NHS pension decisions (complicated by redundancy)

CroakingMole

Appreciate that every circumstance is different and no comments will be taken in isolation but I have a couple of questions around the NHS pension some of which I have an idea on but would appreciate a sanity check on. 

We have sought advice from an IFA, which as I have read on here before, is singularly interested in investing my money in funds their company has an ‘interest in’ and when seeking answers to the below we are told they will have to go away and look.  

We have tried unbiased.co.uk and a week on still waiting to be paired with a specialist.

 

I am hoping that others have found themselves asking or knowing the answers to the same questions in their final years working in the NHS.

 

Circumstances

53 year old employee of the NHS with continuous service since 1988 and 1995 pension membership since 1997.  Band 8a with both the recent uplift from the 2+ years at that band, back dated to May 2024 and pay rise, back dated to April 2024.

 

Due to organisational restructure, I have been given the option to apply for redundancy. (I have applied for this and if accepted I do not intend to use any of these funds to make up the full pension but rather accept the redundancy payment of ~£112k, accepting the tax implications)

 If redundancy is offered it is likely to be 3-5 months before my 54th birthday.

 Question

1. I understand that if I were to take my pension shortly after accepting redundancy (aged 53) I would be accepting a reduction of 29% in the pension and 20% in the lump sum. If I defer that pension until I am 54 would the reductions reduce to 25% pension and 18% lump sum (or better still 55 with 21% and 15% respectively) or is it fixed at the point of retirement no matter what?

2. By taking a pension early does this affect the annual CPI enhancements? I appreciate an early pension means lower annual pension amount but with other finances we have in place this is acceptable if there are CPI enhancements. I guess the point of this I would rather not end up 10 years from now, aged 63 with the same annual pension having not kept up with inflation. When do the CPI enhancements start, 55?

3. Are there tax detriments to taking pension lump sum and redundancy in the same financial year?

4. The best of the last three years is calculated on the previous 12 month period, if there are pay enhancements within that 12 months are these included, averaged out over the period they apply.

5. One option I have is to use some or all of the redundancy to make up the difference in pensions allowing me to take full pension immediately, but how is that amount worked out. The likelihood of getting an answer from pension services is next to zero.

Thanks so much in advance.

Sarahspangles

CroakingMole said:

We have sought advice from an IFA, which as I have read on here before, is singularly interested in investing my money in funds their company has an ‘interest in’ and when seeking answers to the below we are told they will have to go away and look.  

We have tried unbiased.co.uk and a week on still waiting to be paired with a specialist.

That doesn’t sound like an INDEPENDENT Financial Advisor. You won’t be a valuable customer to a Financial Advisor as it sounds like you’re considering spending rather than investing your lump sum.

NHS CPI uprating continues for deferred pensions. If you start your pension at a younger age then normally with public sector pensions the aim is to pay out the same amount over your expected remaining lifespan.

Do you know how much you need to live on through to normal retirement age?

Purplelady65

You haven’t really said what your plans are. Are you planning on looking for another job after redundancy? Would that be in the NHS? What would your reasons be applying for your pension straight after redundancy? If you’re not planning on working again you could live off your redundancy for a significant amount of time as it’s a significant amount of money. This would mean you could then apply for your pension at a later date therefore reducing the reduction for taking it early. 

Re getting any pension/redundancy advice if you go to the NHS Employers website and then google pension advice they have put together a list of financial advisors who specialise in the NHS pension. Some of the companies are set up for just doctors but others offer advice to medics, clinicians and non clinicians. 

CroakingMole

Thanks for the replies. 

The NHS pensions website is where we sought the details of the IFA, though I completely understand their income is dependant on investment in their platforms or recommendations for platforms.
My partner is already retired and has a good private pension which with a little cloth cutting would see us both ok, having previously had serious health issues the mindset is taking the lump sum/redundancy provides some assurance for us and family of at least taking something from the pot.

The overall intention is to move abroad, we meet the criteria for this and already own a property overseas. 

We have no children, the idea is to enjoy life a little, not in a ‘spending’ way but with some modest pleasures here and there.  Taken pension from NHS now would see that being possible but helpful to understand some of the complexities.

Unfortunately, NHS pensions website services have a 40 day response with their usual ‘we are very busy’ caveat. In the next couple of weeks there will be an expectation of accepting, or not redundancy packages.

Dazed_and_C0nfused

1.  I would be amazed if this wasn't based on when the pension started.

2.  Not sure how it works at the end of the year the pension commences but each year after that you should get the annual increase.  However if you take it very early I believe some schemes don't apply an annual increase until you reach a certain age.  I think civil service may be 55 and there is likely to be info on the relevant NHS website for that scheme.

