NHS Pension 2015. Using redundancy payment to buy out pension reduction.

runner310

I am currently considering whether to make an Expression of Interest for a Voluntary Redundancy Scheme. I’m 61 and am (mainly) in the  2015 NHS pension scheme (I joined the NHS in 2014)

I’ve heard that if ultimately I applied for redundancy and was accepted, that it may be possible to use my redundancy payment to help buy out the reduction in my pension that would otherwise occur if I took my pension early.

Is my understanding correct?

If so, how is the buy-out amount calculated? For example is it the monetary reduction in my pension (approximately 25 per cent multiplied by the amount of pension I will have earned at the date of redundancy) multiplied by the number of years early that I would be taking the pension (i.e. six years)? Or is a different methodology used? (I realise it may not be possible to calculate an exact figure, but I’m trying to establish what the ball park amount would be).

Would the amount taken to buy out my pension be taken before or after taxation of my redundancy payment?

Thank you.

Lowtrawler

The early retirement buyout options available with the NHS 2015 pension scheme only apply to the pensions earned following the buyout i.e. if you had 10 years pension built up, took out an ERBO contract and retired 2 years later, only the final 2 years would benefit from the contract. Hence, there is no means I am aware of to use your redundancy payment in the way you describe.

It might be possible to purchase Additional Pension which would give you a higher pension at normal retirement age and so, also a higher pension than you would otherwise get by taking your pension early. However, you would need to check if they will accept this.

As the first £30k of any redundancy payment is usually tax free, you would likely only want to consider putting into the pension anything above the £30k.

hugheskevi

I’ve heard that if ultimately I applied for redundancy and was accepted, that it may be possible to use my redundancy payment to help buy out the reduction in my pension that would otherwise occur if I took my pension early.

Is my understanding correct?

Yes, your understanding is correct. 

You would be entitled to a cash Voluntary Redundancy payment on leaving, which you could decide to receive and not involve your pension. You could alternatively use that cash lump sum to buy-out the actuarial reduction for taking your pension before Normal Pension age. 

Depending on the value of your cash lump sum and the cost of buyout:

1. If the cash lump sum exceeds the cost of buyout, you fully buyout the actuarial reduction and receive the balance of remaining cash as your redundancy payment.
2. If the cost of buyout exceeds your cash entitlement, you can use all of the cash payment to partially buy-out the actuarial reduction
3. If (2) applies, you can further choose to contribute a sum of your own funds to make up the shortfall to fully buyout the reduction (this would be a pension contribution and benefit from income tax relief).

Section 16 of this link may be helpful.

If so, how is the buy-out amount calculated? For example is it the monetary reduction in my pension (approximately 25 per cent multiplied by the amount of pension I will have earned at the date of redundancy) multiplied by the number of years early that I would be taking the pension (i.e. six years)? Or is a different methodology used? (I realise it may not be possible to calculate an exact figure, but I’m trying to establish what the ball park amount would be).

The cost of buyout is calculated actuarially, being the capital value of the additional stream of pension payments that would be paid before Normal Pension age.

You are aged 61 and your Normal Pension age is (mostly) 67, so that is a 6 year reduction. Hence, the cost of buyout will be slightly less than 6 times the annual value of your pension payable from your Normal Pension age (which will set out on your Annual Benefit statement).

Would the amount taken to buy out my pension be taken before or after taxation of my redundancy payment?

Before tax is applied - instead of paying you your full redundancy cash entitlement, the employer makes a payment to the pension scheme. If the cash entitlement exceeds the cost of buy-out then the remaining funds become your redundancy payment and it is to that lower sum that tax rules apply (first £30,000 tax free, then taxed at marginal rate).

runner310

Thank you. This is very clear and very helpful. Much appreciated.