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  • FIRST POST
    • Maelwys
    • By Maelwys 20th Jun 15, 5:07 PM
    • 143Posts
    • 94Thanks
    Maelwys
    2015 NHS Pension Scheme - ERRBO
    • #1
    • 20th Jun 15, 5:07 PM
    2015 NHS Pension Scheme - ERRBO 20th Jun 15 at 5:07 PM
    I'm looking for a spot of advice about one of the new "features" of my pension scheme... the scheme advisors themselves have thus far been less than helpful; and other than a Similar Civil Service Pension thread at http://forums.moneysavingexpert.com/showthread.php?p=68165295 there doesn't appear to be any discussion about this on MSE, so here goes...

    The NHS Pension scheme is a Defined Benefit Scheme, and is usually considered a pretty good one.

    The 2015 version of this scheme came into force a few months ago. and one of the differences is that this version tracks an individual's STATE PENSION AGE rather than defining a specific retirement age (this was 60 or 65 with the previous versions of the scheme) and like all versions of the scheme, it imposes heavy actuarial reduction factors on your pension if you retire before this.

    However, the scheme allows for Early Retirement Reduction Buy Out (ERRBO) - a mouthful of an acronym which basically translates to you voluntarily paying an extra percentage of your wage each year to reduce the actuarial reduction on that year's worth of pension contributions.

    So, for example, if your State Retirement Age is 68, you can pay an extra few % of your salary per year and retire at 65 with no Actuarial reduction.

    - - - - - - - - - - -

    I've been trying to work out if applying for ERRBO would actually be worth it for me.

    Part of the problem is that there are no automated comparison tools, and the information about how it works is quite scattered (anyone I've talked to internally about it hasn't a clue how it works)... so I've been having to piece things together myself with numbers taken from the various files at http://www.nhsbsa.nhs.uk/Pensions/4017.aspx as well as the Actuarial Reduction tables at http://www.nhsbsa.nhs.uk/Documents/Pensions/2015_VER-ARER_factors_V3.pdf

    The closest thing I've found to a working calculator for the pension scheme itself is at http://dh.firstactuarial.co.uk/default.aspx

    Thus far, plugging in my numbers seems to suggest the following:
    + A basic Band 5 Salary currently tops out at 27901.
    + Each year in the scheme will give 1/54th of this, or 516.69 worth of extra yearly pension.
    + The pension tracks CPI plus 1.5%, which is (very roughly) an average of 4.21% per year over time.
    + So if I have 35 Years left to run before my SPA, this 516.69 would become (very approximately) around 2188.04

    Normally if I retired 3 years early (65 instead of my SPA of 68) then this "amount added per year" figure would be actuarially reduced and become 2188.04*0.849 = 1857.64.

    But by applying the maximum (3 Years) ERRBO, this actuarial reduction would be negated - an effective boost of 2188.04-1857.64=330.39.

    That's yearly pension added, so the equivalent lump sum would work out at 330.39*12=3964.72... so by paying for 3 Years worth of ERRBO now I would expect to get (very roughly) around 3964.72 back in 35 years time.

    Given my age and tax bracket, paying for 3 Years worth of ERRBO would currently cost me 850.42 (NET) per year. So that's 850.42, after 35 years, becoming worth a lump sum of roughly 3964.72... or the equivalent return of around 4.5% yearly compound interest.

    But to make matters more complicated, once you start a ERRBO agreement, it automatically carries forward into subsequent years and once you terminate it you can't restart it later. So the above is very likely the "ideal" situation - each subsequent year as I get closer and closer to retirement age, the benefit for me would get lower and lower due to that CPI-plus-1.5% tracker having less time to work its magic.

