NHS Pension

Danny-r

Hey Guys,

Looking for some help as I'm looking to get my head around my pension. I'm 26 so haven't paid a massive amount of attention to this, but have been paying in to a NHS 2015 scheme pension since I was 22. I'm pretty financially astute, but not really paid attention to my pension as there's no real changing it when you're working in the NHS. I'm considering a move out of the NHS so I've been trying to work out the true value of my pension.

My salary means that I contribute 9.3% of my pensionable earnings each month. The NHS contribute 20.6% of my pensionable pay.

Although I pay 9.3% in every month, I've read that my pension pot increases each year by 1/54 (1.85%) of my annual salary each year. As a newbie to pensions, that seems a bit of a con since I'm paying in 9.3% to increase the pot by 1.85%. Admittedly I can see that it is offset by the hue 20.6% that they contribute, but does make the employer contribution a bit less impressive. Each year’s pension earned will increase every year in value by CPI plus 1.5 % per year.

So essentially from what I can gather. I'm paying 9.3% and as a result, I'm gaining 22.45% of my annual salary into my pension pot (1.85% plus employer contribution of 20.6).

So here's the question (finally). Does this seem right? Have I got my head around it all?

QrizB

No you've completely misunderstood.

There is no pension pot.

Each year you pay 9.3% of your salary. In exchange you gain an entitlement to 1.85% of that year's salary, every year from your retirement age. The next year's 9.3% earns you 1.85% of that year's salary in addition.

Given that you're likely to live for 20 years or more after retiring, It's an outrageously generous deal.

There will be an NHS pension expert along in a minute to flesh out the details of my bare-bones explanation, I'm sure.

El_Torro

Firstly, it's great that at 26 years of age you are taking an interest in your pension. Many people your age don't. 

Secondly, you're not looking at it the right way. The amount your employer pays in to your pension is basically irrelevant. What matters is what you get out of it, i.e. a fixed income which increases with inflation from the day you retire to the day you die. Sure, it's "only" 1.85% of your current salary (plus inflation) for every year you contribute but that is every year from your retirement to your death. If you run the numbers you'll see that sacrificing 9.3% of your salary for this benefit is a bargain.

The important thing to remember is that the NHS pension is one of the best pension schemes in the UK. If you move to the private sector there is pretty much no chance you'll be offered as generous a scheme. Other parts of the public sector have great pensions too. 

Dazed_and_C0nfused

You've misunderstood how the NHS pension works.

There is no pot and the employer contributions are irrelevant.

You are basically correct that your 9.3% (before tax relief so probably only a real cost of 7.44%) gets you 1.85% in return.

But that 1.85% is inflation proofed from when it accrues to when you take the pension.  At a very generous rate, CPI (or RPI) plus 1.5% every year.

And you pay 9.3% for one year.  The 1.85% is paid from the scheme NPA to whenever you die.  Could easily be 30+ years.  And it continues to be inflation proofed once in retirement.

If you think you can do better please enlighten us 

Thrugelmir

Danny-r said:

My salary means that I contribute 9.3% of my pensionable earnings each month.

You pay less tax though as the pension contribution is tax deductible. If you are a basic rate taxpayer the net cost to you is 7.44%. 

What's your accrued pension entitlement to date? 

hyubh

Danny-r said:

My salary means that I contribute 9.3% of my pensionable earnings each month. The NHS contribute 20.6% of my pensionable pay.

Although I pay 9.3% in every month, I've read that my pension pot increases each year by 1/54 (1.85%) of my annual salary each year. As a newbie to pensions, that seems a bit of a con since I'm paying in 9.3% to increase the pot by 1.85%. Admittedly I can see that it is offset by the hue 20.6% that they contribute, but does make the employer contribution a bit less impressive. Each year’s pension earned will increase every year in value by CPI plus 1.5 % per year.

So essentially from what I can gather. I'm paying 9.3% and as a result, I'm gaining 22.45% of my annual salary into my pension pot (1.85% plus employer contribution of 20.6).

So here's the question (finally). Does this seem right? Have I got my head around it all?

What you are imagining is that the scheme is a 'cash balance' one in which the sum of your accrual for each year, revalued, becomes a 'pot' to do what you want with at the scheme's normal pension age (NPA). However, the NHS scheme is not a 'cash balance' one. Instead, those 1/54 chunks, revalued, define an annual income, for life, from NPA. In other words, you don't get that 1/54, revalued, once, but for however long you live from NPA (with a potential survivor pension to follow).

PS - active member revaluation in the NHS scheme is CPI + 1.5%. So for each year you remain an active member in the scheme, your previous years' accruals increase in real terms.

PPS - both employer and employee rates have no necessary connection to the accrual rate. That said, while 20.6% sounds (and is) a lot, a private sector employer running their own private sector scheme with the same benefit structure would be needing to put in rather more.

MX5huggy

Again well done for taking an interest at your age, wish I had.

The NHS pension is massively valuable you can tell that by size of the contributions to pay for it 9.3 employee plus the 20.6%  no private employer is going to get close to making contributions that big to any scheme. Although NHS contributions don’t go to a pot but pay for today’s retirees. 

