NHS Penion vs Investment ISA: please educate me

hugheskevi

prb1984 said:

Thrugelmir said:

Will you have cleared your mortgage by the time you plan to retire? 

Yes, how fast depends on if putting into something else makes more sense. There's 190k left around 2.45% now. Could pay this off within about 5 to 7 years quickest, without putting money into anything else.

You could consider using  investment vehicles to repay the mortgage - more risk, but greater expected return.

I understand that this is only drawable after 60. Given that I'm thinking my NHS pension will cover my income post retirement age,

What do you think is your post retirement age, and when do you plan to commence NHS pension? How do you factor in State Pension? Are you planning to smooth income from when you retire until your State Pension age, or do you plan to just have State Pension as a bonus when it arrives?

Planning for the period between date of early retirement and State Pension age can be complicated, using a variety of different vehicles. Doing locum work would be a good way of doing this, as it will also give National Insurance qualifying years, but there are other ways too, and if the goal is semi-retirement, then planning to fill gap with extra work may not be intuitive given the goal is doing less work.

Sorry to ask another question, but when would I be benefiting from the higher rate relief on extra contributions? Is this when earning at least the additional contribution over the higher tax rate limit?

When your taxable income exceeds £50,270 - so salary exceeding £57,450 assuming no other income and membership of NHS pension.

Dazed_and_C0nfused

With your NHS pension you get the maximum possible tax relief each payday i.e. you earn £48,000 but pay 10% for the NHS pension so your income for tax purposes is only £43,200 (this will be the amount on your P60).

With a personal pension you get basic rate tax relief added to your pension fund and have to claim any additional relief due from HMRC.  The tax relief is only ever due for the tax year you make the contribution in.

So say you contribute £8,000 the pension company adds 25% giving you a pension fund of £10,000 (£10,000 x 20% = £2,000 basic rate tax relief).

Your basic rate tax band is then increased by £10,000 meaning if you earn enough you will pay 20% tax on an extra £10,000 instead of paying 40%.

In very straightforward cases where you are paying enough higher rate tax this could save you £2,000 in personal income tax meaning you have ended up with a pension fund of £10,000 for a real cost of £6,000.  

If you ever become liable for the High Income Child Benefit Charge the saving can be much more making it very tax efficient.

Finally, don't forget that when working out how much tax you will be paying your NHS salary is irrelevant, it is your taxable pay which counts and your normal NHS pension contributions will have already reduced this a fair bit - see example above.

prb1984

hugheskevi said:

You could consider using  investment vehicles to repay the mortgage - more risk, but greater expected return.

Have you got a link or a search term I would use to look at this? It sounds just the sort of thing I'd be interested in.

What do you think is your post retirement age, and when do you plan to commence NHS pension? How do you factor in State Pension? Are you planning to smooth income from when you retire until your State Pension age, or do you plan to just have State Pension as a bonus when it arrives?

Not factoring in state pension and just having this as bonus when it arrives. I imagine working full time from 36 to 45/50, 3 days per week from 45/50 to retirement age (which I would assume will be around 68), may drop down in hours further around 60. Of course this is all very dependent and thumbnail sketchy

Planning for the period between date of early retirement and State Pension age can be complicated, using a variety of different vehicles. Doing locum work would be a good way of doing this, as it will also give National Insurance qualifying years, but there are other ways too, and if the goal is semi-retirement, then planning to fill gap with extra work may not be intuitive given the goal is doing less work.

I would likely still be working 3 days out 5 NHS, so assuming no promotion, it would be equivalent of 61k*0.6 = 36.6k with scope to do some extra work - maybe something entirely different to NHS work if wanted to. When I say semi-retirement, I mean this - to work 3 days and then have 4 'off' a week. Ideally I'd like to do this between ages of 50 to retirement age.

jamesd

Given that you're 36 the normal minimum access age for pensions will have risen to 57 and state pension age to 68 or possibly another increase to 69 by the time you get there. The minimum access age increase won't apply to any personal pension you have now, so if you have one, don't close it because money put into it can be drawn on two years earlier.

A general plan tends to look like this:

Last pension to arrive, state pension, adds about 9k to income and puts you at your highest guaranteed income.

DB pensions arrive and you use DC pensions or savings to top them up with the same amount as the state pension will pay.

Before DB and SP you use personal pensions and savings including ISA to pay yourself the combined DB and SP amount. If you can't sustain this you look at taking DB earlier with a reduction and lower both your lifetime income expectation and the cost of bridging the gap. Or part time work can be used.

Since personal pension money can't be accessed until 57 you first accumulate in ISA to bridge that time gap. Your thought about starting with ISA then adding more to personal pension as your tax rate is in higher rate is good.

hugheskevi

prb1984 said:

hugheskevi said:

You could consider using  investment vehicles to repay the mortgage - more risk, but greater expected return.

Have you got a link or a search term I would use to look at this? It sounds just the sort of thing I'd be interested in.

Google for "Pension mortgage" - things like this link. Back in the 1980s these were fully provided products, but there is no reason you can't do it yourself with separate mortgage and pension/LISA/ISA. Note the link describes using interest only mortgage, that is not necessary, just use repayment mortgage with maximum possible term.

