NHS Penion vs Investment ISA: please educate me

prb1984

Hi all, I hope you can help me understand the best way forward with two options I've been thinking about lately.

I'm 36, partner and I have no debt. We have mortgaged property with around 10k in emergency fund savings. So we're starting to look at investments.

I'm an NHS worker with 9 years of paying into NHS pension. For anyone who is not aware of NHS pension, I pay a contribution (rate based on my salary), for which the reward is my eventual pension raises by 1/54th of my current annual salary. My problems with this set up is two fold: 1) I don't get to access this until 65 or most likely 70 by time I retire, and 2) I'm about to go into a much higher contribution rate for the same reward. The employer contribution is admittedly a very generous 20%

Re: the contribution rate. I'm currently paid around 45k so contribute 9.8% so ~about 360 a month out of salary. I'm about to get a raise to around 51k (this rises automatically to about 60k in five years). This 51k pushes my contribution rate from 9.8% to 12.5% (~530 a month) for the same benefit. I would expect my pension at the end of my career (lets assume I work up until 65ish) to be around (1/54th of average salary of say 60k for next thirty years) to be around 38k.

I've been looking into investment ISAs. Currently I could probably add about 1k a month, missing out on the other 8k a year allowance. If I came out of the NHS pension I could add that 530 a month (and more later when salary rises) to the ISA. From looking at calulator sites with a modest return of around 6.5%, the differences are massive. Using a calculator, I could have a nest egg providing 30k in interest after 20 years at my current ISA investment rate. If I was to stop pension contributions and add these to the ISA I would have 30k in interest in 15 years. Additionally, with the investments route the nest egg would be mine/my childrens at the end of it as well, whereas the NHS pension wouldn't.
My dream would be to work full time for the next say 15 years and then drop to part time work if possible - so essentially be working part time from 45-50ish.

Am I missing anything here? Part of the driver to this is losing my mother in the last year, and both her and her parents all worked up until late sixties, and then died with a year or two of retirement. That and the arbitrary increase in contribution rates with my pay rise has got me thinking. Please help educate me to know if I'm thinking wrongly at all here.

molerat

To pay £530 into an ISA instead of the pension you are going to have to put in an extra £106 of your own money as a first point.

prb1984

molerat said:

To pay £530 into an ISA instead of the pension you are going to effectively reduce your monthly net income by £105 as a first point.

Is this due to pension contributions being before tax/deductions? 

Ibrahim5

The NHS pension will pay an index linked pension from age 55. This is so valuable anyone would be a lunatic to stop it. This would probably not pay enough for your needs. Not at 55. This is where your investments come in.

hugheskevi

I'm an NHS worker with 9 years of paying into NHS pension.

Were you in service on 31 March 2012? If so, you will be in-scope of the McCloud remedy.

I pay a contribution (rate based on my salary), for which the reward is my eventual pension raises by 1/54th of my current annual salary.

You also receive in-service revaluation of CPI+1.5%, the 1.5% extra compounded over many years will make a significant difference.

My problems with this set up is two fold: 1) I don't get to access this until 65 or most likely 70 by time I retire, and 2) I'm about to go into a much higher contribution rate for the same reward.

Your Normal Pension age is your State Pension age (currently 68), unless you have purchased ERRBO. This is the age at which your pension is payable without reduction.

Your minimum pension age is 55 (with actuarial reduction)

The employer contribution is admittedly a very generous 20%

The employer rate is irrelevant. You are accruing an entitlement to a pension, not an employer contribution. What the government determines this costs is irrelevant, it may be considerably more or less than 20% depending on what you consider the appropriate discount rate to be, age, life expectancy, etc, etc.

I would expect my pension at the end of my career (lets assume I work up until 65ish) to be around (1/54th of average salary of say 60k for next thirty years) to be around 38k.

You need to take into account the enhanced in-service revaluation of CPI+1.5%.

If I came out of the NHS pension I could add that 530 a month (and more later when salary rises) to the ISA.

No you could not. Your take-home pay would not increase by £530 per month as the pension contribution benefits from tax relief.

