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

LightFlare

Regarsing McCloud - IF eligible (which she most probably will be) then the remedy is a choice between considering 2015-2022 in either the 1995 OR 2015 sections.

When I asked for a forecast I specifically asked for both but I believe the default is to include in the 1995 

What is the “best” is not clear cut - I am taking early retirement at 56 with 35 years service - so the 1995 came out slightly better from a monthly figure but had the “bonus” of a nice lump sum which will clear the mortgage

The closer you get to 60 and beyond and also intent  to continue in the NHS tends to more favour the 2015 due to the better accrual rate of 1/54 - more so with employment towards 67 in my opinion (I am NOT an expert or advisor though)

Moonwolf

Mr_Crabbs said:

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?

Yes, exactly.  

If you have typical health, using a by eye on the charts generated by the ONS calculator here 
https://www.ons.gov.uk/peoplepopulationandcommunity/healthandsocialcare/healthandlifeexpectancies/articles/lifeexpectancycalculator/2019-06-07

At 60 you have something like an 87% chance of living twelve years to 72

At 67 you have roughly 77% of living twelve years to 79

Of course you might have health conditions and know your chances are less, but if you don't have any known issues then your income band probably means you have an above average chance of living longer.

Lowtrawler

Mr_Crabbs said:

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.

My wife did a retire and return a few months ago and was in a similar position to what you describe. As she has continued to work in the NHS, the 1995 pension payments are effectively surplus income and so are being paid into a SIPP. There were effectively 2 choices available:
1. Pay into a SIPP
2. Subscribe to Additional Pension (pretty much the same as the AVC you mentioned but retaining Defined Benefits)

My wife already contributes to Additional Pension (AP) and making further payments would have been attractive. However, if she were to die before me, I would only get 37.5% of the payments arising under the AP and we are looking to create a position where either of us are comfortable should one pass before the other. You pay roughly £16 - £17 per £1 AP but get tax relief on the payment in.

The SIPP became a more sensible choice due to us both benefitting equally. 

Incidentally, when considering the McCloud judgement, be aware of the different death benefits between the 1995 scheme and the 2015 scheme. With the 1995 scheme, 50% of the pension would be payable to you. Under the 2015 scheme, only 37.5% would be payable to you.

Cobbler_tone

Ah, the old 'take the lump sum vs extra pension'.

It all boils down to other provisions, do you need the cash injection now and the most important...how long are you going to live?!

At those rates the balanced decision is to take the maximum pension. I'm wrestling with that one and my rate is 20/1. It will probably come down to whether I have a genuine need to put the lump sum to good use and be comfortable on the lesser amount. In terms of life expectancy I have no idea but fancy getting to my 80's. Spousal provision is normally protected either way....but check the scheme rules as always.

crv1963

If you don't have an earmarked need/ reason for the larger lump sum then on average if no health issues involved the larger pension is probably more attractive over the long term.

I retired and returned - I had previously had a heart attack and although told my life span is now probably slightly better than average for my peers having had stents and the condition managed now, I took the greater lump sum, reduced my annual pension. My rationale was if I do pop my clogs my wife has the benefit of the survivor pension and the lump sum was used to pay of the mortgage and do some building work to future proof our home.

I do pay 40% tax on total income wage + pension, so initially I paid into SIPP to reduce the HR tax and when the option to rejoin the NHS Pension - 2015 scheme I did so and I am paying monthly to buy additional pension in the scheme over the SIPP.

Buying additional pension has worked well for me, it is almost cost neutral, buying 2k pension over 6 years is costing me £470 pm, this obviously reduces take home pay but my pension income increased by £350 pm through reduced tax paid, the other £120 pm is obviously from salary but my pay rise this year was £120 pm so in effect I have just sacrificed this years pay rise (in my mind lol).

Just juggle with the NHS Pension calculator, it is easy to use. Good luck with your plans.

Mr_Crabbs

Pat38493 said:

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 ...

- 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.

Thanks. Sorry, I missed your post first time round.

I think the points about commutation, long term income and inflation protection are all good particularly for my partner (and I) who are not necessarily financially savvy and may not be good at thinking about (lump sum) investments outside the schemes.

The trust held seminars for people thinking about retirement. As part of that they provided access to advice about pensions, retirement planning etc. through a company called MyWealth, for partners as well as employees. Presumably this was either offered as a loss leader or paid for by the trust or NHSBSA.

We had two long (3 hour) meetings with the FA as part of that; they went into our plans and finances in considerable detail, much more than a typical initial FA meeting, and produced a report saying what we should do with our various moneys. However I was disappointed as the report ignored options for a lot of our savings, including the lump sum, and it appeared in the end like a tout for business as the only real conclusion was 'take your ISA cash and put it in our high cost managed stocks & shares fund'. My partner was persuaded, but I don't really trust the advice.

We don't need the lump sum unless we move to the country, and even then the additional £48k is < 10% of the money we could have available for a house.

The only bigger cash flow we might need is exotic holidays or expensive hobby purchases, but it's not obvious we would spend that way or absolutely need the £48k if we did.

By my calculations income tax would be 20% on just under half the standard income and 40% on the rest while she's still working, so say the next 3 - 5 years. We hoped to mitigate that by salary sacrificing c. £12k p.a. into the NHS AVC scheme or contributing to a SIPP but need to be wary of recycling rules though I think they don't apply here.

crv1963

Mr_Crabbs said:

Pat38493 said:

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 ...

