NHS pension - not sure whether to take standard or maximum lump sum

Mr_Crabbs

Hi all,

I've seen some good informed discussion about NHS pensions here (such as https://forums.moneysavingexpert.com/discussion/6464889/nhs-pension-1995-section-delaying-retirement which helped a lot) and hope you can help with this.

Partner is 61, in both 1995 section and 2015 scheme and wants to go for partial retirement, claiming the 1995 section benefits and reducing hours by 20% (1 day in 5). It seems to make sense to do this as there is no benefit to deferring. She is entitled to £20k p.a. and £61k lump sum, or £16k p.a. and £109k lump sum.

A financial advisor supporting NHS prospective retirees (MyWealth) have advised taking the full lump sum as it is not taxed. However we don't have confidence in them as their advice is patchy and seems aimed at getting us to sign up to their expensive managed funds.

Plans for the lump sum if she did take it are unclear. We have talked about moving to the country but it's not clear when or if that would be, or whether the £48k difference between the two lump sums would be needed for that as she has a house and we both have savings. The lump sum might just end up sitting.

We are worried about having income in later life as we have recently seen parents ill and needing costly care, but want to make rational decisions.

She is currently earning just over the higher rate tax threshold so a large part of the pension income would be taxed at 40%, more so if she takes the standard benefits. To mitigate this and build for later life we thought to put part of her ongoing salary into a DC scheme (if available through her trust) or SIPP. We were not sure if this would fall foul of recycling or MPAA rules.

We've also just noticed on the pension form that the maximum lump sum might be taxable, and we're not clear why or how to find out whether it is or not? The form asks whether you want to take the maximum (which could be liable for tax) or the maximum tax free.

I would be grateful for any thoughts on the plan, tax and particularly the pros and cons of standard or maximum lump sum. Thanks.

MK62

The commutation rate, at 12:1, isn't great tbh........but you also have to consider your partner's tax position......she will pay 20%, but could end up paying 40% income tax on the extra £4k pa pension, at least while she is still working, so you need to do the maths on that.

Moonwolf

You can take DB pension without triggering MPAA so that shouldn't be an issue.  I'm not sure about recycling but you will have extra spare income.

I'm not a fan of taking the lump sum if you don't have a use for it.  I personally think, if you die early with the extra lump sum sitting in a cash savings account you haven't really benefitted from it and if you live more than 12 years you would have been better off taking the smaller lump sum.

If you lean towards more income has your wife looked at taking the McCloud years in 2015?  This will reduce your early pension and she will miss out on 7 years of payments and get a smaller lump sum but the 2015 accrual rate is higher and she will get 1.5% growth over inflation while she continues to work for the NHS, so the final sum of both pensions will be higher and you will have less of a 40% problem in the short term.  Worth checking the numbers including thinking about how much longer she will work and how much the 2015 will grow by.

If you do decide later you want more lump sum then you can make the decision against the 2015 which doesn't have an automatic lump sum but does allow commutation and she would be seven years older so seven fewer years left.

Marcon

Mr_Crabbs said:

We've also just noticed on the pension form that the maximum lump sum might be taxable, and we're not clear why or how to find out whether it is or not? The form asks whether you want to take the maximum (which could be liable for tax) or the maximum tax free.

See https://chasedeveremedical.co.uk/is-the-nhs-pension-lump-sum-taxable/ which answers your question and gives a particularly useful summary of the various sections of the NHS pension scheme lump sums.

Dazed_and_C0nfused

Mr_Crabbs said:

Hi all,

I've seen some good informed discussion about NHS pensions here (such as https://forums.moneysavingexpert.com/discussion/6464889/nhs-pension-1995-section-delaying-retirement which helped a lot) and hope you can help with this.

Partner is 61, in both 1995 section and 2015 scheme and wants to go for partial retirement, claiming the 1995 section benefits and reducing hours by 20% (1 day in 5). It seems to make sense to do this as there is no benefit to deferring. She is entitled to £20k p.a. and £61k lump sum, or £16k p.a. and £109k lump sum.