These sort of things do take you down the path of endowment mortgages,and the issues there - not that there was ever anything wrong with endowment mortgages, you just need to understand the risks and monitor more closely than many did and be ready to make adjustments.

jamesd

On the mortgage side, I took out an interest only offset mortgage some ten years ago, with pension money to be the main repayment method. That got me the tax relief and NI savings of a salary sacrifice pension going towards my capital repayment. With something more than nine times the mortgage in savings and investments I can now pay it off whenever I like but don't because I expect to make more from investments than I save in interest. Another ten years of potential investment growth to go 

With pension money available no earlier than 57 (possibly 55 for some) in your case it might be hard to get a mortgage that leaves lots of capital until pensions are available. Only 25% of pension money is available and then only until the total value of all pensions taken so far goes over roughly a million Pounds. DB are valued at twenty times income plus lump sum, DC at lump sum value. Taking DB early with actuarial reduction can be a useful tool to reduce this potential bill.

My own pension has spent most of the last year almost fully offset, minimising my interest cost.

tibbles209

A potentially very important consideration for you is the pensions lifetime allowance. As an NHS doctor planning to work until normal retirement age, there is a significant risk you will come close to, or potentially even exceed the lifetime allowance with your NHS pension alone. I would therefore be cautious about using AVCs/ personal pensions for additional savings, especially if at the moment you will only get basic rate tax relief. 

prb1984

tibbles209 said:

A potentially very important consideration for you is the pensions lifetime allowance. As an NHS doctor planning to work until normal retirement age, there is a significant risk you will come close to, or potentially even exceed the lifetime allowance with your NHS pension alone. I would therefore be cautious about using AVCs/ personal pensions for additional savings, especially if at the moment you will only get basic rate tax relief. 

Yes, I'll make sure to keep an eye on this.
I shouldn't expect I'll hit it though. If all goes to plan and I work 3 out of 5 days for a decade towards the end of my career, I imagine I won't build up enough to worry the limit

nigelbb

prb1984 said:

hugheskevi said:

You could consider using  investment vehicles to repay the mortgage - more risk, but greater expected return.

Have you got a link or a search term I would use to look at this? It sounds just the sort of thing I'd be interested in.

What do you think is your post retirement age, and when do you plan to commence NHS pension? How do you factor in State Pension? Are you planning to smooth income from when you retire until your State Pension age, or do you plan to just have State Pension as a bonus when it arrives?

Not factoring in state pension and just having this as bonus when it arrives. I imagine working full time from 36 to 45/50, 3 days per week from 45/50 to retirement age (which I would assume will be around 68), may drop down in hours further around 60. Of course this is all very dependent and thumbnail sketchy

Planning for the period between date of early retirement and State Pension age can be complicated, using a variety of different vehicles. Doing locum work would be a good way of doing this, as it will also give National Insurance qualifying years, but there are other ways too, and if the goal is semi-retirement, then planning to fill gap with extra work may not be intuitive given the goal is doing less work.

I would likely still be working 3 days out 5 NHS, so assuming no promotion, it would be equivalent of 61k*0.6 = 36.6k with scope to do some extra work - maybe something entirely different to NHS work if wanted to. When I say semi-retirement, I mean this - to work 3 days and then have 4 'off' a week. Ideally I'd like to do this between ages of 50 to retirement age.

How do you come up with an annual salary of only £61K for a doctor with 20 years experience? The basic starting salary for a consultant is £82K rising to over £110K even aside from extra sessions or Clinical Excellence Awards. Even if you don't do your exams & just aspire to a service role as a Specialty Doctor the top end of the pay scale is a basic of £76K again ignoring extra sessions which could easily add 20%. The Associate Specialist grade is being reopened which allows for a more senior sub-consultant role with a basic pay scale up to £95K. On all these pay scales you get annual or biennial pay increases without any promotion.

Bottom line is you are seriously underestimating what your salary will be in a few years.

prb1984

nigelbb said:
How do you come up with an annual salary of only £61K for a doctor with 20 years experience? The basic starting salary for a consultant is £82K rising to over £110K even aside from extra sessions or Clinical Excellence Awards. Even if you don't do your exams & just aspire to a service role as a Specialty Doctor the top end of the pay scale is a basic of £76K again ignoring extra sessions which could easily add 20%. The Associate Specialist grade is being reopened which allows for a more senior sub-consultant role with a basic pay scale up to £95K. On all these pay scales you get annual or biennial pay increases without any promotion.

Bottom line is you are seriously underestimating what your salary will be in a few years.

There are different types of doctors in the NHS. I'm a Clinical Psychologist, a Dr having done a practitioner doctorate. Clinical Psychologists are paid on Agenda for Change pay scales between  band 7 (starting at 39k) newly qualified, up to band 9 (105k) when leading whole trust psychological professionals. I am at band 8b (53k to 62k).  I never said I had 20 years experience as a doctor. I qualified as a doctor five years ago, but had been working in the nhs as a trainee clinical psychologist and other roles previous to that, hence I have been paying into my nhs pension for 9 years now. There is scope to do private work, chargeable at about £100-150 an hour, which is the extra work I could take on to top up income as an extra if needed/desired. The above figures are current pay scales.
In terms of projecting forward, the likelihood is I would progress. I've gone from band 7 to 8b in five years since qualifying, which is relatively quick. It's common to progress onto consultant levels - 8c and 8d, I would think that most likely take a further 5 to 10 years at 8b. Band 9 posts would be realtively rare and require probably at least a further five to ten years as a consultant.