NHS Pension Question

kfahri342

Hi, I have been researching how the 2015 NHS Pension works and although I believe I have understood most of it, I am unclear on certain aspects of the Pension that hopefully can be cleared up?
1. It is a defined benefits scheme, so the amount contributed will determine how much I get paid for life? (maths below)

• You Pension payout increases by 1/54th of your Salary (Rebuild Rate)
• Pot increases to cover inflation (Revaluation Rate)

So assuming I am on a 20k salary, at the end of year one my pot will be standing at £370.37  (20k x (1/54)). Does this mean if I were to retire at the end of Year 1, I would get £370.37 for life?
At the end of Year 2, the pot would be £753.70. (assuming a revaluation rate of 3.5%, [370.37 + [370.37 x (1/54) x 3.5%]]. Again does this mean if I were to retire at the end of Year 2, I would get £753.70 for life?
2. The NHS have to contribute 20.6% of your salary. This doesn't directly impact your pension right? This just keeps the Pension Machine well-financed.
3. Which is better 1995 vs 2008 vs 2015 scheme. I've been doing maths and I find that the 2015 scheme is actually better than the older schemes. Which I find very hard to believe. 

Many Thanks

Dazed_and_C0nfused

1.  The amount you contribute has no deal bearing on the pension.  It is a defined benefit scheme so the pension is based on length of service and pensionable earnings.  So taking your example of £20k salary and assuming this is full time equivalent salary you would contribute say £1,120 (pre any tax relief) and accrue a pension of £370.37.  Which as you say gets revalued for for inflation each year.

2.  Correct.

3.  There are a lot of different elements to consider, accrual rate, revaluation (or lack of it), tax free lump sum, Ill health element etc etc.  So what might be best for one person isn't necessarily best for another.

Stubod

I would be surprised if the new schemes are "better", as they changed them to save money! (They may appear better on the face of it but the earlier pension paid out based on a retirement age of 60, now it's whatever the SPA is at the time, so you are potentially paying in for at least another 6 years). .

AnotherJoe

You are misusing the word "pot"

At the end of year one your annual pension entitlement (not "pot") will be £370.37 per year, for life, uprated by inflation or whatever.

At the end of year two your annual pension (again, not "pot")  will be £740.74 per year, (eg 370.37 x 2)  for life, uprated by whatever inflation figure is used. Dont sweat that in your calculations it doesn't really matter since in theory its just standing you still with regard to inflation.  Its like that senator in the US railing against the $15/hr minimum wage when he got $6 umpteen years ago , and then people pointed out that in todays money thats $24. Just think of the pension in todays money terms, its more meaningful. No use to know that in say 20 years youd get (say, made up number) £5,000 a year if in todays terms, thats still £370.37.

The 20.6% is just for info (though it does give a clue how much it costs to provide a DB benefit)

Andy_L

kfahri342 said:

Hi, I have been researching how the 2015 NHS Pension works and although I believe I have understood most of it, I am unclear on certain aspects of the Pension that hopefully can be cleared up?
1. It is a defined benefits scheme, so the amount contributed will determine how much I get paid for life? (maths below)

• You Pension payout increases by 1/54th of your Salary (Rebuild Rate)
• Pot increases to cover inflation (Revaluation Rate)

So assuming I am on a 20k salary, at the end of year one my pot will be standing at £370.37  (20k x (1/54)). Does this mean if I were to retire at the end of Year 1, I would get £370.37 for life?
At the end of Year 2, the pot would be £753.70. (assuming a revaluation rate of 3.5%, [370.37 + [370.37 x (1/54) x 3.5%]]. Again does this mean if I were to retire at the end of Year 2, I would get £753.70 for life?
2. The NHS have to contribute 20.6% of your salary. This doesn't directly impact your pension right? This just keeps the Pension Machine well-financed.
3. Which is better 1995 vs 2008 vs 2015 scheme. I've been doing maths and I find that the 2015 scheme is actually better than the older schemes. Which I find very hard to believe. 

Many Thanks

1. Yes - although its only paid when you reach retirement age
2. Yes - although as there is no pot it doesn't keep it well-financed its an estimate of what it would cost to finance a pot and keeps the NHS "honest" when it comes to making decisions about staff costs. Any excess goes back to the treasury/tax payer and they make good any deficit. Due to workforce demographics the NHS scheme is "in profit" whilst the similar Civil Service scheme is "in deficit"
3. The older schemes had an earlier pension age (60/65 vs state pension age) & lower employee contributions (and I think better ill-health & dependants provisions?) making them better. The old schemes favoured those who stayed for a full career & who progressed up the ranks (because they were "final salary" schemes, the new scheme doesn't favour one over the other as its a "career average" scheme - thus if you are one of the latter you would get a higher pension than in the old scheme.  

hugheskevi

Stubod said:

I would be surprised if the new schemes are "better", as they changed them to save money! (They may appear better on the face of it but the earlier pension paid out based on a retirement age of 60, not whatever the SPA is at the time.

Analysis by groups such as the IFS showed the change in scheme design had very little impact on long-term costs. There was however a lot of redistribution, with some winners and losers.

The big savings came from the switch from RPI to CPI for indexation and revaluation in 2011 and the member contribution increases between 2012-2014.

kfahri342

Thank you all fo your responses. And correcting my understanding where needed.

Andy_L

kfahri342 said:

Thank you all fo your responses. And correcting my understanding where needed.

You're far more on the ball with understanding how it works than most people who ask on here

nigelbb

There is no pot. It's much simpler to consider your NHS pension as deferred salary paid in retirement. Each year you earn 1/54 of your salary as pension so if your salary is £54,000 your pension will be an index-linked £1,000/year. Average lifespan at retirement age is over 21 years so in total you will receive at least £21,000 (index-linked) so it is worth over 40% of the salary that you were paid while working.

Nurse2047

Do they base the 1/54 of your salary on your FT salary if working PT or PT salary?

Dazed_and_C0nfused

Part time in the 2015 scheme.