3.  The PCLS from the NHS pension is tax free, what tax implications do you think there could be 🤔.  Pension income is taxable and you appear to be getting into tapered Personal Allowance territory 😥.

Sarahspangles

CroakingMole said:

Thanks for the replies. 

The NHS pensions website is where we sought the details of the IFA, though I completely understand their income is dependant on investment in their platforms or recommendations for platforms.
My partner is already retired and has a good private pension which with a little cloth cutting would see us both ok, having previously had serious health issues the mindset is taking the lump sum/redundancy provides some assurance for us and family of at least taking something from the pot.

The overall intention is to move abroad, we meet the criteria for this and already own a property overseas. 

We have no children, the idea is to enjoy life a little, not in a ‘spending’ way but with some modest pleasures here and there.  Taken pension from NHS now would see that being possible but helpful to understand some of the complexities.

Unfortunately, NHS pensions website services have a 40 day response with their usual ‘we are very busy’ caveat. In the next couple of weeks there will be an expectation of accepting, or not redundancy packages.

I’m sure you’re aware the Commutation rate for a lump sum from NHS pensions isn’t the best. However survivor benefits are unaffected, which isn’t always the case.

What do you actually need advice about? We took the view that the risk for us is running out of time rather than money. So in the end the calculations haven’t been about maximising capital and income over our lifetimes, but the optimal way to manage capital and income, particularly in the pre-SPA period.

If you’re maybe moving abroad, do you know what your tax position will be?

CroakingMole

Dazed_and_C0nfused said:

1.  I would be amazed if this wasn't based on when the pension started.

2.  Not sure how it works at the end of the year the pension commences but each year after that you should get the annual increase.  However if you take it very early I believe some schemes don't apply an annual increase until you reach a certain age.  I think civil service may be 55 and there is likely to be info on the relevant NHS website for that scheme.

3.  The PCLS from the NHS pension is tax free, what tax implications do you think there could be 🤔.  Pension income is taxable and you appear to be getting into tapered Personal Allowance territory 😥.

Thanks all… Sorry for the delay in coming back to you.

I will try and manage this piece by piece. As you can imagine, things are going fast this end and a number of initial questions have resolved or become insignificant now. Stressful times.. Some of the more relevant decisions and points are here..

To answer Dazed first..

1. Yes, I was a member of the 1995 scheme since 1997, therefore MPA is 50, NPA is 60. 
2. You are correct, it’s 55.
3. Regarding the tax, if I take redundancy pay in the same financial year as pension I may not be making the best of my tax free allowance. I am probably overthinking this and very confused.

4. Easily understood now.

5. This leaves the last question of making up the value of the pension, to receive and unreduced amount by sacrificing some of the redundancy pay.
Seems this calculation is based on this sum:

Capitalised costs are based on the difference between an unreduced pension and a

pension reduced for early payment plus the cost of paying a lump sum early. These two

amounts are then multiplied by the appropriate factors provided by the Government

Actuary’s Department (GAD). 

from “NHS Pension Redundancy Basic Overview” (I can’t post links)

The factors are ERF1 and ERF7 for me

(I can’t post links) the page was “NHSBSA Retirement”

ERF1… 0.782
ERF7… 0.902

As an example if my unreduced pension were £20k, pension reduced for early payment were £15k and the lump sum were £50k how are the factors used?  I would be using the age factor of 54yrs 0months.

I have been going round in circles and NHS Pensions wait is 40 days.

if someone is able to show me an example of how this looks I would be so grateful… 

Thanks so much.

Pippa_Panthers

Croaking Mole did you ever manage to find out how the capitalisation cost was calculated to understand cost of using redundancy payment to offset early retirement reduction ?  I am struggling to currently find this myself.  Thanks

AodhAye

Pippa Panthers did you manage to get the answers you were looking for? I have to recommend Facebook Pengage NHS Pensions group. Laura is an independent expert on NHS pensions (and public sector pensions), she and a team create webinars and can do illustrations of individuals pension options (eg given what you think you’d need to live on, would you be better off taking your 95 section pension at 55 or 60, whilst continuing to work and contribute on a retirement and return or partial retirement set up? Or example 2, work out the figures around whether to put your redundancy payment towards retiring early without any reduction). There are tons of NHS workers in the Facebook group, all helping eachother out. The webinars are exceptional; understanding NHS pensions (lump sum/ retirement, different sections), options for contributing more into a pension, early retirement calculations, redundancy options, ill health retirement.
HMRC tax consideration is set out too. In some instances, because of the McCloud Judgement you can pay for Pengage to create personal illustrations and claim the cost back from NHS pensions (because it’s complicated and NHS pensions accept a lot of people will need help, especially when they themselves are way behind sending personalised illustrations out, no criticism of NHS pensions, it’s a lot to do, backdating so many workers pension options after the ruling.
Best of luck

TH