NHS pension value

benish

Hi,

I’m going through a divorce at the moment and I’m just trying to get my head around pensions. We’ve been asked for our pension values and in my wife’s case I’ve filled out a cash equivalent value request for her Nhs pension. 

I have a pension at work through Scottish widows and I pay 4% per month and the company adds 6%. 

Ive logged on to Scottish widows and seen my current pension cash value, which is the current value applicable in the divorce. 

However for my wife, I’ve read about the nhs pension only been 1/54th of your annual salary, which would work out a value of around £300 for her each year, yet she currently pays in at 9.3%, around £125 a month! 

I’m slightly confused. How can it only be valued at £300 each year when she is paying in £1500 a year?! 

I’m guessing I’m totally wrong on this, can anyone explain in layman’s terms to me please!!? 

Thanks
Ben

Nurse2047

I still don’t understand this also so would be eager to understand. 

JoeCrystal

CETV is not valued at annual pension but the total amount calculated to pay a defined benefit pension based on a very large range of factors. You clearly misunderstood the purpose behind CETV in this case. While I have no idea how they calculate the CETV, it should be in multiples of the annual pensions accrued.

It is £300 index-linked every year for the rest of her life after reaching normal pension age at a peanut cost of £125 per month for one year. That is dirt cheap for amazing benefits.  I would be paying £444 per month in a DC scheme to even consider the same level of benefits and even then, it is not guaranteed. Of course, there are all other bells and whistles on the NHS pension scheme as well like that fancy CPI+1.5% adds on as well. £100 in today's money would be doubled in today's money in 47 years for example. Indeed, she would expect to recoup all her contributions back very quickly in a few years once she gets her pension.

So I wouldn't be surprised that CETV for NHS pension to be pretty hefty.

Aretnap

benish said:

However for my wife, I’ve read about the nhs pension only been 1/54th of your annual salary, which would work out a value of around £300 for her each year, yet she currently pays in at 9.3%, around £125 a month! 

I’m slightly confused. How can it only be valued at £300 each year when she is paying in £1500 a year?! 

1/54th of her annual salary *for each year of service*.

So the £1500 she contributed this year will buy her an income of £300 every year from her retirement age until she dies. Rising with inflation as well. Assuming she plans to live for more than 5 years after she retires, that makes it a rather good deal. 

Next year she will contribute another £1500 and receive another £300 for every year of her retirement.

In actual fact it's better even than that, because as long as she stays employed by the NHS each "chunk" of income increases by more than inflation - off the top of my head ISTR that it's inflation plus 1.5%. Which means that if she stays with the NHS another 20 years, this year's contributions would buy her an annual income of just over £400 in retirement, in today's money.

There are several different ways of valuing a defined benefit pension, but by any reasonable measure an NHS pension is worth much, much more than the sum of one's contributions.

Dazed_and_C0nfused

However for my wife, I’ve read about the nhs pension only been 1/54th of your annual salary, which would work out a value of around £300 for her each year, yet she currently pays in at 9.3%, around £125 a month! 

I’m slightly confused. How can it only be valued at £300 each year when she is paying in £1500 a year?! 

There are two things you need to remember.

Firstly the NHS operate net pay for tax relief so that £125 is saving her £25 in tax each month so the real monthly cost is only £100.

And as others have said she is paying £1500 (or really £1200) for one year.  In return she is getting an inflation proofed £300 for every year she is retired.  If you can find a better investment please let is know.

nigelbb

Dazed_and_C0nfused said:

However for my wife, I’ve read about the nhs pension only been 1/54th of your annual salary, which would work out a value of around £300 for her each year, yet she currently pays in at 9.3%, around £125 a month! 

I’m slightly confused. How can it only be valued at £300 each year when she is paying in £1500 a year?! 

There are two things you need to remember.

Firstly the NHS operate net pay for tax relief so that £125 is saving her £25 in tax each month so the real monthly cost is only £100.

And as others have said she is paying £1500 (or really £1200) for one year.  In return she is getting an inflation proofed £300 for every year she is retired.  If you can find a better investment please let is know.

Average life expectancy at retirement age for a female is around 21 years so that pension is worth over £6,000 for a cost of £1,200. In practical terms the NHS pension is deferred salary paid in retirement.

Flugelhorn

getting a "value" on NHS pensions is complicated,  - I have seen assorted calculations, at one time you were given the cost of an equivalent annuity (haven't seen that for years) , then there is the lifetime allowance value (which probably undervalues it ) - there is a whole section at the NHSBSA dealing with valuing for divorce:

https://www.nhsbsa.nhs.uk/member-hub/divorce-or-dissolution-civil-partnership-and-your-pension

JoeCrystal

That is very handy page. Even got factors to calculate CETV very roughly!

hugheskevi

JoeCrystal said:

CETV is not valued at annual pension but the total amount calculated to pay a defined benefit pension based on a very large range of factors. You clearly misunderstood the purpose behind CETV in this case. While I have no idea how they calculate the CETV, it should be in multiples of the annual pensions accrued.

It is £300 index-linked every year for the rest of her life after reaching normal pension age at a peanut cost of £125 per month for one year. That is dirt cheap for amazing benefits.  I would be paying £444 per month in a DC scheme to even consider the same level of benefits and even then, it is not guaranteed. Of course, there are all other bells and whistles on the NHS pension scheme as well like that fancy CPI+1.5% adds on as well. £100 in today's money would be doubled in today's money in 47 years for example. Indeed, she would expect to recoup all her contributions back very quickly in a few years once she gets her pension.

So I wouldn't be surprised that CETV for NHS pension to be pretty hefty.

The CETV is calculated on the basis of the member leaving the scheme on the date of calculation. That removes the benefit of enhanced in-service revaluation.

The future expected cashflows to pay the pension are calculated by actuaries, taking into account expected inflation, life expectancy and survivor benefits should the member pre-decease their partner. All of these values are based on averages across the entire scheme membership rather than being done at individual level. So, for example, all members would be considered to be 90% married at retirement, if that was the scheme average. These assumptions are based on HM Treasury Directions and calculations by scheme actuaries.

Crucially, the expected future cashflow requirement is then discounted back into a present-day capital value by applying the scheme discount rate. This is the same rate across the whole public sector, the SCAPE rate. It is CPI+2.4% currently.

The SCAPE rate is significantly higher than would be used in a private sector scheme. This means the value of any given level of pension is calculated as being much lower in the public sector than the same value would be calculated as being in the private sector. This is because the discount rate can be thought of as a rate of return, and if a higher rate of return is assumed, clearly a lower initial capital amount is required to reach a future target. Hence, the maximum multiplier you see applied to annual pension to calculate capital value is only slightly over 20 in most cases in public sector, whereas multipliers of 30-something are routine in private sector schemes, and can be 40+ in some cases.

Flugelhorn

@hugheskevi - thanks for explanation!

Was always getting told a figure for my  LTA (about 23x) with the rider "of course the pension is worth much more than that" but no-one explained further.

Silvertabby

JoeCrystal said:

That is very handy page. Even got factors to calculate CETV very roughly!

You really can't diy a divorce cetv, even VERY roughly. 

 Before you could begin to use these factors you would need accurate pension figures as at the date of the calculation.  Plus you would need any gmp and mod calc amounts - and know how to factor them into the calculation.

Divorce cetvs are one of the most complicated calculations there are - and the only way to obtain a correct figure is to ask your pension provider.