From looking at calulator sites with a modest return of around 6.5%

Modest by the standards of the past decade perhaps, but that level of return is only possible with taking on investment risk and is well above cautious assumed rates of return.

I could have a nest egg providing 30k in interest after 20 years at my current ISA investment rate.

Presumably that is assumed return (not interest) based on 6.5% p/a return.

Please help educate me to know if I'm thinking wrongly at all here.

You need to understand a lot more about pension accrual, in-service revaluation, tax relief, expected rate of return and safe withdrawal rates.

However, what you would find with a comprehensive analysis is that the NHS pension is great value (unless affected by Annual and/or Lifetime Allowance issues, but even then it is often still valuable, just to a lesser extent) and you will not match it by opting-out. Invest in addition to, not instead of the pension. Take into account all of the following when deciding where and how to invest:

• ERRBO
• Added Pension
• AVC
• Personal pension (including SIPPs) - noting that new arrangements are likely to have a minimum pension age of 57.
  
• Stocks and shares ISA
• Lifetime ISA
  

prb1984

Ibrahim5 said:

The NHS pension will pay an index linked pension from age 55. This is so valuable anyone would be a lunatic to stop it. This would probably not pay enough for your needs. Not at 55. This is where your investments come in.

Are you sure this is true of the current pension - I thought it is a lot higher than 55. 
In terms of what I would need in terms of money from pension - I would imagine it's relatively low. I'm frugal, don't have expensive tastes, and would house paid off. The work I do I can also do a days private work to top up whatever money I have from pension/investments. This would be possible to carry on well into my 60s/70s.
EDIT: Just googled and see you mean retirement with reduction. Will look into it.

prb1984

in response to hugheskvi:
Thank you, lots of things to think about. I was in service from Feb 2012 so will look into the McCloud remedy.
I think from your and Ibrahim's posts it's clear I need to better understand the reductions from taking retirement at 55. 
Yes aware of the in service revaluation ut gave ~38k as an indicator - as in equivalent of... But totally take your point that the pension provides that whereas the investment route does not.
The point about employer contribution was merely to recognise that I am aware it is a generous pension scheme.

So the sense I'm getting is to stay in the scheme but also add investments to supplement. I think the annoying thing is the bit of an arbitrary contribution rate change. Rather than be a consistent percentage of wage, for a wage rise of ~5k I'm having to pay a lot more for the same benefit and wondering if that could be used better. It's the biggest contribution rate jump and seems somewhat unbalanced...

4	£26,824.00 to £47,845.99	9.3%
5	£47,846.00 to £70,630.99	12.5%
6	£70,631.00 to £111,376.99	13.5%
7	£111,377.00 and over	14.5%

prb1984

Also, the aspect of keeping the nest egg on death vs not doesn't factor into decision making at all?

hugheskevi

Also, the aspect of keeping the nest egg on death vs not doesn't factor into decision making at all?

It is one of the factors which may influence where you decide additional savings should go, especially if you think inheritance tax will be an issue.

The DB scheme provides very good protection for death-in-service- not so much the lump sum, rather the enhanced survivor pension payable. Nest egg on death can also be built up by saving regular income. DC pensions may be best if inheritance tax is a problem, but then Lifetime Allowance might also be an issue to take into account.

Ibrahim5

Regarding the nest egg you can contribute to a SIPP up until the age of 75 which avoids inheritance tax if that is an issue. So you can take NHS pension, state pension and investments and funnel that into the SIPP for descendents.

prb1984

I think with current inheritance tax limits, it is likely to be something to consider. I guess I am cautious about putting a lot into the scheme when I've seen members of my family die young and not reap the benefits.
I hear a lot that it's best to take the most lump sum you can get with the NHS pension when available - which of course then is going to into some sort of investment. I was wondering if the ISA strategy is kind of that but a lot sooner, like a 401k without the employer contribution.

My main aim with all of this, is to try and semi-retire early. Ideally I would work full time until around age 50, then reduce my working hours to 3 days a week for the next 10/15/20 years.