Help! NHS pension and extra payments

kellyp

I'm 44 and worked in NHS for past 20 years and likely to remain there until the end…..!. I've started doing some 'private' work and I'm keen to invest additional income into pension pot but I'm incredibly confused by the options and why I would chose 1 option over the other…..

The extra earnings I currently have may not be forever but should hopefully be at least for a few years.

My ultimate goal is to retire early! No idea on exact age but somewhere between 60-65 dependent on pension

If I go down increasing the NHS pension there looks like 3 options: 1) additional pension (assume this is just adding to my original/main pension pot through my NHS salary so ?? Get maximum benefits?), 2) AVC contributions (I get that this can be through salary too or in lump payments but is a seperate fund, as such, to the main pension, 3) stakeholder pension (which is more like a private pension and can be transferred elsewhere??)

I'm really struggling to understand the pros and cons of different options. To thrown in to the mix too would a private standalone pension be more favourable than a stakeholder pension?? Some of the private pension fees seem to be less than the stakeholder pensions.

Are the NHS options more likely to be cheaper for me (confused by the costs of all the options too!)

Thank you in advance to anyone who can help explain why you might chose one option over another 😊

saucer

I don’t know about the stakeholder option you mention so, regarding the others. The AVC is an old school way of diverting your salary, before it is taxed, into a fund that will go up and down depending on the investments within. It will provide a lump sum that will , I presume, be payable subject to 25% tax free and the rest taxed at your marginal rate.

The NHS Additional Pension on the other hand provides a guaranteed annual sum, index linked for life, with or without dependent cover should you pop your clogs, this option costing more. Use the calculator here https://www.nhsbsa.nhs.uk/member-hub/increasing-your-pension/additional-pension to do the sums for you. Choose between paying in a lump now or out of your ongoing salary. You can stop at any time and retain what you have already paid for, something I did some time ago.

You might want to guesstimate how many of those units of £250, based on how long (in years)you think you might live after retirement, and compare that to the cost. Don’t forget they will increase in payment with inflation . It is generally a good plan, especially if you are a higher rate tax payer and you won’t need the lump sum. 

MX5huggy

If you get to 35 to 40 years service you’re going to have a decent NHS pension. But it will be across probably 3 schemes unless you opted to combine the previously. So estimating what you are likely to get is hard you need your statements. What you want to look at how much you will get at 60 & 64 and retirement age. Then you’ll get state pension at 67/68 that additional £10k per annum will see you probably have a sustainable income for the rest of your years. 

So it’s how to bridge from retiring from the NHS to SP. I doubt buying an extra 1 or 2 thousand of NHS pension per year will help but you’ll then have too much once SP kicks in. 

With this in mind we’re saving in Private Pension (SIPP) to bridge this gap. So if we can get to having £15k of NHS pension at 60 after reductions for taking it early and have a SIPP worth £100k so we can use £10k per year till the SP kicks in the finishing line looks in sight. 

Moonwolf

I posted the following here before.  It might help although I can't be certain nothing has changed.

https://forums.moneysavingexpert.com/discussion/comment/78669411#Comment_78669411

I have posted versions of this before. I am in the 2015 scheme and these are my un-expert and non-professional thoughts based on the research I did when I wanted to make additional contributions. 

In the 2015 scheme you pay for 1/54th of your salary added to your pension as a defined benefit each full year. You can't change that directly and as you already know, the percentage you pay depends on your salary range. 

There are three supported ways (in the 2015 scheme) of getting additional pension plus a couple of other options.

1. Additional purchase - using a lump sum or regular payment you can increase your pension by up to £6500 a year. There are some funny rules on this which you should read, the cost of living increases are not the same as your main pension and you have to decide if you are giving some to your dependants.

Pros: Good value for money compared with other similar risk investments.
Cons: For regular payments, you need to keep in the NHS to get the benefits. Lump sum payments might cause annual allowance issues. If you don't have a dependant cover then you lose the investment if you die early. Personally I found the rules complicated.

2. ERRBO - (Early Retirement Reduction Buy Out) This allows you to take your pension 1-3 years earlier without actuarial reduction. This can be valuable if you think you will retire early and live a long time (unless you know different you probably will but nothing is certain). You pay a fixed percentage extra from your salary which is higher the closer you are to retirement. If you leave the NHS it applies to the pension you have accrued.

Pros: Good value for money compared with other similar risk investments. No direct impact on lifetime allowance (as on its own it doesn't change the value of your final scheme, just when it is paid).
Cons: No benefit to dependants, all benefit lost if you die before retiring. Committed to regular increased payments for the rest of your career, messy if you cancel and difficult to suspend.

3. Discounted AVC scheme with one of two providers. I think both offer 0.4 percentage point reduction in the annual management charges on the funds you choose. Otherwise they are just standard pension investment funds that result in a DC scheme.

Pros: Can be more flexible when you take and use the fund, for example, draw down to use as a bridge between early retirement and taking your NHS pension. Might be transferrable if you leave the NHS. Pot is payable to dependants if you die.
Cons: You would probably need better than average fund growth to beat the long term value of the other two.

You could also save additional pension separately or save into e.g. ISAs but you don't get the input tax benefits (but you don't pay tax when you take the money out)

I was unable to find cost effective professional advice when I looked at this back in 2015 when I joined. Basically fixed fee advice would have cost me 5 years of what I was going to save. I (was) only planning to work for another 10. I decided my worst decision would cost less than that.

I went with ERRBO (which I had problems with but are now sorted) and paying extra into an existing DC personal pension with some savings in ISAs as well. This means that I have a good secure DB pension and extra that can be used more flexibly. I will be able to take my 2015 NHS pension at 65 without actuarial reduction and retire even earlier using my DC pot as a bridge. I won't need to take pension even earlier with an actuarial reduction.

For what its worth, my opinion of the ERRBO is that it is too inflexible for most but favours those in my position with an older partner who probably won't need to benefit from it directly, but as a couple we hope to benefit from me being able to retire on full pension earlier. (I've also recently heard that only a few hundred have taken it up)