Salary sacrifice and buying additional NHS pension

greenstick

Hi

My wife and I both work for the NHS but in different organisations.  Her organisation offers a very good salary sacrifice car leasing scheme that has a very tempting offer on currently, cheaper than the car could be found elsewhere, no deposit to pay, fully maintained and insured.

We don't want this to affect her pension so I'm looking to see if the cost of purchasing additional pension to cover the "lost" amount by using the salary sacrifice would work but I'm losing confidence in my calculations and wondered if anyone could check them.

I'm aware the 2015 scheme works on 1/54 of annual salary.  For the purposes of this I'll use an annual salary of £30000.  The lease "amount taken from salary" of £500/month so £6000 annually

No car: 30000/54 = 555 a year in pension
With car: (30000-6000)/54 = 445 a year in pension

Resulting in a lower annual pension by £110/year.


Now, this is where I'm struggling.

I'm looking at the NHS Additional Pensions calculator Additional Pension Calculator (nhsbsa.nhs.uk).  The minimum amount to buy is £250, I've confirmed with them that this is £250 in pension per year if retiring at Normal pension age.

Do I just select £250 (therefore being £140 better off every year from pension age) and pay that over the 36 months of the lease?, effectively adding £86.08 to the monthly cost or is it more complicated than that - It's all seeming too good to be true, which usually means it is.

Any assistance gratefully received.

Lowtrawler

greenstick said:

Hi

My wife and I both work for the NHS but in different organisations.  Her organisation offers a very good salary sacrifice car leasing scheme that has a very tempting offer on currently, cheaper than the car could be found elsewhere, no deposit to pay, fully maintained and insured.

We don't want this to affect her pension so I'm looking to see if the cost of purchasing additional pension to cover the "lost" amount by using the salary sacrifice would work but I'm losing confidence in my calculations and wondered if anyone could check them.

I'm aware the 2015 scheme works on 1/54 of annual salary.  For the purposes of this I'll use an annual salary of £30000.  The lease "amount taken from salary" of £500/month so £6000 annually

No car: 30000/54 = 555 a year in pension
With car: (30000-6000)/54 = 445 a year in pension

Resulting in a lower annual pension by £110/year.


Now, this is where I'm struggling.

I'm looking at the NHS Additional Pensions calculator Additional Pension Calculator (nhsbsa.nhs.uk).  The minimum amount to buy is £250, I've confirmed with them that this is £250 in pension per year if retiring at Normal pension age.

Do I just select £250 (therefore being £140 better off every year from pension age) and pay that over the 36 months of the lease?, effectively adding £86.08 to the monthly cost or is it more complicated than that - It's all seeming too good to be true, which usually means it is.

Any assistance gratefully received.

The £250 additional pension contributions will usually be paid until your Wife's NRA, not just 36 months. If you stop after 36 months, only a portion of the £250 will have been earned. (Unless you have chosen to make the payments over 3 years, also possible). 

Remember, she will also get tax relief at her marginal rate on the additional pension contributions which reduce their cost from the headline level.

spaniel101

You may find this previous discussion helpful:

https://forums.moneysavingexpert.com/discussion/6206470/nhs-car-lease-through-salary-sacrifice-impact-on-pension


Indeed lots to consider, including this also:

https://www.nhsbsa.nhs.uk/sites/default/files/2021-04/Added Benefits-Additional Pension factsheet-20210423-(V9)_0.pdf

"Additional pension purchased in the 2015 Scheme is revalued by a Treasury Order each year before the Additional Pension comes into payment and increased in line with CPI inflation whilst it is being paid. The Treasury Order is the method by which the Treasury notifies the value of the change in prices or earnings to be applied as part of revaluation. The additional pension earned in a Scheme year (April to March) is revalued on 1 April of the following and each subsequent Scheme year until you retire. For example, if the Treasury Order was 2% the value of your earned Additional Pension would increase by 2% at the beginning of the following Scheme year. Additional Pension does not receive the additional 1.5% applied to the standard earned pension. If an Order is negative it will result in the earned Additional Pension being reduced at the beginning of the following year. Provided that you are a contributing member of the Scheme, in good health and not absent"

That, and the fact that the employer benefits more from this scheme, from less employer contributions, as reflected by your reduced 'Pensionable' earnings.  

MX5huggy

You’ve calculated the £110 for year 1 but presuming it’s a 3 year lease it’s £330 per year lost from the pension. 

greenstick

MX5huggy said:

You’ve calculated the £110 for year 1 but presuming it’s a 3 year lease it’s £330 per year lost from the pension. 

I'm really struggling with this, sorry.  I'm sure it will click eventually.  I can't get why it's £330 per year?