- 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.

Thanks. Sorry, I missed your post first time round.

I think the points about commutation, long term income and inflation protection are all good particularly for my partner (and I) who are not necessarily financially savvy and may not be good at thinking about (lump sum) investments outside the schemes.

The trust held seminars for people thinking about retirement. As part of that they provided access to advice about pensions, retirement planning etc. through a company called MyWealth, for partners as well as employees. Presumably this was either offered as a loss leader or paid for by the trust or NHSBSA.

We had two long (3 hour) meetings with the FA as part of that; they went into our plans and finances in considerable detail, much more than a typical initial FA meeting, and produced a report saying what we should do with our various moneys. However I was disappointed as the report ignored options for a lot of our savings, including the lump sum, and it appeared in the end like a tout for business as the only real conclusion was 'take your ISA cash and put it in our high cost managed stocks & shares fund'. My partner was persuaded, but I don't really trust the advice.

We don't need the lump sum unless we move to the country, and even then the additional £48k is < 10% of the money we could have available for a house.

The only bigger cash flow we might need is exotic holidays or expensive hobby purchases, but it's not obvious we would spend that way or absolutely need the £48k if we did.

By my calculations income tax would be 20% on just under half the standard income and 40% on the rest while she's still working, so say the next 3 - 5 years. We hoped to mitigate that by salary sacrificing c. £12k p.a. into the NHS AVC scheme or contributing to a SIPP but need to be wary of recycling rules though I think they don't apply here.

The recycling rules don't apply here, she will be paying into SIPP or AVC or additional pension from earnings. There is of course nothing preventing her paying into your pension with the lump sum or gifting it to children (as long as she lives 7 years no Inheritance tax). Likewise you can pay into her SIPP so it's really smoke and mirrors if it is examined.

Mr_Crabbs

@Lowtrawler @crv1963 thanks, it's really helpful to hear from people who've had the tax mitigation experience, and in particular that there are definitely no recycling issues. I didn't think there would be as it would be coming from earnings not lump sum, and the decision is unaffected by having a lump sum or not, but it's good to have confirmation.

We weren't aware that there was an additional [DB] pension option but that's definitely one to look at. We think doing this and effectively deferring some pension income would be useful as it would spread the income more evenly. and maybe be a hedge against care needs late in life.

@Moonwolf thank you again. No known issues, though you never know, and as I say partner does tend to have a pessimistic outlook on it.

I was thinking of the difference being £48k now vs. £4k a year, but of course it's vs. £4k less 20 - 40%, and there's inflation to think about, and so on. My brain is starting to hurt :-).

I also need to look at allocation; a few years ago we nominated each other to receive our pension benefits but on hers I don't know whether that's allocation or just a nominee for the adult dependent benefit. Not finding obvious answers on the NHSBSA site.

crv1963

Mr_Crabbs- NHS Pension has two parts really, there is the "Death in Service" part, should your wife die whilst employed then there will be a tax free lump sum of two times salary paid out. This is basically the same as a life insurance policy. This Death in Service benefit can be to any nominated person(s). Most usually spouse but it doesn't have to be.

Second part is the Survivors Pension. This is 50% of pensionable pay is half of what her pension would have been or is if in payment under the 1995 scheme and it is 33% of pensionable pay or what it is if in payment under the 2015 scheme. This can only be nominated to a surviving spouse/ legal partner (under the alternatives to marriage, or same sex marriages), this will be paid for the duration of the surviving spouse life, regardless if they marry again or not.

Moonwolf

Mr_Crabbs said:

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 ...

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.

On McCloud.

At a basic level, McCloud lets you choose whether to take the 7 years of service from 2015 to 2022 in the 1995 scheme or the 2015 scheme.

In either case, the 1995 will use your best of last 3 years salary at the time you take it and you will get 1/80th of that for each year you worked.

Someone earning top of Band 4 £29,114 now who had been working at Band 4 for the NHS since April 2005 would either get 10/80ths x £29,114 or 17/80s x £29,114 plus 3 x that as lump sum.  So pensions of either £3,539.25 or £6,186.73 and a lump sum of £10,917.75 or £18.560.18.

However the 2015 scheme accrues by 1/54th and in those 7 years has had revaluations above inflation growing by more than salaries have grown.  In the example above I think the 2015 pension would be £1,679.79 with McCloud in 1995 or £5,860.36 with the McCloud in 2015, plus if the employee was going to work another 7 years then the extra 1.5% growth would accrue an extra £536.92 of annual pension over inflation.

I worked out that, ignoring inflation and assuming pay now follows inflation, and this Band 4 worked to 67, the difference, summing the 1995 and 2015 pensions, from 67 would be

With McCloud years in 1995 pension = £12,040.44
With McCloud years in 2015 pension = £14,000.45

So £1,960 extra a year to offset against £17,832.33 extra pension paid over the 7 years and £7,642 larger standard lump sum, I think that is equivalent to a commutation rate of about 13?

These figures will be totally different for someone who has had promotions or climbed bands in the period and I have thrown these calculations together so there will probably be errors.  However, I think there is a group of people who will be better off taking the years in 2015, mostly people who have not had promotions, many of whom are just looking at the bigger lump sum.

All I'm saying is check the figures carefully and think about what they mean.