NHS additional payments... is it worth it?

Tree10

Hi all,

I have a couple of questions about making additional contributions to my nhs pension since i have some money saved. I have read my nhs pension booklets about AP however i do not fully understand it. I am sure i am missing many points and my questions are probably stupid, but i am trying to make sense of it and i am sure i won’t be able to follow the pension guy on the phone, i need a dummy’s guide explanation XD 

I worked overseas for many years then i joined the NHS 4 years ago when i was 32. Then i took maternity leave last year and now i am working 30  hours a week. My pension overseas is very basic therefore i am worried about reaching retirement age and not earning enough. I would be earning 33k full time, so approx 26k a year. I am thinking about making additional payments to make up for this, however i do not fully understand how it works.

Using my trust’s AP calculator, to buy an extra 1k a year (no dependent, payment just for my pension) would cost me £9,120. Or if i pay in installments over 4 years this would be in total, 11k. 

1. Does that mean i would  get 1k more a year regardless or wether i started on 21k or even i continue working part time?

2. That means that retiring at 68, i'll get back what i paid at 77, so i wonder if it makes economically sense. i know that the1k will increase with inflation but still seems like… i dont know, i might die at 80! Would i be better putting that money in a private pension then? My role is frontline & physical so if i was to be full of arthritis at 62 and chose to retire, i probably be better with a private pension?

3. if you have the money saved, what is  a better value? lump sum, or pay in instalments? The instalment option is 2k more expensive, and i can claim tax back from the lump sum, right? If the instalment's price is 11k over 4 years, is that before of after tax? 

I am sure many questions would depend on my personal circumstances, but if i just want to know if in general its a good choice, since i dont know  anyone else who has done it.

Thank you 

tibbles209

I've bought as much NHS additional pension as I am allowed to buy. I've done the sums and it is excellent value. £9,120 to buy an index-linked guaranteed £1000/year from retirement to death is by a huge margin the best value annuity you will ever have the opportunity to buy. Would you end up better off if you invested it in a private pension? Nobody knows for sure, it depends how your investments performed. You could end up better off, you could end up much worse off. With the Additional Pension however you would have that guaranteed income for the rest of your life, without ever having to worry about the money running out. To me that is worth a lot, so I definitely think it is worth buying. Yes, you might die at 80 (or indeed earlier), but you might also die at 108. 
As for your concerns about retiring early - if you do retire early, any Additional Pension can be taken early with the same (non-punitive) actuarial reduction factors as main scheme pension, so you would not be worse off. 

The extra pension you buy is independent of your earnings, it is a separate purchase so £1k is £1k regardless of what salary you are on. The only difference salary makes is whether you get basic or higher rate tax relief on the contributions, unless of course you are a very high earner (consultant/GP/upper management) and the annual/lifetime allowance is a consideration. 

Lump sum is cheaper, both prices are gross. If you pay by lump sum you need to contact HMRC to separately claim back the full tax relief. If you pay by instalments the money will be taken via a net pay arrangement so you get tax relief automatically. 

Tree10

Thank you tibbles209, it makes sense when you put it that way. 9k sounds like a lot of money to spend in one go (for someone in my salary anyway) but i might get started by opting for 750 pounds which is a bit less lump sum.
I didn't know that all private pensions carried such a risk, with my luck i better dont chance it!

OldBeanz

Somethings to note which applied to my son's pension in the teachers' scheme:
If you pay a lump sum into the pension you will only receive up to any tax you have paid in that year. This is unlike a personal pension where you can pay in up to 80% of your salary (less other pension contributions) and get tax relief.
The price of additional pension is based on your date of birth so will increase on your birthday. Worth sorting out before.
Inflation growth starts on the whole amount from day 1. So with the Teachers' Pension it looked cheaper to buy 10x£750 but it was better to buy £7500 over 10 years as inflation pension growth tipped the balance.

chucknorris

I have bought additional pension in the Teachers Pension Scheme (TPS) and I think that it is very good value, I have purchased the max allowed in the pre 2015 scheme, and I now use all my part time salary to buy more in the current TPS scheme, which I will continue to do so until I reach the state pension age (you can't buy it beyond that, and that may trigger my retirement, I would also be in the 60% tax band if I continued working). As mentioned above the cost depends on your age, the last purchase I made at 62 years old (a few months ago) was £16,520 (more because I'm a lot older than the OP) per £1,000 of pension purchased, which is approximately half the price of buying a similar index linked annuity. I am not a big fan of annuities, but I would be if they were half the price.

chucknorris

Tree10 said:

Thank you tibbles209, it makes sense when you put it that way. 9k sounds like a lot of money to spend in one go (for someone in my salary anyway) but i might get started by opting for 750 pounds which is a bit less lump sum.
I didn't know that all private pensions carried such a risk, with my luck i better dont chance it!

I put everything that I can into the TPS, it has to be 'relevant income' (so it cannot be things like bond interest or dividend income), I only invested in my SIPP when I had reached the max allowed in the TPS, and when I was eligible to move to the newer 2015 TPS (in August 2020) I started investing in that too, it is much better value than my SIPP, I have plenty of less secure investments anyway. If the TPS (and the NHS scheme) becomes at risk, you can be sure that the economy is so bad that just about everything else has already gone down the toilet.

ossian

My wife was advised by HR at her hospital that the additional pension was stupidly expensive and not worth looking at so she should look at the AVC funds.  I looked and laughed my head off at the terrible value offered by the AVC funds.  I then looked to see if there was a borderline case for buying extra pension entitlement.  There wasn't a borderline case, there was an overwhelming case it is the pension bargain of the century.  I advised my wife to fill her boots!

NottinghamKnight

ossian said:

My wife was advised by HR at her hospital that the additional pension was stupidly expensive and not worth looking at so she should look at the AVC funds.  I looked and laughed my head off at the terrible value offered by the AVC funds.  I then looked to see if there was a borderline case for buying extra pension entitlement.  There wasn't a borderline case, there was an overwhelming case it is the pension bargain of the century.  I advised my wife to fill her boots!

Whilst I applaud the HR for trying to save taxpayer money I would assume this was a statement of pure ignorance by them. Might be worthy of a complaint if only to get the staff better trained and avoid misleading other people in future. 

chucknorris

ossian said:

My wife was advised by HR at her hospital that the additional pension was stupidly expensive and not worth looking at so she should look at the AVC funds.  I looked and laughed my head off at the terrible value offered by the AVC funds.  I then looked to see if there was a borderline case for buying extra pension entitlement.  There wasn't a borderline case, there was an overwhelming case it is the pension bargain of the century.  I advised my wife to fill her boots!

It makes me wonder how many others that the HR department have said that to! Which is why something should be said to the HR dept, to stop them giving out such awful advice. It really surprised me when I discovered that most of my colleagues at the university did not realise the value of the pension they have. 

Dazza1902

How is the pension affected by early retirement or ill health. Not many people planning for their retirement envisage working to 68, especially in a physical job. 

chucknorris

Dazza1902 said:

How is the pension affected by early retirement or ill health. Not many people planning for their retirement envisage working to 68, especially in a physical job. 

I imagine that the NHS is similar to the TPS, in the TPS you can retire early and elect to wait and receive the pension at normal retirement age or take an actuarial reduction, but if it is retirement because of ill health you receive the full pension. My state pension age is 66 (3 years away), I may retire, but mainly because I can't avoid the 60% tax band if I carry on working, and although I will not have to pay NI, I still don't fancy paying 60% tax (due to the loss of the tax free allowance).