A financial advisor supporting NHS prospective retirees (MyWealth) have advised taking the full lump sum as it is not taxed. However we don't have confidence in them as their advice is patchy and seems aimed at getting us to sign up to their expensive managed funds.

Plans for the lump sum if she did take it are unclear. We have talked about moving to the country but it's not clear when or if that would be, or whether the £48k difference between the two lump sums would be needed for that as she has a house and we both have savings. The lump sum might just end up sitting.

We are worried about having income in later life as we have recently seen parents ill and needing costly care, but want to make rational decisions.

She is currently earning just over the higher rate tax threshold so a large part of the pension income would be taxed at 40%, more so if she takes the standard benefits. To mitigate this and build for later life we thought to put part of her ongoing salary into a DC scheme (if available through her trust) or SIPP. We were not sure if this would fall foul of recycling or MPAA rules.

We've also just noticed on the pension form that the maximum lump sum might be taxable, and we're not clear why or how to find out whether it is or not? The form asks whether you want to take the maximum (which could be liable for tax) or the maximum tax free.

I would be grateful for any thoughts on the plan, tax and particularly the pros and cons of standard or maximum lump sum. Thanks.

As she is taking this pension at 61 she could (🤞) get it for the next 35-40 years.

That is a ln awful low of inflation protected pension to give away for just an extra £48k PCLS.

The reference to tax on the lump sum will be because there is now a cap (~£268k) on tax free cash from pensions so she also needs to consider if that will be a factor.  If presumably isn't now but if she has other pension provision which tax fee cash options then it might be.

The NHS 2015 scheme doesn't have any automatic tax free cash and the commutation rate there will be similarly awful so the pension is likely to be the better choice.  Subject to how separate she is for a lump sum.

MPAA isn't a factor if the only pension she had taken money from is the NHS defined benefit one.

LightFlare

I would say - it depends

She is “losing” 4k a year for life to gain 48k now

Regardless - get is sorted asap. She has already lost out by not taking her 1995 pension at 60

Also - read up and be aware of the McCloud judgement remedy which will affect her 2015-2022 scheme eligibility 

Stubod

If you don't need the extra money, and you don't have any life shortening health issues it makes more sense financially to only take the minimum cash as the commutation rate is not very good, (particularly as the pension has some good index linking)......IMHO...

Moonwolf

Dazed_and_C0nfused said:

The NHS 2015 scheme doesn't have any automatic tax free cash and the commutation rate there will be similarly awful so the pension is likely to be the better choice.  Subject to how separate she is for a lump sum.

The commutation on the 2015 is also 12:1, ostensibly the same, but you would be 7 years older when you take it, which technically makes it quite a bit better as your chance of living beyond the breakeven point has gone down a bit.  Ergo, if you want the lump sum but can wait, you might be better off taking the optional lump from the 2015 scheme.

LHW99

Could she pay some income into a SIPP to reduce her liability to 40% tax if she takes the higher income?

She could use the money in the SIPP to defer taking the other part of the NHS scheme but still retire a couple of years earlier than its NRA without it being actuarily reduced.

Pat38493

My wife took the standard lump sum.

As a general rule of thumb, the commutation rate on the NHS pension is pretty bad at 12.  Therefore the generaly first guide is not to take the max lump sum, as it doesn't make financial sense.  It's true that the lump sum is tax free, but, when you are looking at a bad commutation rate, there is probably still a high chance you'll be better off in the long term by maximising the annual pension income.

Keep in mind that you are losing part of a pension which is the best you can get - fully inflation protected with no cap, so you have to keep in mind that you are surrendering all your inflation protection on the difference.

I doubt the financial adviser is an IFA (independent) if they are advising that, unless there is detailed information that you have not stated.  Is this FA actually engaged by you  to advise you on your wife's personal situation, or is this just general comments?

There could be details you have not mentioned that could impact on this somewhat - examples:

- You desperately need the higher lump sum for some specific reason e.g. pay off the mortgage.
- You need the higher lump sum to support bigger cash flow in the early years that the pension is in payment (e.g. kids Uni expenses or whatever).
- By taking the higher lump sum, your wife will avoid paying higher rate tax on the annual pension.  How long is she planning to carry on working part time after putting the pension in payment?  (that probably wouldn't be an issue once she stops working, based on your posted figures, but it could become an issue if she has any other income sources or DC pensions available).

