NHS pension, but want to save more to retire early

anewloginapparently

Hello all. 

I'm a 42 year old Scottish nurse that is just starting to think about how I can use my wages more wisely to hopefully allow me to work less in the future. 

Unfortunately like most people I probably didn't think about pensions and investing until far too late as I was putting every penny before into getting through uni, or saving for a house.

My situation is I'm 42, married, have a 2.5 year old son. I'm a band 6 nurse at the top of my pay band and fiscal drag is just taking me into being taxed at the 42% band (in Scotland).

I have 7 years of pension accrued (NHS 2015 scheme) and whilst this is financially generous, I can't access it until state pension age (currently 68) without a large reduction if I take it earlier.

I just moved house last year so have a 24 year mortgage at 4.75% interest, but I should easily be able to overpay this to pay it off within ten years. 

I have about £10k in a rainy day cash ISA, and another £5k in an ISA to save for my son to have a headstart when he's an adult that I contribute about £200pm too. The hope is it'll be worth £80k by the time he's 18 to help him through uni and for a house deposit.

I earn enough to live a comfortable life, although the unexpected such as car bills or home maintenance can still take the odd large chunk out of my savings at times. 

Since I'm getting dragged into the higher rate tax bands I'm thinking that I'm probably better investing the money into a pension trust I can perhaps access earlier than 68 so I can at least partially retire or go part time in the future. I really can't see me doing my job until 68 full time! A lot of my colleagues are fortunate enough to be in the 95 scheme so have done this now.

It looks like my options are save more in a stocks and shares ISA (but I won't save on income tax then), Salary sacrifice for an AVC pension with Standard Life which NHS Scotland will allow, or set up a SIPP pension and reclaim the money from the tax man (but without the national insurance saving I guess).

Has anyone else found themselves in a similar situation that has some advice on the best way forward for me?

El_Torro

Since you are currently paying 40% income tax on some of your income it makes sense to sacrifice enough of your salary to get you down to 20%. Assuming you can afford it of course. Remember that you won't be able to access this money until you are 58. Perhaps older, depending on what future legislation says. 

From the options you give I would say that salary sacrificing AVCs is the way to go.

ColdIron

As a 40% taxpayer pension contributions to take you back to basic rate tax is the obvious solution

Salary sacrifice into AVCs is probably the best way to do this for the NI savings and lack of hassle involved in reclaiming the higher rate tax

An ISA is likely to be the least beneficial option

hugheskevi

My situation is I'm 42, married, have a 2.5 year old son. I'm a band 6 nurse at the top of my pay band and fiscal drag is just taking me into being taxed at the 42% band (in Scotland).

You mention a lot about your own position, but nothing about your partner. Financial and tax planning may well be far more efficient if done as a household rather than as individuals. For example, if your partner is aged under 40 then LISAs might become part of the plan.

I have 7 years of pension accrued (NHS 2015 scheme) and whilst this is financially generous, I can't access it until state pension age (currently 68) without a large reduction if I take it earlier.

7 years is not much pension for a 42 year old. Have you considered your household position taking into account all pensions yourself and your partner have, and what you think you will need? Then you can plan the best course to get to where you want to be, taking into account your current starting position.

I just moved house last year so have a 24 year mortgage at 4.75% interest, but I should easily be able to overpay this to pay it off within ten years. 

Are mortgage overpayments the most efficient approach? Might it be better, for example, to put more into a pension and use a future tax-free lump sum to repay the remaining amount of mortgage at age 57 (the earliest age you will be able to take a pension from)? Especially as you have access to salary sacrifice - even if you saved on intermediate rate and employee NI only that is still 29% relief, and you will pay tax at about 15% when withdrawn if you take it out at basic rate tax with 25% tax free lump sum  - almost a 20% uplift from tax planning if it can be made to work.

I have about £10k in a rainy day cash ISA, and another £5k in an ISA to save for my son to have a headstart when he's an adult that I contribute about £200pm too. The hope is it'll be worth £80k by the time he's 18 to help him through uni and for a house deposit.