The other way to look at it is you started at 22 so at 68 you would have 46 years service which would give you 46 54ths or 85% of your average salary inflation linked for life. If you kept earning £30000 through out that’s a Annual pension of £25500 for a total contribution of £128000 (9.3% of £30k X 46 years). All in today’s money so index linked. 

For a private pension of £25500 you would be looking at needing a pot of £640000. and you would need lots more to keep up with inflation on top.

Don’t forget you’ll get State pension as well (don’t believe the stuff about it going, the only thing more sacred to voters is the NHS) £9800 index linked.

Doing a job is not all about pension so if you have found an opportunity that is stimulating and rewarding (financially and personally) outside the NHS then go for it, just makes sure you save for your retirement as well. 

Danny-r

Thank you all for your responses. It's definitely helped me understand it more.

I won't reply to all individually, but will overall. I would like to reply to one bit in particular though about "doing better in the private sector" I know I won't find a better pension in the private sector. That's not what this is about, but through understanding exactly what I am getting in terms of a NHS pension.

The example on the last post was particularly useful, especially seeing that essentially I'd only have to work roughly 5 years to get my moneys worth based on that sum (£25.5k for 5 years being close to the total contribution by myself). Interesting to also know that the state pension is £9800 index linked, I think I tried finding that out but struggled, so that was useful. I think a lot of people forget about their state pension.



Essentially the reason I'm trying to find this out is to work out the true value of my financial package with the NHS. I take home a decent about, but most of it is due to out of hours work I do. On a good month I can do a basic of 2700 but with £1k of extras, but only 2800 is pensionable. It puts me on a salary of probably in the region of £42-£45k, but pensioned on ~£32k basic. This basic will progress to £34k in 2 years and £39k after another 3, subject to increase with annual pay deals. In my line of work, above this band is a real bottleneck, so progression to the next band is unlikely (however something I will aim for). All the extras are based on my hourly rate, so will go up proportionally as well.

I like the idea of both jobs, and I'm completely undecided. I completely agree about not choosing a job purely on financials, but because I'm so undecided I'm trying to get my head around anything. The offer I've been given is £42k (although she said some room to manoeuvre so I suspect I could negotiate up to £45k). So that would be pensionable. A £5k car allowance added to the salary. And then pension, which I've read in one place is a non-contributory pension but then been told it's 5% matched.

On that deal alone, it's not worth it, but I have been told that they'd expect that in 3 years I'll be on £55k and in terms of progression, I can progress onto management which is paid £70k.

I think many people look at basic pay packages and allow that to sway them, but I am trying to take into account the bigger picture. There's also annual leave to throw into the mixer to. I hit 5 years service next year so progress to 29 days.

draiggoch

There is nothing stopping you from paying part of your extra out of hours income in to a private pension / SIPP. This could be a bridge for you to retire a few years earlier before taking the NHS pension.
At the end of the day you are near the start of your working life and it should not be all about the pension options available. Do you enjoy your work or would the new job be more enjoyable?
Whatever you do make sure that you keep an ongoing eye on the pension. If you move then you should pay at least 9.3% to the new pension since that is what you are used to in the NHS.

najan49

MX5huggy said:

Again well done for taking an interest at your age, wish I had.

The NHS pension is massively valuable you can tell that by size of the contributions to pay for it 9.3 employee plus the 20.6%  no private employer is going to get close to making contributions that big to any scheme. Although NHS contributions don’t go to a pot but pay for today’s retirees. 

The other way to look at it is you started at 22 so at 68 you would have 46 years service which would give you 46 54ths or 85% of your average salary inflation linked for life. If you kept earning £30000 through out that’s a Annual pension of £25500 for a total contribution of £128000 (9.3% of £30k X 46 years). All in today’s money so index linked. 

For a private pension of £25500 you would be looking at needing a pot of £640000. and you would need lots more to keep up with inflation on top.

Don’t forget you’ll get State pension as well (don’t believe the stuff about it going, the only thing more sacred to voters is the NHS) £9800 index linked.

Doing a job is not all about pension so if you have found an opportunity that is stimulating and rewarding (financially and personally) outside the NHS then go for it, just makes sure you save for your retirement as well. 

I’m not 100% sure but I think it’s even better than that - because the accrued benefits increase by inflation + 1.5%, in real terms a 46 year pension from a £30k salary comes out at more than £36k pa, according to the back of my envelope.

MallyGirl

Danny-r said:

I like the idea of both jobs, and I'm completely undecided. I completely agree about not choosing a job purely on financials, but because I'm so undecided I'm trying to get my head around anything. The offer I've been given is £42k (although she said some room to manoeuvre so I suspect I could negotiate up to £45k). So that would be pensionable. A £5k car allowance added to the salary. And then pension, which I've read in one place is a non-contributory pension but then been told it's 5% matched.

You definitely need clarity on the contribution basis - matched by employer or non-contributory.
You need to see if they are a stingy employer - some only calculate their contribution based on a percentage of the pay above the lower threshold (the amount you have to be earning in order for them to be required to contribute to a pension).
Car allowance is a taxable benefit and can limit the amount of fuel you get reimbursed (different rate per mile).
Is the pension via salary sacrifice? Yes is the better answer.