NHS additional pension to offset early retirement actuarial reduction

tibbles209 · 13 January 2019 at 2:45PM

I am a 28 year old Junior doctor in Scotland (GP trainee) and I am a member of the NHS 2015 scheme, with a scheme retirement age equal to state pension age. I would like to retire around age 60, and would ultimately like my total pension income (NHS pension + state pension) to be as high as possible without breaching the lifetime allowance or the higher rate tax threshold (at the moment in Scotland is £43,481). As things are at the moment, this would mean I would ideally want my NHS pension to be up to ~£35k, and I would make other arrangements to bridge the extra until my state pension kicks in.

My current state pension age is 68. I currently pay additional ERRBO contributions to buy out 3 years early retirement reduction. I expect to work part time for many (~10) years when I have young children, and do not plan to be working/accumulating pension beyond the age of 60, so I am less likely to hit the lifetime allowance from my NHS pension alone (although it is possible).

I have been thinking about how to bridge the ~5 years between age 60 and my ERRBO retirement age of (currently) 65. It is likely investments in a SIPP would push me above the lifetime allowance. I have also been considering LISAs, which seem to meet my needs fairly well, but wouldn't take advantage of my personal allowance over those years.

I have started wondering about possibly buying NHS Additional Pension (note - not AVCs) to increase the value of my NHS pension, with the intention of taking it earlier than age 65 and hopefully partly offsetting the actuarial reduction, to keep my pension above the level that I would be happy with (basically as I got closer to retirement age, I would calculate how early to take my pension to achieve my target income while avoiding LTA/ higher rate tax once SP kicks in). Additional pension is currently very cheap for me to buy because of my age (someone aged 60 in the scheme would have to pay ~2.5x as much to buy the same amount of additional pension as me). Every £1000 of additional pension (from state pension age) would cost me £6000, which after 41% tax relief would only be £3540; and this includes dependents cover. The other benefit of buying now rather than later is that my salary is not yet big enough for annual allowance to be an issue. The downside is that it is linked to CPI so the value could somewhat erode by the time I hit retirement. Additional pension is actuarially reduced by the same factor as main scheme pension (http://www.sppa.gov.uk/Documents/NHS/NHS%20Useful%20Resources/Factors/NHS%20Early%20retirement%20factors%202015.pdf) for early retirement, but would be calculated back from state pension age rather than my ERRBO retirement age (unlike my main scheme pension).

I realise I am going a bit off-piste here, trying to use pension enhancements in a way that the scheme does not really intend, so I thought I better run it past the forum to get some opinions/make me see sense before I do anything silly

Thanks!

OldBeanz · 13 January 2019 at 4:31PM

I am sure others have intentionally or unintentionally done the same before. Why not. One thing you should factor in is that your child allowance can be maintained when you go back full time by bringing your salary down to under £50k thus making your pension sacrifice even more valuable.

tibbles209 · 13 January 2019 at 5:02PM

Hi OldBeanz,

Thanks very much for your reply. I can't think myself of any reason why not, but there have been occasions in the past where people on the forum have flagged up issues I hadn't considered so I thought it was worth checking here before I do anything

That is a good point about child benefit. I think though in my particular circumstances it wouldn't work; my husband (DC pension) already earns significantly above the child benefit tax threshold, even after pretty hefty pension contributions so we probably wouldn't qualify for child benefit anyway. By the time I went back full time I'd be in my early 40s and the Additional Pension would be quite a bit more expensive by that point on account of my age.

Thanks for flagging it up though, it was something I hadn't considered.

atush · 13 January 2019 at 5:26PM

TBH, I would look iinto paying intoa Sipp or PP outside the NHS if you want to leave early.

But depending on your specialty, you could run up to the LTA?

tibbles209 · 13 January 2019 at 5:34PM

Hi Atush,

Thanks for your thoughts. I certainly have considered SIPP as a possible bridge, although because of the uncertainty as to how long I will work part time, how long I will be a salaried GP for, whether I will end up in a partnership (likely) and how profitable it will be etc. it is very hard to predict with any real accuracy what my eventual NHS pension will be, and how much room I would therefore have in my LTA for SIPP investments. I do worry that there would not be enough room to invest enough to cover the full 5 years until my NHS pension.

You may well be right, but could you give me your thoughts on why this would be preferable to the Additional Pension idea above? I'm just struggling to weigh the two up against each other.

hugheskevi · 13 January 2019 at 7:49PM

Your thinking looks well considered, and on the whole fine.

The main point, as atush says below, is that I'd also think a personal penson (which could be a SIPP), even if relatively small, would likely be a part of the plan.

A personal pension would give a bit of diversification - do not underestimate the amount of political risk involved in public sector pensions. There have been many proposals to cap pensions and lump sums at arbitrary levels, eg, £40K or £50K p/a and these will keep being made in the future. To give a practical demonstration of political risk manifesting itself, you might recall the change from RPI to CPI revaluation and indexation in 2010, which significantly reduced the value of accrued and future pensions - for someone your age the loss would have been very large (in percentage terms), given the 1% p/a difference between RPI and CPI.

