Taking NHS Pension early - Actuarilly Reduction vs "potential" CPI Increase.

Korkyb

Firstly apologies if I have got hold of the wrong end of the stick.

I'm currently 55 and have around 37 years in my (mainly the 95 scheme) NHS pension with a pensionable pay of just over £60k.

I plan to take my pension early (but keep working some hours) in around 12 - 18 months which I know will incur an Actuarilly Reduction of around 4% for each year I take it early based on my NPA of 60. (family history & my past health make it unlikely I'll be getting a 100th birthday telegram from whichever Monarch is on the throne).

My question is: Given that the NHS pension annual increase is based on the CPI would I be better / just as well to take the pension now / ASAP.

My thinking is:

- assuming I take the pension in 12 months I will have increased it by approx 4% as opposed to taking it now.

- If I take it now it will be 4% less than it would be in 12 months time but given that the CPI next year is likely to be heftier than usual would the annual Pension increase next April (based on CPI) offset the 4% hit I incur for taking it early?

Hope I've explained my thoughts clearly & it makes some sort of sense.

Thanks for any advice!

justme111

Find out what your pension would be in both cases ( with or without 4% reduction) and compare the numbers - I am not sure what exactly you are struggling with.
I do not think you taking it early reduction will be offset by increase- it would be increased whether you take it or not as far as I am aware.

saucer

Apologies in advance for assumptions and fag packet calculations:

Option 1 
Retire now with 37 years in the NHS 1995 scheme
Pension = (60000/80*37) MINUS reduction factor you give of 4% = 27750-(1110x4) =£23310.  Depending the date you retire this will be subject to all some or all of the 3.1% pa rise to account for CPI at Sept last year .  Pension 1 up to  £24170 pa

Option 2 
Retire in 1 year with 38 years in the NHS scheme.  Assuming there is an NHS pay rise backdated to today (April) of 3% which is what the government has indicated the max it can afford:  
Pension = (61800/80*38) MINUS 3 years reduction factor = 61800/80*38 = 29355-3522 = £25833 pa

You may benefit from checking if these rough sums apply to you and how much difference it would make net.  Also don't forget the impact of having another's full income, which is what the actuarial reductions reflect

saucer

justme111 said:

I do not think you taking it early reduction will be offset by increase- it would be increased whether you take it or not as far as I am aware.

Not quite.  NHS final salary pensions in payment (incl 1995 scheme) get an annual rise based on CPI.  Before retirement any rise is based on years of membership and final salary, the latter which will hopefully be subject to some pay rises (albeit far less than inflation for many years).  The new 2015 scheme, which everyone in the NHS is now transferring to, does have annual inflationary rises both before and after retirement, and is a CARE scheme.   

Thrugelmir

Korkyb said:

My question is: Given that the NHS pension annual increase is based on the CPI would I be better / just as well to take the pension now / ASAP.

1995 scheme also increases annually by a factor of 1.5% prior to retirement. Doesn't sound much however compounding over the years mounts up. 

saucer

Thrugelmir said:

Korkyb said:

My question is: Given that the NHS pension annual increase is based on the CPI would I be better / just as well to take the pension now / ASAP.

1995 scheme also increases annually by a factor of 1.6% prior to retirement. Doesn't sound much however compounding over the years mounts up. 

Does it?  My understanding is that 1995 pension entitlement only increases as a function time and salary at or in the 3 years before retirement.  

Korkyb

saucer said:

Thrugelmir said:

Korkyb said:

My question is: Given that the NHS pension annual increase is based on the CPI would I be better / just as well to take the pension now / ASAP.

1995 scheme also increases annually by a factor of 1.6% prior to retirement. Doesn't sound much however compounding over the years mounts up. 

Does it?  My understanding is that 1995 pension entitlement only increases as a function time and salary at or in the 3 years before retirement.  

I thought the same as you Saucer.

The majority of my pension will be in the 1995 scheme & I understood it was purely a calculation of pensionable service accrued & final salary.

It may be that the later schemes have an annual increase.

Thrugelmir

saucer said:

Thrugelmir said:

Korkyb said:

My question is: Given that the NHS pension annual increase is based on the CPI would I be better / just as well to take the pension now / ASAP.

1995 scheme also increases annually by a factor of 1.6% prior to retirement. Doesn't sound much however compounding over the years mounts up. 

Does it?  My understanding is that 1995 pension entitlement only increases as a function time and salary at or in the 3 years before retirement.  

Actually it's 1.5% my typo previously. 

saucer

Thrugelmir said:

saucer said:

Thrugelmir said:

Korkyb said:

My question is: Given that the NHS pension annual increase is based on the CPI would I be better / just as well to take the pension now / ASAP.

1995 scheme also increases annually by a factor of 1.6% prior to retirement. Doesn't sound much however compounding over the years mounts up. 

Does it?  My understanding is that 1995 pension entitlement only increases as a function time and salary at or in the 3 years before retirement.  

Actually it's 1.5% my typo previously. 

unless I am very mistaken you mean the 2015 scheme where the CARE works on the basis of CPI + 1.5 before retirement.  In the 1995 and 2008 schemes it is based on best or average salary against years membership.  

Korkyb

saucer said:

Apologies in advance for assumptions and fag packet calculations:

Option 1 
Retire now with 37 years in the NHS 1995 scheme
Pension = (60000/80*37) MINUS reduction factor you give of 4% = 27750-(1110x4) =£23310.  Depending the date you retire this will be subject to all some or all of the 3.1% pa rise to account for CPI at Sept last year .  Pension 1 up to  £24170 pa

Option 2 
Retire in 1 year with 38 years in the NHS scheme.  Assuming there is an NHS pay rise backdated to today (April) of 3% which is what the government has indicated the max it can afford:  
Pension = (61800/80*38) MINUS 3 years reduction factor = 61800/80*38 = 29355-3522 = £25833 pa

You may benefit from checking if these rough sums apply to you and how much difference it would make net.  Also don't forget the impact of having another's full income, which is what the actuarial reductions reflect

Thanks saucer - that looks similar to the ballpark figures I have been playing with.

Given that CPI for 22/23 is being forecast as potentially being over 7% I just need to figure out if I would be better off taking the pension now to benefit from the (likely) bigger than normal pension rise next year.

As you pointed out I need to factor in:

- the annual pay rise (? 3%).

- the fact that I probably wouldnt drop my hours for at least another year which means a chunk of the pension would end up being paid in tax (although a fair amount would still find its way into my Jack Daniels fund).

- a years worth of superannuation I wouldnt have to pay (around £3k).

One thing I didnt mention was that I reduced my hours to approx 50% of full time around 12 months ago so am not sure if my last 12 months pensionable pay is going to be higher than my 2020/21 pensionable pay (which was the just over £60k figure I initially quoted).

Ma heids birlin :-)

Bobinyorkshire

Out of curiosity, did you look at the ‘step down’ option of the NHS pension? I took a lower grade job at the same NHS Trust and was able to ‘mark time’ and protect my pension at the higher salary for the years I had done up until the step down started.