NHS Penion vs Investment ISA: please educate me

Albermarle

As well as the 6.5% return being probably a bit optimistic , you maybe underestimating how much money is needed to generate a fixed income for life that is inflation linked.
An lifetime annuity of £30 K pa for a 60  year old that increases with inflation each year, would cost up to  £1.5 million. 

peter3hg

prb1984 said:

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%

The jump from 9.3% to 12.5% was designed to coincide with higher rate tax and was basically the same in take home pay terms.
9.3% with 20% tax relief is a net contribution of 7.44% whereas 12.5% with 40% tax relief is a net contribution of 7.5%

What has happened subsequently is that the higher rate tax band has increased above the pension band, so you fall in that gap paying 12.5% but not getting the full 40% relief.

As your salary increases, that gap will close now that the higher rate tax band is frozen for a number of years.

prb1984

peter3hg said:

The jump from 9.3% to 12.5% was designed to coincide with higher rate tax and was basically the same in take home pay terms.
9.3% with 20% tax relief is a net contribution of 7.44% whereas 12.5% with 40% tax relief is a net contribution of 7.5%

What has happened subsequently is that the higher rate tax band has increased above the pension band, so you fall in that gap paying 12.5% but not getting the full 40% relief.

As your salary increases, that gap will close now that the higher rate tax band is frozen for a number of years.

Interesting, thanks Peter. This will be why it feels a tad unfair position to be in at the mo. Perhaps they will look at this quirk when they review contribution rates.

dunstonh

You would need to pay around 35% of your income into the S&S ISA to match the benefits of paying into the NHS Pension.

There is not a hope in hell that the S&S ISA would come close to the NHS pension on the same net contribution.  It would probably be the worst financial decision of your life to opt out and do an S&S ISA.

Thrugelmir

prb1984 said:

 From looking at calulator sites with a modest return of around 6.5%, the differences are massive. 

Given that a compound return of over 6.5% per annum (after inflation and fees) is not modest. Hardly surprising that the differences are massive. Trouble is you cannot invest in a calculator. Identifying suitable investments is far more challenging. 

hugheskevi

prb1984 said:

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.

Taking the highest lump sum you can get is a terrible suggestion. Taking that strategy and converting into opting out and investing into an ISA is, to keep it polite, very sub-optimal. It is the sort of thinking that led to the huge misselling issue of the 80s and 90s (individuals leaving DB schemes to invest in high returning investments that in theory would out-perform the DB pension).

Lump sum is generated by exchanging pension at the rate of 12:1. Even if you assume a person is taking their pension at age 66 (current State Pension age) their life expectancy at that point is around 20 years or slightly higher. So that is 20 years of income, knock off basic rate tax (only a very small percentage of people pay higher rate tax when retired) and that is 20 x 0.8 = 16 years of income after tax. So exchanging that for a tax free lump sum of only 12 times the annual pension is a bad idea, unless there are other compelling circumstances.

But most will be commencing their pension at some point between age 60 and 65. For a 60 year old, that is over 25 years of life expectancy, so exchanging 25 years of pension for a lump sum equal to 12 years of pension is a terrible idea.

Even once you are into the realms of people facing lifetime allowance charges (exchanging pension reduces LTA charge) and being higher rate tax payers in retirement, exchanging pension for lump sum is not always the best decision.

Playing around with spreadsheets, I find that at age 68 on assumptions as stated throughout (age 36, salary £51,000, return of 6.5% nominal) along with assuming zero starting base (opting out would reduce value of final salary and CARE pension already accrued), only taking account of basic rate tax relief, and inflation at 2%:

• Annual NHS pension at age 68 is £77,500 (note this is in cash terms, not today's terms)
• ISA pot is £732,000

The assumptions are set to flatter the ISA scenario. If we continue that by assuming a withdrawal rate of 5%, that is an annual income of £36,600 compared to a pension income of around £64,000 after tax.

So even with assumptions favouring the ISA strategy, a long-term compounding growth of 6.5%, no sequencing of returns issues, and a very high safe withdrawal rate, the pension still gives nearly two times the ISA outcome. You would need an annual rate of return of in excess of 10% for the ISA strategy to be a consideration

prb1984

So that's all really clear, the consensus is to not opt-out but to stay in and in vest in an ISA additionally.

I understand the concerns better now with a sole ISAstrategy, so thank you for that. Of course, the discusssions also make the assumption I live long enough to benefit from the pension - as mentioend my grandparents died at 63, 65 and mother at 70. Between them, they drew on their pensions for about 6 years in total - but of course I understand times are different and better safe than sorry.

So what's the best plan to make this work with my goals: to work full time for next 10 to 15 years and then reduce to 3 days a week until retirement age? Continue with NHS pension and fund investment ISA with the extra cash left over beyond emergency fund?

Nurse2047

Have you not considered paying additional pension payments? https://www.nhsbsa.nhs.uk/member-hub/increasing-your-pension/additional-pension

hugheskevi

prb1984 said:

So that's all really clear, the consensus is to not opt-out but to stay in and in vest in an ISA additionally.

Agree with the first point, not necessarily with the second.

Why have personal pension contributions in particular not been considered? Why an ISA? An ISA may well be right initially, but would there be a point at which you may wish to switch to a personal pension, eg, when paying higher rate tax? Would you be planning to use a LISA, stocks and shares ISA or both?

prb1984

hugheskevi said:

prb1984 said:

So that's all really clear, the consensus is to not opt-out but to stay in and in vest in an ISA additionally.

Agree with the first point, not necessarily with the second.

Why have personal pension contributions in particular not been considered? Why an ISA? An ISA may well be right initially, but would there be a point at which you may wish to switch to a personal pension, eg, when paying higher rate tax? Would you be planning to use a LISA, stocks and shares ISA or both?

So additional NHSpension contributions beyond what I'm already contributing, is that what you mean? Can you explain why that would be beneficial please?

The focus was on a stocks and shares ISA due to accessibility - as mentioend I don't want to work until standard retirement age, and the solutions you mentioned all lock money away until such a time, do they not? I may misunderstand them.
The goal is to retire early and not have to work full time until retirement age.