If the final pension amount for a given year is calculated as 1/54 of the earnings that year, and the difference between no car and having the car affects each of the 3 years by £110 does that not mean I need to just make up at least £110 a year, which the £250 (paid over 3 years to match the lease) would do?

MX5huggy

Because you’re looking at the input which is reduced by £110 per year but I’m looking at the output at retirement, reduce the input by £110 for 3 years means at retirement the pension is reduced by £330 per year live for 20 years after retirement makes for an expensive car. But well done for considering the impact on pension many don’t. So to cover it you need to be buying £330 of extra pension. 

Lowtrawler

greenstick said:

MX5huggy said:

You’ve calculated the £110 for year 1 but presuming it’s a 3 year lease it’s £330 per year lost from the pension. 

I'm really struggling with this, sorry.  I'm sure it will click eventually.  I can't get why it's £330 per year?

If the final pension amount for a given year is calculated as 1/54 of the earnings that year, and the difference between no car and having the car affects each of the 3 years by £110 does that not mean I need to just make up at least £110 a year, which the £250 (paid over 3 years to match the lease) would do?

As per MXhuggy, the eventual pension is reduced by £110 for each year they lease the car, so £330 in total. You could buy £500 of additional pension, which assuming you have already looked at payments over 3 years, would come to an extra £86.08 x 2 = £172.16 per month. Assuming 20% tax, it is 80% x £172.16 = £137.73 per month. That buys you £500 of additional pension v the £330 reduction, although as Spaniel01 says, it won't increase in quite the same way as the lost pension.

spaniel101

Is this really working out to be 'cheaper' ?


Each £110, is a loss from the pension - for life.
Over 3 years, £330 is lost from the pension - for life.
In addition to the compound effects of inflation (CPI) loss, plus 1.5% loss.

So all in all, the loss is actually a lot more than £330 - for life.


Additional pension of £250 per annum - for life (purchased @ a cost of £86.08pm/£1032.96pa x 3yr) with only 'benefit' of inflation increase (CPI) compounded (not the 1.5% as with the standard pension).

As per Lowtrawler - you will benefit from tax relief at your marginal rate each month  - of which the additional pension contributions will also reduce your 'Pensionable Pay', further (=more loss).   


You will benefit from lower NI contributions.

AlanP_2

Is there a pension loss, or is the main NHS accrual based on contracted salary for grade rather than "after car" salary?

I don't know but worth finding out before you get too far down a rabbit hole.

QrizB

greenstick said:

I'm looking at the NHS Additional Pensions calculator Additional Pension Calculator (nhsbsa.nhs.uk).  The minimum amount to buy is £250, I've confirmed with them that this is £250 in pension per year if retiring at Normal pension age.

Do I just select £250 (therefore being £140 better off every year from pension age) and pay that over the 36 months of the lease?, effectively adding £86.08 to the monthly cost or is it more complicated than that - It's all seeming too good to be true, which usually means it is.

Any assistance gratefully received.

What did you enter for "length of payment plan" in that calculator? Was it 36 months, and is that where you get the £86.08/month from?

What does the calculator say if you ask to pay as a lump sum, rather thanv in stallments?

And everyone else is correct, if you lose £110 of pension accrual each year for 3 years, you're going to be at least £330/yr worse off when you retire. You might want to buy £500 of additional pension instead.

spaniel101

https://www.enhertsccg.nhs.uk/sites/default/files/documents/Jan2019/181129_FleetSolutions_East_and_North_Hertfordshire_CCG.pdf       (rough guide for one CCG/Trust which provides a good indepth explanation of leasing pros/cons with some good points for deep consideration)


2015 Scheme

For all employees in the 2015 Scheme, given future service benefits will accrue on a Career Average Revalued Earnings basis, your pension in the 2015 Scheme will be based on your pensionable pay for each year you are in this scheme. Essentially this means that the pension you earn each year is based on pensionable pay in that year and is increased by a set revaluation rate, linked to inflation, for each year up to retirement or leaving. The final pension is then calculated by adding together the pension earned in each year of NHS Pension Scheme membership in the 2015 Scheme so it will not be limited to the period immediately before you leave as is the case under the 1995/2008 Scheme.

This basis of calculation for final pension entitlement in the 2015 Scheme means that any salary sacrifice arrangement that exists during membership of this scheme will have the effect of lowering your pensionable earnings each year and, therefore affecting your final pension entitlement in the 2015 Scheme. It is therefore recommended that you obtain advice to understand the impact that any salary sacrifice arrangement will have on your specific pension entitlement before entering into the Car Lease Scheme. This advice can be sought from NHS Pensions on 0300 3301 346.




Also worth noting, lower 'Pensionable Earnings' would inevitably effect your Death In Service benefits, ill health, etc, during your scheme period, if this is on your radar.