Additional NHS pension payment

V3cash

Hi we are hoping that my husband’s inherited house will sell soon. (2nd time luck, hopefully 😬
This will be divided as he has a sister.
we will max out ISA’s in both our names and give our daughter some money at this point too.
hopefully we will live another 7yrs.

I am enrolled in the 1995 and 2015 NHS pension and have worked 15 years now in the nhs.
I opted out of 2008 scheme and will get a modest pension at 60 from 
 the 1995 scheme.
I will continue to work and pay into 2015 scheme until 67.
I would like to retire at 65 but may need to keep going til 67.
the question is do I put a chunk of change into NHS pension to save paying interest on savings and is it worth it?
using the calculator it’s about 16k for £1000 extra, I’m assuming that’s a year.
I haven’t presently got much in the 2015 pension pot as it started from 2022 and I took a couple years out to retrain.
I’m hoping in the next 10 yrs this will build up.
When I put monthly calculations in rather than lump sum the calculator results comes up you pay more doing it as monthly payments than if you do a lump sum?
so 2 questions really
1. is it worth doing?
2. why does it appear you pay less doing it in a lump sum?

Marcon

V3cash said:

Hi we are hoping that my husband’s inherited house will sell soon. (2nd time luck, hopefully 😬
This will be divided as he has a sister.
we will max out ISA’s in both our names and give our daughter some money at this point too.
hopefully we will live another 7yrs.

I am enrolled in the 1995 and 2015 NHS pension and have worked 15 years now in the nhs.
I opted out of 2008 scheme and will get a modest pension at 60 from 
 the 1995 scheme.
I will continue to work and pay into 2015 scheme until 67.
I would like to retire at 65 but may need to keep going til 67.
the question is do I put a chunk of change into NHS pension to save paying interest on savings and is it worth it?
using the calculator it’s about 16k for £1000 extra, I’m assuming that’s a year.

I think you need to have a rather deeper dive into what's on offer! Paying £16K to get a one-off £1,000 doesn't look like a great deal, whereas £1K extra a year (which will increase each year when in payment) looks extremely good.

V3cash said:

I haven’t presently got much in the 2015 pension pot as it started from 2022 and I took a couple years out to retrain.
I’m hoping in the next 10 yrs this will build up.
When I put monthly calculations in rather than lump sum the calculator results comes up you pay more doing it as monthly payments than if you do a lump sum?
so 2 questions really
1. is it worth doing?
2. why does it appear you pay less doing it in a lump sum?

1. Check the facts - making assumptions won't help you to make an informed decision. If you want to add to your retirement provision, where can you get a deal which matches or beats this one?
2. Because with a lump sum the scheme has all the money sooner than if you 'drip feed' it. Think about a simple deposit account with a building society - if you invest £100 at the start of a year, at the end of that year you get a full year of interest. If on the other hand you invest 1/12 of the money each month during that year, you get less interest because only 1/12th of the money has been invested for a full year. Same principle!

hugheskevi

V3cash said:

the question is do I put a chunk of change into NHS pension to save paying interest on savings and is it worth it?
using the calculator it’s about 16k for £1000 extra, I’m assuming that’s a year.

You receive £1,000 of pension payable without reduction from your State Pension age, and that increases in line with price change, currently measured by CPI, from when you purchase it, and also once in payment.

V3cash said:

1. is it worth doing?
2. why does it appear you pay less doing it in a lump sum?

Pension contributions are usually worth doing, but you have a number of options.

Purchasing Added Pension gives you a secure, lifelong, inflation-protected income, although you would be subject to the risk that your State Pension age increases after you have made the purchase - this would mean the age from which the Added Pension is payable without reduction would increase in line with State Pension.

However, the cost of those guarantees is high. The discount rate used to calculate the cost using CPI+1.7% p/a and you can think of this as the rate of return. While a Defined Contribution pension brings investment risk, you would expect most portfolios to achieve more than CPI+1.7% p/a over a reasonable time period.

The Added Pension also effectively does not have a tax-free lump sum, whereas a Defined Contribution pension has a 25% tax free lump sum. This is due to the very poor commutation rate offered (12:1) which means in many cases you would be worse off taking a tax free lump sum than keeping taxable pension income.

Lowtrawler

hugheskevi said:

Pension contributions are usually worth doing, but you have a number of options.

Purchasing Added Pension gives you a secure, lifelong, inflation-protected income, although you would be subject to the risk that your State Pension age increases after you have made the purchase - this would mean the age from which the Added Pension is payable without reduction would increase in line with State Pension.

However, the cost of those guarantees is high. The discount rate used to calculate the cost using CPI+1.7% p/a and you can think of this as the rate of return. While a Defined Contribution pension brings investment risk, you would expect most portfolios to achieve more than CPI+1.7% p/a over a reasonable time period.

The Added Pension also effectively does not have a tax-free lump sum, whereas a Defined Contribution pension has a 25% tax free lump sum. This is due to the very poor commutation rate offered (12:1) which means in many cases you would be worse off taking a tax free lump sum than keeping taxable pension income.

The poster has around 10 years until they are 67 and at SPA. It is unlikely the SPA will change for those within 10 years of retirement although always possible.

Even at current, generous, annuity rates, it will cost around £20k to purchase £1k per year of index linked annuity with a 50% guarantee for surviving spouse. (The NHS survivor pension is only 33.75%). To turn £16k into an inflation adjusted £20k over 10 years would require a real return of 2.25% per year. Whether that would allow purchase of an inflation linked annuity at that time will then depend on the annuity rates available.

As always with these decisions, much will depend on attitude to risk and how much required income is already covered by guaranteed pensions. It sounds like the poster will have a total of around 23 years in the NHS 1995 / 2015 schemes and together with state pension, this may come close to meeting their required income. If not, Additional Pension would be a sensible way to bridge the gap.

As a side note, as the poster plans to retire and return to claim their 1995 pension at 60, unless they need the income, they should consider paying the 1995 pension income into a pension. That may be Additional NHS pension or not. In essence, I think V3cash needs to do a financial projection on what income they need in retirement compared to the income coming from their pensions to help inform a good decision.

V3cash

Thanks for the advice, lots to think about 
sale fell through again so no need to worry yet 🙄