You may find it difficult to finely tune Additional Pension payments to fully take advantage of higher rate tax, whereas personal pension payments can can calculated and made right up to 5th April each year, so you can contribute precisely the right amount.

As you can withdraw 100% of a personal pension if you wish (acknowledging the rules will be different in 40 years, but who knows in what way) it will also be a more flexible than the NHS pension to ensure you fully exploit any personal allowance or basic rate tax when you come to take the pension.

Twoplus · 13 January 2019 at 8:56PM

I don't think there's an easy answer, the way things are going in the pension world NHS pensions may no longer accept contributions in 10 years time and you may have to pay into a private pension. It could be argued it's best to make use of them while you still can as they provide a good return if you live a long time.
Alternatively private pensions give you more flexibility and mean all your eggs are not in one basket.
I personally regret not buying additional pension when I was in the 1995 NHS pension scheme, but hindsight is a wonderful thing.

tibbles209 · 13 January 2019 at 9:38PM

Thanks hugheskevi,

I think you are right that SIPP/PP will likely end up being a component of my retirement plan, but may be quite limited by LTA. My career would be 35 years long by the age of 60, and to have accumulated my target ~£35k pension by the age of 65, I would only need to average pensionable earning of £54k/year over my career, and as a GP even working part time for a proportion of my career, it is highly likely that I will exceed that (given that when I am working part time I am still likely to be earning ~£40k/yr, and full time later in my career >£90k). In fact, revaluation would increase my pension even further. Without taking my pension earlier than 65, and instead trying to bridge the 5 years by other means, I may therefore have little room in my LTA to build adequate investments in a SIPP/PP to cover much of the 5 years needing to be bridged.

I could do a bit of a combination; buy the max additional pension I can, take my pension as early as I can while still meeting my target income (perhaps not pulling it back the full 5 years, but part thereof), and then bridging any period remaining between age 60 and when I am taking my NHS pension with funds in a SIPP. SIPPs certainly do offer more flexibility, but of course they do come with more risk than a guaranteed income from additional pension. I take your point about the political risk of government DB schemes... so far they have resisted making retrospective changes so I could only hope they stick to that policy but you never do know.

Twoplus

That is part of what is driving me to seriously consider buying the additional pension; it looks like a very good deal, which becomes not nearly as generous the older I get, and there is no guarantee how long I will have the chance. I want to try and make sure I don't panic-buy something that may not truly meet my needs, but unless there is something I am missing it seems like it could fit nicely into my retirement plan.
They certainly do provide a good return if I live a long time, but even if taken 8 years early (at age 60) with actuarial reduction applied, I would break-even for post-tax cost vs post-tax pension income before I even reached my normal retirement age, and everything thereafter would be a bonus. I could of course die prematurely, but provided I bought the additional pension with dependant cover it would not all be for nothing.

Thanks both for your comments, much appreciated.

Thrugelmir · 13 January 2019 at 10:57PM

Twoplus wrote: »

I don't think there's an easy answer, the way things are going in the pension world NHS pensions may no longer accept contributions in 10 years time and you may have to pay into a private pension.

Little point in dreaming up potential scenarios. Far better to spend ones time in focussing on what can influence and have direct control over.

In a similar vein worry about hitting the LTA when you actually get closer to it. Investments returns are an unknown quantity. If you happen to pay some additional tax by saving through a SIPP. So be it. You'll still have money available that you weren't expecting.

Never let the tail wag the dog.

atush · 14 January 2019 at 11:04AM

tibbles209 wrote: »

Hi Atush,

Thanks for your thoughts. I certainly have considered SIPP as a possible bridge, although because of the uncertainty as to how long I will work part time, how long I will be a salaried GP for, whether I will end up in a partnership (likely) and how profitable it will be etc. it is very hard to predict with any real accuracy what my eventual NHS pension will be, and how much room I would therefore have in my LTA for SIPP investments. I do worry that there would not be enough room to invest enough to cover the full 5 years until my NHS pension.

You may well be right, but could you give me your thoughts on why this would be preferable to the Additional Pension idea above? I'm just struggling to weigh the two up against each other.

I am unconvinced that buying added years, that you take early/reduced is good value for the money.

Buying added years that you Wont take early/reduced can be a good idea.

ChopperST · 14 January 2019 at 11:14AM

In a very similar situation. I have 13 years in the 1995 scheme and 5 in the current scheme. State pension age is 68. After much toiling I decided a SIPP was the way forward as my OH only works part time to look after our two young children I have also taken advantage of reducing my ANI to keep child benefit (appreciate you are in a different situation).

40% relief swung it for me, it also added some diversification away from the NHS pension should it change in the future. I would like to have the option of retiring at 58/60 similar to many of my peers who currently retire at 55 now on the older schemes. However I do feel that I would like to do something (just not full time) so I see the SIPP as buying me choices in my late 50's that the NHS scheme simply would not.

Good luck whatever you decide.

NHS additional pension to offset early retirement actuarial reduction

Comments

Categories

Get our FREE Weekly email full of deals & guides - and it’s spam-free