will be an index linked £1000/year. Average lifespan at retirement age is over 20 years so the pensioner will receive over £20K in pension over their lifetime. It's effectively deferred salary paid by instalment in retirement.

Well there may not be an actual ‘pot’ of money but it might help the op imagine what is happening to their money. It is like a pot that never empties!

To summarise, you get 1/54th of the salary for every year you work, e.g. if you are paid £27000 in one year this would give you £500 pension for that year, and if you were paid £54000 in another year (unlikely unless you are very senior staff) you would earn £1000 pension for that year. The pension for each of these years rises by inflation until you retire, when they are all added together and paid just like your salary until you die! 

In the above example if you only worked for the NHS for two years and were paid these salaries you would be entitled to a pension of £1500 [£500 +£1000) (not allowing for inflation) a year, from the day you retire (assumed to be your state retirement age). Add in inflation to each year’s contribution and your pension will, over your career (hopefully more than 2 years), accumulate a very useful and totally secure payment for the rest of your life.