Help understanding NHS pension for someone who has always been (sort of) self employed

SomeMadeUpName

Dazed_and_C0nfused said:

Cost to buy £500pa index linked, and with surviving spouse, at NPA, as a lump sum is £8400 (equates to about 5,95%). So you think that sounds damn near as good as the transfer right? However, the NHS scheme gets the 25% uplift of HMRC (so they get £10,500 into their pot). If instead we put that £8,400 into her personal pension then her DC pot gets the uplift and she has £10,500 in there. So sacrificing £10,500 to get £500pa is more like a 4.75% annuity purchase which I think is currently sub best on market even with the index linking and spousal.

I think you have got confused there.

There is no "pot" with the NHS scheme, she is buying extra defined benefit pension.

If she pays a lump sum to the NHS is it not more likely that she could then claim tax relief from HMRC, so the real cost of paying £8,400 might only be £6,720.

If she paid £8,400 to a DC scheme using relief at source then yes, she would end up with a "pot" with £10,500 in it.

I realise she would have no personal 'pot' in the NHS scheme, and that's my point she has to pay in £8,400 in full to get the £500pa.

I'm not sure how the mechanism could work for her to get a net cost of £6,720 and that is maybe down to her individual circumstance.  She is not a tax payer, as in she earns less than the personal allowance.  In 2025/26 she'll do 9 months work at a weekly average of say £300, she'll gross maybe £11,700.  How will making the £8,400 contribution then net down to £6,720? Also, AI (which I know is not always right) says that the tax refund goes to the scheme, and only higher rate taxpayers get a credit on their self assessment return.

If it's a contribution to a DC pot though:  She earns say £11,700, pays maybe £700 in NHS employee contribution, then puts £8,800 into her DC pot and HMRC gross it up to £11,000 despite her not actually having paid any tax. 

Lowtrawler

SomeMadeUpName said:

Dazed_and_C0nfused said:

Cost to buy £500pa index linked, and with surviving spouse, at NPA, as a lump sum is £8400 (equates to about 5,95%). So you think that sounds damn near as good as the transfer right? However, the NHS scheme gets the 25% uplift of HMRC (so they get £10,500 into their pot). If instead we put that £8,400 into her personal pension then her DC pot gets the uplift and she has £10,500 in there. So sacrificing £10,500 to get £500pa is more like a 4.75% annuity purchase which I think is currently sub best on market even with the index linking and spousal.

I think you have got confused there.

There is no "pot" with the NHS scheme, she is buying extra defined benefit pension.

If she pays a lump sum to the NHS is it not more likely that she could then claim tax relief from HMRC, so the real cost of paying £8,400 might only be £6,720.

If she paid £8,400 to a DC scheme using relief at source then yes, she would end up with a "pot" with £10,500 in it.

I realise she would have no personal 'pot' in the NHS scheme, and that's my point she has to pay in £8,400 in full to get the £500pa.

I'm not sure how the mechanism could work for her to get a net cost of £6,720 and that is maybe down to her individual circumstance.  She is not a tax payer, as in she earns less than the personal allowance.  In 2025/26 she'll do 9 months work at a weekly average of say £300, she'll gross maybe £11,700.  How will making the £8,400 contribution then net down to £6,720? Also, AI (which I know is not always right) says that the tax refund goes to the scheme, and only higher rate taxpayers get a credit on their self assessment return.

If it's a contribution to a DC pot though:  She earns say £11,700, pays maybe £700 in NHS employee contribution, then puts £8,800 into her DC pot and HMRC gross it up to £11,000 despite her not actually having paid any tax. 

As a non-taxpayer, you are correct she will not receive any tax benefit paying into the NHS additional pension and so paying into a DC scheme makes more sense., However, AI is wrong to think the tax refund goes to the scheme. As a non-taxpayer, there is no refund and, if she were a taxpayer, the refund would go to her as a reduction in the tax she would otherwise pay in the year.

SomeMadeUpName

So it looks like AI talks rubbish (no surprise there, despite using 'think deeper' not 'quick look'.  If you buy with lump sum then you do list on your self assessment and get a tax reduction.  In 2025/26 I don't think that's worth it for my missus as all it would mean is 'saving' some of her rental finance tax credit for future years in the expectation of a tax reduction at some later point.  In 2026/27 assuming she is still working NHS I think maybe we'll buy £250pa for somewhere north of £4k as she could earn say £15k that year plus a little rental profit, which would make the fact she won't get taxed at source on the £350'ish pcm worth it.

SomeMadeUpName

ggmf said:

One thing I would add is presumably she is or will join the 2015 scheme, hence any benefits built up would not become payable (without reduction) until her state pension age.

With a SIPP she can take that earlier i.e currently 55 yrs, but the available age will increase in coming years, if she decides she has had enough and wants to retire earlier.

Yep, understood, that's also why I'm trying to work a balance between ISA savings, DC pot and a bit of DB (along with state (for real security).  We'll also have rental incomes off one or two houses and one or two business units (dependant on how many we sell over the next couple of years).

The 'nice' thing for her about the NHS job is that it's zero hours and so she'll only do circa 25hrs for 40weeks a year, the rest of the time she can be in France, meaning (hopefully) she won't 'need' to stop too early despite the job being customer facing (ie can be stressful/hectic).

SomeMadeUpName

Lowtrawler said:

I'm not sure how the mechanism could work for her to get a net cost of £6,720 and that is maybe down to her individual circumstance.  She is not a tax payer, as in she earns less than the personal allowance.  In 2025/26 she'll do 9 months work at a weekly average of say £300, she'll gross maybe £11,700.  How will making the £8,400 contribution then net down to £6,720? Also, AI (which I know is not always right) says that the tax refund goes to the scheme, and only higher rate taxpayers get a credit on their self assessment return.

If it's a contribution to a DC pot though:  She earns say £11,700, pays maybe £700 in NHS employee contribution, then puts £8,800 into her DC pot and HMRC gross it up to £11,000 despite her not actually having paid any tax. 

As a non-taxpayer, you are correct she will not receive any tax benefit paying into the NHS additional pension and so paying into a DC scheme makes more sense., However, AI is wrong to think the tax refund goes to the scheme. As a non-taxpayer, there is no refund and, if she were a taxpayer, the refund would go to her as a reduction in the tax she would otherwise pay in the year.

Thanks for that.  I didn't see your 11.33 post before I posted my 11.40 one, but reading yours confirmed what I'd concluded about AI spouting nonsense (as it has a wont to do).