When he is 18 you will be over 57, so again, perhaps a pension might be a more efficient vehicle for this (although if you are still in full-time work at age 57 then you would only be able to take 25% without paying higher rate tax).

Since I'm getting dragged into the higher rate tax bands I'm thinking that I'm probably better investing the money into a pension trust I can perhaps access earlier than 68 so I can at least partially retire or go part time in the future. I really can't see me doing my job until 68 full time! A lot of my colleagues are fortunate enough to be in the 95 scheme so have done this now.

The 1995 scheme is payable unreduced from age 60, but has a lower accrual rate. The 2015 scheme is payable unreduced from age 68, but don't get obsessed about that - it is simply a reference point to calculate the benefits due. It may well work out that the 2015 scheme gives more than the 1995 scheme at age 60 despite the actuarial reduction. Taking it before or after 68 leads to an actuarial reduction or enhancement respectively. The focus should be on what you need and what you will have, not on Normal Pension age.

Pension contributions look to be very valuable, and salary sacrificing to at least higher rate tax appears desirable. But there could be ways to arrange your finances to go further potentially, although balancing efficiency with liquidity is the usual challenge.

anewloginapparently

Sorry it's difficult to quote reply on a phone, but Hugheskevi that looks like great advice.

My wife is 7 years younger than me and is currently studying nursing so will be qualified in a year's time and hopefully on a similar wage to me in 7 years or so. 

Our financial situation will drastically improve in a year when she's working again, and also next year when we are able to access free nursery hours, which will save us £500 per month, and again further in 2 years when our son starts school. 

Otherwise the rest of your advice has given me a lot to think about and is very helpful so cheers for that.

anewloginapparently

Yeah 7 years isn't too much yet, but it should be 35 years by the time I retire so should be a pretty decent pension by then. 

I perhaps have another couple of years occupational pensions from previous jobs, but I'll need to try to trace them.

Dazed_and_C0nfused

anewloginapparently said:

Yeah 7 years isn't too much yet, but it should be 35 years by the time I retire so should be a pretty decent pension by then. 

I perhaps have another couple of years occupational pensions from previous jobs, but I'll need to try to trace them.

35 years in the 2015 NHS pension and no doubt the full standard new State Pension is genuinely a position many can only dream of!

Moonwolf

Don’t discount the NHS Additional Pension options.

https://www.nhsbsa.nhs.uk/member-hub/increasing-your-pension/additional-pension

The ERRBO means you could take the pension a bit earlier without the actuarial reduction. The others would just be more pension which could be used to offset the reduction.

A SIPP or other private pension is also a good idea although you might need to claim back the higher rate tax. I mixed ERRBO with adding to an old pension from a previous employer, taking advantage of the fact it was relatively low cost. As your NHS pension is guaranteed you could consider taking more risks with your investments than if a DC was your only pension.

DRS1

anewloginapparently said:

Yeah 7 years isn't too much yet, but it should be 35 years by the time I retire so should be a pretty decent pension by then. 

I perhaps have another couple of years occupational pensions from previous jobs, but I'll need to try to trace them.

My maths may be off but doesn't that mean you'll be working till you're 70?

35 - 7 = 28
28 + 42 = 70

kempiejon

If, as per the title, you want to retire early then doing your calculations based upon 35 years of pensions and working until after state pension age seems the wrong place to start.
Tax leverage can be very useful if you'll be paying a higher rate when earning than when claiming piling everything  into a pensions of some sort gives more. Pensions limit your access until after 57 or 8, perhaps later. If you want to retire before 58 ISAs are probably favoured for tax efficiencies.
Investing aggressively in an all stock portfolio whilst accruing the NHS DB pensions would be one approach.

anewloginapparently

DRS1 said:

anewloginapparently said:

Yeah 7 years isn't too much yet, but it should be 35 years by the time I retire so should be a pretty decent pension by then. 

I perhaps have another couple of years occupational pensions from previous jobs, but I'll need to try to trace them.

My maths may be off but doesn't that mean you'll be working till you're 70?

35 - 7 = 28
28 + 42 = 70

You are off course right. It would be 33 years of NHS pension. It should still be a pretty decent pension in monetary terms though once I make it to 68.