NHS 1995 pension lump sum

Bobinyorkshire

A friend was asking about the merits of whether to take the larger lump sum for the NHS 1995 pension she plans to take later this year. She has special class status and did not transition into the 2015 scheme until April 2022 because of her age. Her estimates shows the 12:1 ratio should she go for the larger lump sum. Neither of the calculated annual pensions will exceed her PA as it currently stands (although it may do in subsequent years with the annual pension increase and frozen PA). My thinking is that the ‘benefit’ of the larger lump sum may actually last less than 12 years as the larger annual pension will increase more with every annual pension uplift. I realise this decision is more than just about the total money received during the retirement period (nobody can predict future health etc) and in 12 years her state pension will also have started too. Is there anything else she would benefit from looking into before making that decision?

NedS

A commutation rate of 12:1, common on public sector DB pensions, is considered particularly poor. NRA of the 1995 scheme is 60, so they would need to live to 72 to break even, and then only if they could invest that money and match inflation. Personally, I would not consider anything under 20:1 (or even higher given the low NRA - it should at least match average life expectancy to be fair, so age 60 - 87 = 27:1). I would only take the larger lump sum if I absolutely needed the extra cash and had no other savings I could use as it is very poor value. But as you say, these decisions often come down to personal choices.

Pat38493

Usually the answer would be no - 12:1 is not a very good rate.  When my wife retired under 1995 scheme she got the higher lump sum due to a paperwork error (we never quite got to the bottom of whether it was her mistake or her employers) but it got fixed later on after writing to NHS and she had to pay back the difference.

The main reasons for taking it would be
- Limited life expectancy due to health conditions.
- You absolutely need the money now for some unavoidable reason.

Otherwise - no.

Bobinyorkshire

Thank you for your prompt replies. They are reassuring to read

Edale

A couple of other considerations. My wife will exceed LTA and would also be a 40% taxpayer. Taking a bigger lump sum will reduce under the LTA and avoid 40% tax. This means £100 gross pension will give £1200 tax free lump sum but the net income lost would only be £100 less (25%+40%) =£35 net. This gives an effective commutation rate of around 34.

sheslookinhot

Yes, consideration must be given to your tax status. If you’re likely to pay higher rate tax, this may be a good reason to take a lump sum/ partial lump sum.

phynix_uk

There are several factors that can impact this decision but the most common mistake is basing this decision on the inflationary increases of the pension alone. You need to include the increased lump sum too and I see people excluding this all the time so the results are not fair or real.

Obviously if you start on a higher pension income, it'll grow more over the longer term but if you're going to assume this then you need to assume the same/similar growth on the increased lump sum.

For example:

Let's say you factor in an inflationary increase of 5% per annum on the pension and just a 4% increase on the lump sum the total combined will favour the higher lump sum, even after 20 years. 

In real terms, will inflation be 5% over the longer term, probably not and will you receive 4% interest on a lump sum over the longer term, probably not but it's completely realistic to expect that level of return net of fees from an average investment vehicle (cautious/balanced risk). The reality is, there's not a huge amount in it but for the lower lump sum strategy to win, you have to live long enough and inflation needs to be a lot higher than the return you'd get from doing something productive with the lump sum. 

Tax and personal circumstances will also be key players. 

Seek independent financial advice/guidance. Most trusts within the NHS offer this service free of charge to their staff, tell you friend to use it.

Bobinyorkshire

Could I also ask for me? if I was to take my 1995 pension and carry on working and paying into the 2015 is MPAA triggered limiting my potential contributions to the 2015 scheme or a SIPP to £4k or can I contribute up to my salary (excluding pension income)? Thanks

sale_of_the_century

@Bobinyorkshire

I received the letter today from NHS pension agency, from April this year all members will have the option to Retire and rejoin the 2015 scheme 

And from October additional  flexibility will be added 

More at www.nhsbsa.nhs.uk/nhs-pensions

In my case I went for minimum lump sum because I could not find a financial product that will give me a better guaranteed return, obviously if I needed the money I would of taken a larger lump sum … it depends on peoples circumstances 

GL

Pat38493

Bobinyorkshire said:

Could I also ask for me? if I was to take my 1995 pension and carry on working and paying into the 2015 is MPAA triggered limiting my potential contributions to the 2015 scheme or a SIPP to £4k or can I contribute up to my salary (excluding pension income)? Thanks

Taking a defined benefit pension does not trigger the MPAA - it is only triggered if you take flexible withdrawals from the taxable part of a DC fund.

I can't comment on what are the NHS rules about going back to work after putting it into payment but I think it was discussed elsewhere on this thread or maybe another recent thread.

phynix_uk

MPAA - Not triggered by taking the '95
You should (in most circumstances) re-join the NHS 2015 scheme. Your employer will also contribute making it (in most circumstances) more attractive than paying into a separate SIPP. Paying into a SIPP has different pro/cons so 'could' be considered for additional contributions over the NHS AVC but generally, stick to the 2015.

If you intend to take the '95 and you below the Normal Retirement Age (60) then in some circumstances the 'Abatement' rule could apply so you should check but this is unlikely and certainly won't apply past NRA.