NHS pension: what should I do?

jimi_man

https://forums.moneysavingexpert.com/discussion/comment/82034145#Comment_82034145

I was in a similar situation to you - retiring from a public sector job (police in my case) and was faced with the decision of whether to take the lump sum or not. It wasn't mandatory, you didn't have to take anything. I think something approaching 99% took the lump sum. By far the most common reason was 'if you die then your family has something'. No argument there and the fact that even by taking the lump sum your family still benefitted from a 50% widows pension of the full amount as though you hadn't taken it. Other reasons were that it was tax free and if you left it in the pension it was taxed - also true.

However most people I know used it to pay of their mortgage (most common), buy an expensive car, an expensive holiday, uni fees for children etc etc.

I looked at it differently. At the time (10 years ago nearly) £161k was the offering to give up £7.5k a year. So in reverse, if you invest £161k you get £7500 a year which is around 4.6% before tax. Guaranteed, for the rest of your life AND index linked with no cap - which, following Covid - was a nice little boost and that part is now worth £10k. I also didn't really know what to do with it and didn't want to fritter it, so thought it best not to take it.

4.6% + CPI seemed quite a reasonable investment so I 'left' it in the scheme and being 51 carried on working in other public sector jobs and saved up the equivalent of the lump sum (actually more) over the next 9 years.

However one point remains. If someone tells you to take it/not take it without knowing full details about your personal and financial circumstances then they can safely be disregarded as not knowing what they are talking about. You are the best person to make the decision and it's what's right for your circumstances, not what the majority of others do. There is no right or wrong answer - since whilst one way might make you more money over the long term, it might not be the best solution for your family as it doesn't allow you to do x,y or z. And vice versa.

Happy deciding.

Ibrahim5

The hardest decisions are obviously when it's most finely balanced. I always think 20% tax is liveable with but 40% tax on a pension is too much. Will taking the max lump sum avoid 40% tax on your pension?

hugheskevi

There are a number of factors that determine whether to commute pension into lump sum:

• Age at date of commutation. Personal choice.
• Commutation rate. Scheme specific.
• Effect of commutation on pension, eg, survivor benefits, payment from protected benefits if die shortly after retiring, etc. Scheme specific.
• Expectations about future tax rate - note, this is subject to considerable political uncertainty, eg, fiscal drag. Largely guesswork, although things are likely to get worse rather than better.
• Average and personal life expectancy - on average, someone with a large DB pension will probably have a higher life expectancy than average unless they have existing health conditions or past work was particularly arduous. Genetics play a role here too.
• Wider financial circumstances, including bequest motivation - if there is an immediate use for lump sum then it is more attractive than if they money would not have any particular use. In particular, if the money couldn't go into ISAs and wouldn't be used for sometime the lump sum option becomes less attractive.

Age will be known with certainty, as will the commutation rate and the effect (if any) of the commutation on pension benefits.

Guessing future tax rates carries uncertainty - many who thought they would be 20% taxpayers in their retirement are now going to pay 40% on some of their income due to fiscal drag, and rates may increase in the future.

Cohort life expectancy is straightforward, but adjusting for personal life expectancy is more difficult, and at the individual level, there is always risk regardless of the expected figures.

Taking the common public service commutation rate, 12:1, if income tax would be paid at 40% on income taken then it would take 20 years to get the same money from pension after tax that would have been obtained from a lump sum, ignoring inflation uplifts and returns from investments. A 60 year old would have about 25-30 years of life expectancy, so even for a higher rate taxpayer it is far from clear to take a tax free lump sum.

But if they were 65, and planned to give money to children then the lump sum becomes much more attractive.

jimi_man

Yes I forgot to mention the commutation rate. 12:1 is pretty dismal and would dissuade me from taking it. Mine was a slightly better 21:1 or thereabouts and even that wasn't great when you take into account my age at the time (51).

However the other point holds true and once the SP kicks in I'll be an HR taxpayer.

Moonwolf

https://forums.moneysavingexpert.com/discussion/comment/82034145#Comment_82034145

I took the minimum lump sum on my 1995 and no lump sum on my 2015. If I need a big lump sum then I have my ISAs and I still have 25% of my DC pot.

However, in addition to everything else. Most NHS people will have, once time they reach SPA, more than enough income to live on; I know of couples who have more income in retirement than they had when working even after taking the larger lump sum.

In this situation the lump sum is more attractive, you don’t need the income but the lump sum bridges to SPA and buys more holidays in the early retirement years. I can see how that would feel better than the pure maths would suggest. Is having cumulatively more money by 85 really better than a more luxurious early retirement - provided the basics are more than met.

ali_bear

Apparently most retirees slow down around the age of 75-80 and spending after that is much reduced. So with a DB scheme and the state pension covering your regular living costs until the inevitable, what you do before that age is up to you.

I suspect that people working in healthcare and the emergency services will have accumulated an appreciation of the brevity of life, to the extent that living for the present becomes more of a priority. Thereby skewing their financial planning. Who is to say this is the wrong approach?

Bobinyorkshire

These comments are really interesting. Yes, that’s was the big dilemma. Big lump sum gives more up front money, useful for early retirement decisions in the ‘go go’ years whilst also reducing the 40% tax take when combined with income while still working or when SP starts. However, small lump sum gives a much better return on regular income over the long term and the reassurance that can give for unplanned events as we age. Although, as pointed out by others, the larger monthly pension amount combined with the SP with no mortgage and adult children will give a disposable income considerably more than you need when elderly and may therefore cause me to reflect on whether the large lump sum at 60 was a better idea.

I know there is no bad decision and I do appreciate all the helpful comments which have helped me to consider most eventualities