    Would I be wrong in thinking that ERRBO is a bad deal if I'm the only one covering the extra contributions, considering that I could (very probably) make a greater return than 4.5%-per-year in a private Stocks and Shares ISA or SIPP?
Page 1
    • xylophone
    • By xylophone 21st Jun 15, 12:04 AM
    • 27,645 Posts
    • 16,610 Thanks
    xylophone
    • #2
    • 21st Jun 15, 12:04 AM
    • #2
    • 21st Jun 15, 12:04 AM
    You've seen this?

    http://www.nhsbsa.nhs.uk/Documents/Pensions/Early_retirement_reduction_buy_out_(ERRBO)_factshe et__(V1)_02.2015_Final.pdf

    Might you prefer the flexibility of a SIPP or other personal pension?
    • Maelwys
    • By Maelwys 21st Jun 15, 2:45 AM
    • 143 Posts
    • 94 Thanks
    Maelwys
    • #3
    • 21st Jun 15, 2:45 AM
    • #3
    • 21st Jun 15, 2:45 AM
    Yeah, that's an earlier version of this Factsheet from the first site I linked.

    It gives examples and a list of the annual contribution rates for 1, 2 or 3 years EERBO (and is where I got that 850.42 cost-per-year figure I used above- 3.81%[modifier]*27901[pensionable pay]*0.8 [basic rate tax]=850.42)

    However like the new comparison sheet that was released earlier this month, it just gives you a list of figures - it doesn't actually give you all the information needed to work out how much return you're actually getting for your money.

    Looking at it from another angle: I essentially have the option to pay 1.016% of my salary to bring this year's pension contributions down 1 Year's worth of Actuarial Reduction. If I started claiming my pension a year earlier, this would give me a 5.71% boost (due to the AR modifier of 0.946%) to whatever this year's pension contributions are. So for my pensionable salary of 27901 I'd be paying 283.47 for 27901/54*5.71%=29.49 extra pension annuity. Since 29.49 annuity is directly convertable to a lump sum of 353.92, I'd basically be paying 283.47 now for 353.92 at retirement (before the CPI+1.5% tracking)

    Or in other words, (353.92-283.47)/283.92=24.85% extra free money.

    Which sounds good when I put it like that, but I'd have to wait 35 years to get my hands on it... and tax at drawdown would eat into that considerably... and growth at (CPI + 1.5%) isn't all that high when compared to other long term investment opportunities...

    Might you prefer the flexibility of a SIPP or other personal pension?
    That's pretty much what I'm thinking -

    I have a private SIPP at the moment, I'm just trying to pin down whether it's more cost effective to use it until I'm 68 (with no ERRBO), or until I'm 65 (with ERRBO).

    If paying extra for ERRBO is going to be a poor investment return then I'll just use my SIPP to tide me over completely from the point I decide to retire until I hit my SPA and the NHS pension kicks in...
    Last edited by Maelwys; 21-06-2015 at 3:31 AM. Reason: [Math Mixup. If A*0.946=B, then A is 5.71% greater than B, not 5.4% greater!!]
    • ranvinder
    • By ranvinder 29th Jul 15, 2:59 PM
    • 8 Posts
    • 1 Thanks
    ranvinder
    • #4
    • 29th Jul 15, 2:59 PM
    Hi
    • #4
    • 29th Jul 15, 2:59 PM
    What did you decide on this? I am currently looking into this and wondered..?
    • Maelwys
    • By Maelwys 29th Jul 15, 5:47 PM
    • 143 Posts
    • 94 Thanks
    Maelwys
    • #5
    • 29th Jul 15, 5:47 PM
    • #5
    • 29th Jul 15, 5:47 PM
    What did you decide on this? I am currently looking into this and wondered..?
    Originally posted by ranvinder
    Well, continuing on from "I'd basically be paying 283.47 now for 353.92 at retirement" (This will be slightly different from person to person, since ERRBO contributions depend on your age, so plug your own numbers in!)...

    ...if I apply the tracking figure of CPI + 1.5% to [353.92] over the 35 years I have until my SPA (CPI historically has averaged around 2.71% over the past few decades, so I'll take it for granted that this trend continues and assume an average total tracking figure of 4.21% per year) then upon retirement I would end up with an extra 1649.73 worth of pension. For my initial [283.47] to end up being worth [1649.73] in 35 years time would equate to an annual compound interest rate of 5.161%.

