What is the point of paying into a private pension?

OuroborosMatt

Hey all,

I want to ask a general question, please.

If the state pension age is raising to 71, and the average age of male fatality on the UK is 80 years, what is the point in paying 20% of salary per annum into the current NHS pension scheme (which starts paying when a candidate reaches state pension age) for 40+ years of a working life when you'll only benefit from the pension for - on average - 9 years after the government allows one to begin claiming a state pension?

At face value, it doesn't seem like a good deal (and it seems like an investment that will pay out significantly less than what is contributed by an individual).

So, my general question is, what's the point? Would it be better to invest that 20% into something else that allows me to benefit from a retirement where I can choose when I retire as opposed to be effectively worked until death?

Thank you for the opportunity to ask this question on this forum.

Kind regards,

JoeCrystal

I strongly advise removing your full name as soon as possible, especially since you mentioned working for the NHS.

Why do you think you are contributing 20%, especially since the maximum, as far as I am aware, is 12.5% or 13.5%. (Your employer will contribute far more than your contribution rate) As you contribute to the NHS pension scheme, perhaps you should do some actual research to understand how it works. It is amazingly generous in terms of benefits at the cost of essential peanuts. The HM Treasury will cover all shortfalls should the current NHS staff's contributions be insufficient to cover the benefits paid out to the NHS pensioners. 

You are not reliant on the SPA to retire; instead, it is the minimum pension age you can access, which will be at least 57 in 2028. You can still access the NHS pension earlier than the SPA; it is just that it is reduced because it is paid longer, so in theory, the cost to the scheme is the same. 

You are not paying into the private pension but a public sector DB pension scheme, which changed the context of your question.

Considering the assumptions you made in your post are wrong, it might be worth it for you to read up the pages on https://www.nhsbsa.nhs.uk/member-hub

HappyHarry

OuroborosMatt said:

Hey all,

I want to ask a general question, please.

If the state pension age is raising to 71, and the average age of male fatality on the UK is 80 years, what is the point in paying 20% of salary per annum into the current NHS pension scheme (which starts paying when a candidate reaches state pension age) for 40+ years of a working life when you'll only benefit from the pension for - on average - 9 years after the government allows one to begin claiming a state pension?

At face value, it doesn't seem like a good deal (and it seems like an investment that will pay out significantly less than what is contributed by an individual).

So, my general question is, what's the point? Would it be better to invest that 20% into something else that allows me to benefit from a retirement where I can choose when I retire as opposed to be effectively worked until death?

Thank you for the opportunity to ask this question on this forum.

Kind regards,

You appear to be making up figures.

The state pension age is not 71, it is a maximum of 68.

The life expectancy for a UK male is not 80, it is 85 (for a 28 year old).

The NHS pension contribution rate is not 20%. It varies between 5.2% and 12.5% for the highest earners.

The NHS pension is an absolutely cracking deal for those eligible to take part.

sevenhills

OuroborosMatt said:

Hey all,

I want to ask a general question, please.

If the state pension age is raising to 71, and the average age of male fatality on the UK is 80 years, what is the point in paying 20% of salary per annum into the current NHS pension scheme (which starts paying when a candidate reaches state pension age) for 40+ years of a working life when you'll only benefit from the pension for - on average - 9 years after the government allows one to begin claiming a state pension?

At face value, it doesn't seem like a good deal (and it seems like an investment that will pay out significantly less than what is contributed by an individual).

So, my general question is, what's the point? Would it be better to invest that 20% into something else that allows me to benefit from a retirement where I can choose when I retire as opposed to be effectively worked until death?

In the UK the median age at death was 82.3 years for males and 85.8 years for females and the modal (most common) age at death was 86.7 years for males and 89.3 years for females in 2018 to 2020; these show the typical ages at which death occurs and were very similar to the estimates for 2015 to 2017.

https://www.ons.gov.uk/peoplepopulationandcommunity/birthsdeathsandmarriages/lifeexpectancies/bulletins/nationallifetablesunitedkingdom/2018to2020

Linton

People have given you the data for people dying now. There are other factors that will be expected to  increase life expectancy by the time you retire. For example those dying now are far more likely than you to have smoked for a significant part of their lives, worked in life-shortening jobs, or suffered from diseases that are now, or in the future, detected and treated early.

