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

Lowtrawler · 21 January at 10:26AM

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 · 24 January at 1:04PM

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 · 29 January at 5:46PM

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 · 30 January at 9:58AM

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.

cvardi · 29 August at 1:22PM

With other pension schemes it's possible to take your Lump Sum in instalments over several tax years, to reduce the amount of tax to pay over the £268k allowance. Is this possible with the NHS pension scheme, or do you need to take the Lump Sum all at once?

Mr_Crabbs · 14 September at 1:32PM

cvardi said:

With other pension schemes it's possible to take your Lump Sum in instalments over several tax years ... Is this possible with the NHS pension scheme, or do you need to take the Lump Sum all at once?

Hi, thanks. I don't know, but in all the info we waded through I didn't see that option, so I suspect it wasn't possible.

@Lowtrawler, @Moonwolf, apologies, I missed your last replies.

Partner took the standard lump sum and higher monthly payments / guaranteed return in the end. Still in two minds as to whether it was the right thing to do, but alea iacta est.

However, it does mean she's now a higher rate taxpayer, and by about £15k (ouch). I lost focus on this as I had a lot of family, work and wellbeing stuff going on, but I need to get on with thinking about the additional pension and tax mitigation.

Lowtrawler said:
... 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 ...

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.

I don't know to be honest, I need to go back and have a look; I found the NHSBA information quite difficult to follow and may have misunderstood.

I need to remind myself, but I think the plan is as partner is working (partial retirement) to do three years paying additional contributions to reduce tax, then take that pension at 65 and use it to bridge to 67 when she gets state pension and 2015 scheme. That might mean flexibility is desirable and additional 2015 scheme contributions aren't, but more thinking needed.

Moonwolf said:

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 ...

Thanks. I'll have a look through that now. To ERRBO, I did look at it and I think we decided there was no advantage in our situation, but I need to refresh my memory.

Mr_Crabbs · 14 September at 1:40PM

Yorkie1 said:

The McCloud election is made at the point you retire (or take the first part of your pension, if it's in a couple of parts which can be taken at separate times).

Annual pension statements should show that year's figures for each version of McCloud. And you should get both sets of figures before you choose to retire, to help.

It now occurs to me that I don't think we saw anything about McCloud when she partially retired. Maybe doesn't apply until full retirement. Cancel that. There was a note about McCloud saying they hoped to offer the choice from summer 2025 and if the pension started before they get there they would do it retrospectively. Bit of a note to myself really to check that.

Mr_Crabbs · 14 September at 4:35PM

Lowtrawler said:

Mr_Crabbs said:

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.

Apologies, I must have misread things. The additional pensions fact sheet (now at https://www.nhsbsa.nhs.uk/sites/default/files/2025-03/Added benefits-Additional pension factsheet-20250401-(V14A).pdf) says:

"Additional pension purchased in the 2015 Scheme is revalued by a Treasury Order each year before the additional pension comes into payment and increased in line with CPI inflation whilst it is being paid".

You don't get the 1.5% uplift or lump sum, though you can purchase additional lump sum when taking the pension.

Lowtrawler said:

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.

Going through the calculator, we'd now have to buy £2500 additional pension to offset the higher rate tax (another birthday, pay increases vs. no change in the higher rate threshold, etc.). That would cost £44,244 over 3 years, which I work out at £17.70 per £1, and would be at 40% relief, so I make that £26546 to get 2000 per year after tax, or 13 years and 3 months payback, starting at age 67 so paid back by age 80.

This is where I start to lack the understanding to compare with an AVC scheme and annuities, drawdown etc.

The additional pensions leaflet also says "HMRC will not allow you to withdraw a tax-free lump sum and receive further tax relief by reinvesting the money back into a registered pension scheme. This is known as ‘recycling
lump sums’ and could apply if the money is reinvested as a lump sum or in monthly payments. You could be affected by this rule if you retire within two years of making an election to purchase additional benefits"

This seems odd to me. I suppose they are just covering themselves and trying to guide members, but I thought MPAA didn't apply to DB schemes? I hope not as that's the whole premise of our plan!