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

Lowtrawler

Mr_Crabbs said:

crv1963 said:

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

Lowtrawler said:

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)

I assume both of you / your wife are only doing this for a short time and there is no problem with doing so? It's likely my partner would only need to mitigate higher rate tax for 3  - 4 years. Not sure if there is a minimum time to hold / contribute to a pension, mand what investment if it would only be held for a short time.

Worth reading https://www.nhsbsa.nhs.uk/sites/default/files/2024-12/Added benefits-Additional pension factsheet-20241105-(V13).pdf

There are no real restrictions on paying Additional Pension over short periods but there are circumstances where the contract will be voided if it is cancelled within 12 months e.g. ill health retirement

Mr_Crabbs

Thankyou both. Apologies for the delay replying; lot going on at the mo (which is partly why I'm asking so many questions!).

crv1963 said:

I plan buying additional pension for 6 years only. You can buy additional pension in £250 slices so can mitigate for 3-4 years, just play with the calculators and your prospective amount of HR tax.

We were thinking along the same lines. An additional £2k pension covers the higher rate tax but it looks quite expensive; we looked on the NHS ready reckoner and it looks as though the payback time will be 15 to 18 years, and there's no lump sum and part of the index linking won't apply, so a DC scheme or SIPP might be better for us.

Lowtrawler said:

Worth reading https://www.nhsbsa.nhs.uk/sites/default/files/2024-12/Added benefits-Additional pension factsheet-20241105-(V13).pdf

There are no real restrictions on paying Additional Pension over short periods but there are circumstances where the contract will be voided if it is cancelled within 12 months e.g. ill health retirement

I found that, thanks. Useful information.

I have just realised I missed one aspect of taking the lump sum. We hope to buy a property which would take some of our savings. By taking the lump sum we could have avoided taking the same amount out of an ISA and having to feed back into it over time. Thinking aloud though, I think the interest and payback calculation still works so it probably wasn't too much of a mistake.

Lowtrawler

Mr_Crabbs said:

Thankyou both. Apologies for the delay replying; lot going on at the mo (which is partly why I'm asking so many questions!).

crv1963 said:

I plan buying additional pension for 6 years only. You can buy additional pension in £250 slices so can mitigate for 3-4 years, just play with the calculators and your prospective amount of HR tax.

We were thinking along the same lines. An additional £2k pension covers the higher rate tax but it looks quite expensive; we looked on the NHS ready reckoner and it looks as though the payback time will be 15 to 18 years, and there's no lump sum and part of the index linking won't apply, so a DC scheme or SIPP might be better for us.

As far as I know, the Additional Pension is fully index linked. Perhaps you are thinking about the extra 1.5% added to CPI for the main pension accrual rate? If so, just think of that as a bonus rate.

From memory, the Additional Pension costs about £17 per £1 of added pension. If you are getting 40% tax relief on the £17 and paying basic rate tax on the £1, that's £10.20 for 80p of benefit and so there should be a payback period of around 13 years - for an index-linked pension, that's incredible value. Even if you only get basic rate relief on the £17, that's £13.60 for 80p or 17 years which is still very good value for an index linked pension. If you were to try and purchase an index linked annuity, it is very likely you would need to pay over £25 per £1 benefit and probably closer to £30. The index linked annuity is also likely to have a cap on the inflation it will cover whereas the NHS scheme does not.

At the end of the day, it depends whether you want the flexibility of holding funds outside the NHS Defined Benefit scheme or whether you prefer the security of guaranteed inflation proof income. 

Moonwolf

Mr_Crabbs said:

We were thinking along the same lines. An additional £2k pension covers the higher rate tax but it looks quite expensive; we looked on the NHS ready reckoner and it looks as though the payback time will be 15 to 18 years, and there's no lump sum and part of the index linking won't apply, so a DC scheme or SIPP might be better for us.

FWIW I posted a long time ago about my thoughts having investigated different additional pension options.  This is what I came up with. https://forums.moneysavingexpert.com/discussion/comment/78669411#Comment_78669411

On the ERRBO, I was lucky that I started it when I joined the 2015 scheme and when I defer it basically still applies to all the pension I have accrued.  Having parts of my 2015 in ERRBO and some not would mean that you take your pension at the earlier date and have actuarial reduction on the parts not covered by ERRBO.  

The other thing about ERRBO which is stated but isn't obvious is the payment rate can change at any time, this makes it even more difficult to work out if it is worth it.  It is based on actuarial calculations though so it should be neutral if you live an average life expectancy.  As it is basically paying to get money earlier it is probably worth it if you die younger and you begin to lose out the longer you live.