Roger175

The whole point of a private pension is that it gives you added flexibility You are looking at this as being purely additional income from when your reach state retirement age, but most people strive to retire prior to this. Under current legislation you can start to access a pension at age 55, which increases to 57 in 2028 and will no double be higher when you get there, but will still be significantly less that state pension age.

If you want to retire early, you must make provision for this and pensions are by far the most cost effective way of doing this (by far), due to the tax relief benefit. Sure you could put some in an Isa, especially if you want to retire earlier than the age you can access your private pension, but you will not get that added tax relief which make pension saving so efficient.

hugheskevi

If the state pension age is raising to 71

It isn't. The State Pension age increases from the current level of 66 to 67 by 2028 and then from 67 to 68 by 2046.

the average age of male fatality on the UK is 80 years

Although you may die before age 65, the odds do not favour it so you have to assume you will make it at least that far. The NHS pension scheme longevity assumptions (page 23) are that male members currently aged 45 will live until 89.5 and that male members aged 65 will live until 87.8.

what is the point in paying 20% of salary per annum into the current NHS pension scheme (which starts paying when a candidate reaches state pension age) for 40+ years of a working life when you'll only benefit from the pension for - on average - 9 years after the government allows one to begin claiming a state pension?

As others have said, the contribution rate is 5.2%-12.5% depending on pensionable earnings.

The current NHS pension scheme is payable without reduction from State Pension age, but can be accessed from minimum pension age (55, will increase to 57 in 2028, subject to minimum pension age protection) with actuarial reduction, or be taken after State Pension age with actuarial enhancement. In the event of ill health it will be paid immediately.

The expected benefit period is around 20 years if taken at Normal Pension age. The pension scheme also provides protection against illness preventing you from being able to work, gives a death lump sum payment, and provides survivor benefits to spouses and dependents.

At face value, it doesn't seem like a good deal (and it seems like an investment that will pay out significantly less than what is contributed by an individual).

The Valuation shows that the cost of newly accruing pension is 28.4% of pensionable salary. Of this, members pay an average of 9.8 percentage points. So the pension has an Exchequer contribution of around 19% of pensionable earnings for the typical member. That is a good deal.

So, my general question is, what's the point? Would it be better to invest that 20% into something else that allows me to benefit from a retirement where I can choose when I retire as opposed to be effectively worked until death?

You are unable to access the Exchequer contribution without being a member of the scheme and paying the member contribution rate. You will not find anything that will be close to the value of the pension scheme for the member contribution you pay.

Marcon

OuroborosMatt said:

So, my general question is, what's the point? 

Hopefully the answers above have explained where you've got your facts wrong, and why it's a brilliant idea. So while you are helping to take care of the nation's health...let the NHS scheme take care of your financial wellbeing in old age.

dunstonh

If the state pension age is raising to 71, and the average age of male fatality on the UK is 80 years, what is the point in paying 20% of salary per annum into the current NHS pension scheme (which starts paying when a candidate reaches state pension age) for 40+ years of a working life when you'll only benefit from the pension for - on average - 9 years after the government allows one to begin claiming a state pension?

If you use duff assumptions, then you will get duff outcomes.

a) its not rising to 71.   Its currently planned to rise to 68 and 68 may be brought forward.   It may end up at 70 but given the life expectancy link and how that has slowed down in recent years, that may not happen or be much slower.
b) life expectancy is not 80.
c) you are not paying 20% salary.
d) why do you think you have to wait until a hypothetical state pension age?

Nothing you do as an alternative will come close to being as good as the NHS pension.

If you work in a part of the NHS that requires facts and analysis, then use the same process to understand your pension.    

Aretnap

Average life expectancy at birth is a fairly meaningless number - it is heavily driven by the small number of people who die very young. A child who dies aged 1 has about 4 times as much impact on average life expectancy as someone who lives to 100. If you make it to middle age without getting leukemia, or being hit by a car, or overdosing on drugs, then you can expect to live much longer than whatever the published national average life expectancy is.

If you're an NHS worker then you can expect to live longer still, because you are more likely than not better educated, better paid (if not necessarily rich), in a less manual role, and generally more middle class than the average person. And also less likely to smoke etc. And you are definitely not an unemployed homeless drug addict, or any of a hundred other categories of people who have well below average life expectancies.

So do not get hung up on whatever the average age at death is - it says very little that's useful about how long you personally can expect to live.

daveyjp

This thread has strong Matt_22 vibes.