Even these reasons might not make it financially the best decision, but they could be considered and modelled.

I would not pay much attention to any FA who is making a generalised statement that you should take the lump sum just because it's tax free, especially if they are touting for my business.

Mr_Crabbs

All, thanks for your comments

Moonwolf said:

... I'm not sure about recycling but you will have extra spare income.

I'm not a fan of taking the lump sum if you don't have a use for it ...

If you lean towards more income has your wife looked at taking the McCloud years in 2015 ...

Moonwolf, one of the other threads I'd read was yours about being better to take partial retirement, so I hoped you might see this.

I think the concerns about recycling rules are real, but as I see it the DC / SIPP pension payments would come from income and the decision is unaffected by whether or not there is a lump sum, so should be OK.

I'm inclined to agree about taking the lump sum without a use. Pure financial calculations aside, there seem to be two things to consider; is there a use for it, and likelihood of surviving another 12 years.

The possible use for the lump sum is to pay for a move to the country and a likely more expensive house, but we both have savings so whether an extra £48k - 10% of current savings - is enough to lose the long term benefit I'm not sure.

I haven't seen a good clear resource on McCloud so am struggling to understand it. I'm not sure, though, that any benefit would offset the loss from what you say, unless I'm misunderstanding.

Moonwolf said:

The commutation on the 2015 is also 12:1, ostensibly the same, but you would be 7 years older when you take it, which technically makes it quite a bit better as your chance of living beyond the breakeven point has gone down a bit.  Ergo, if you want the lump sum but can wait, you might be better off taking the optional lump from the 2015 scheme.

I'm not sure I'm following this? You mean that commuting some of the 2015 income to cash is an effective gain as the chances of living to see the income are less?

Marcon said:

See https://chasedeveremedical.co.uk/is-the-nhs-pension-lump-sum-taxable/ which answers your question and gives a particularly useful summary of the various sections of the NHS pension scheme lump sums.

@Marcon, thanks, I hadn't found a clear explanation but I get it now.

Dazed_and_C0nfused said:

As she is taking this pension at 61 she could (🤞) get it for the next 35-40 years. That is a ln awful low of inflation protected pension to give away for just an extra £48k PCLS.

It is. There is the 'how long is she likely to live for' question and being an oncologist and ex-smoker, and not in the best of health (though just wear and tear, not anything specific) she's convinced she's going to die early, but parents both lived well into their 90s, and were able to pay for care late in life as they had a good regular income from their NHS pensions.

LightFlare said:

Regardless - get is sorted asap. She has already lost out by not taking her 1995 pension at 60

Yes, noted. Unfortunately we had a lot going on with bereavements, stuff at work etc. the last couple of years so while she talked about this, our focus was elsewhere and I wasn't aware of the detail and implications. Pressing on with it now - one of the reasons for this post is because having decided to go for it, she wants to do it NOW and it's my job to worry about the details!

Stubod said:

If you don't need the extra money, and you don't have any life shortening health issues it makes more sense financially to only take the minimum cash as the commutation rate is not very good, (particularly as the pension has some good index linking)......IMHO...

We initially went with the FA's 'take the maximum because of the tax' but as I say I'm not convinced about him - the analysis has turned out sketchy and self-serving - and unless we can make a convincing argument for needing the money, taking the minimum cash sounds better provided we can mitigate the 40% tax.

LHW99 said:

Could she pay some income into a SIPP to reduce her liability to 40% tax if she takes the higher income?

She could use the money in the SIPP to defer taking the other part of the NHS scheme but still retire a couple of years earlier than its NRA without it being actuarily reduced.

The idea would be either to do this, or - if NHSBSA or the trust run a DC / AVC scheme, which I understand is possible - to salary sacrifice enough from her ongoing pay to take her below the 40% threshold, which looks like being about £12k.

DC / AVC would be better because of the NI as well as tax uplift, and having the admin done, but a worry is whether that falls fould of pension recycling rules. Having read up I don't think it does, but I'm by no means an expert.