    So I'd effectively be getting 5.161% return on my money per year.

    5.161% is very good for a LOW RISK investment. It's a better return than today's best savings accounts will give you (although in the future it might not be, and average CPI might be higher or might be lower than my assumed figure of 4.21%). However, over a 35 year period you could likely beat this rate comfortably by investing the same amount of money in a good S&S ISA portfolio. And for a time horizon of 35 years, I personally am open to taking a little higher risk for a little higher return.

    Basically, after weighting it all up, I pretty much decided that I'd rather stick the extra money in a mixture of Stocks&Shares and P2P lending and then migrate it into a SIPP later on once I hit 55. That way I can control how much risk my investment is exposed to as time goes by - and very likely beat the return I'd get by going down the ERRBO route.

    That said, if you can get your employer to offer to contribute towards your ERRBO reductions, it'd probably be a good idea to take them up on it. Free money is Free money after all!
    Last edited by Maelwys; 29-07-2015 at 5:51 PM.
    • neilvw
    • By neilvw 29th Jul 15, 6:54 PM
    • 462 Posts
    • 225 Thanks
    neilvw
    • #6
    • 29th Jul 15, 6:54 PM
    • #6
    • 29th Jul 15, 6:54 PM
    The Bank of England is tasked with keeping CPI inflation around 2% on a two-year time horizon, so really the revaluation by CPI+1.5% should be producing 3.5% p.a. if the BoE is doing its job right. (Granted they overshot big for a few years and are now undershooting big!)
    Last edited by neilvw; 29-07-2015 at 7:00 PM. Reason: minor edit
    • EJS_Superted
    • By EJS_Superted 22nd May 16, 1:21 PM
    • 79 Posts
    • 54 Thanks
    EJS_Superted
    • #7
    • 22nd May 16, 1:21 PM
    • #7
    • 22nd May 16, 1:21 PM
    I am also considering this. As an ambulance worker I qualify for 50% employer contribution towards the cost of ERRBO so I figure I should be considering it seriously.

    What I don't understand is the contribution rates. They increase the closer to retirement age you are when you choose to take the option but not by much. I'm age 30 and if I took the option now I would have to contribute an extra 3.75% or my salary every year until I retire to retire 3 years early. If I waited until I was 60 I would have to contribute 4.65% per year but I would save 30 years of contributions for only a very small increase in yearly cost. So surely its far cheaper the later you apply. I feel like I must be misunderstanding something but I don't know what. Can anybody help please?
    • hugheskevi
    • By hugheskevi 22nd May 16, 6:44 PM
    • 2,075 Posts
    • 2,645 Thanks
    hugheskevi
    • #8
    • 22nd May 16, 6:44 PM
    • #8
    • 22nd May 16, 6:44 PM
    I'm age 30 and if I took the option now I would have to contribute an extra 3.75% or my salary every year until I retire to retire 3 years early. If I waited until I was 60 I would have to contribute 4.65% per year but I would save 30 years of contributions for only a very small increase in yearly cost. So surely its far cheaper the later you apply. I feel like I must be misunderstanding something but I don't know what. Can anybody help please?
    The thing you are missing is that you only get the lower pension age on the part of the pension accrued when you were paying the higher contributions.

    So if you started contributing at age 60, you would only have the reduced pension age on the portion of pension accrued after age 60, not the whole pension.
    • DPurnell
    • By DPurnell 9th Jul 16, 10:10 AM
    • 2 Posts
    • 1 Thanks
    DPurnell
    • #9
    • 9th Jul 16, 10:10 AM
    Errbo
    • #9
    • 9th Jul 16, 10:10 AM
    I think ERRBO is a joke. You are better off putting your contributions in a stakeholder pension. You will make slightly less (assumed stakeholder increase 3.5%), but you have the flexibility of being able to draw at what will be the earliest retirement age (prob going to be 58/59) and importantly if you have family and fall off your perch they will get the private pension pot tax free. The ERRBO contributions amount to nothing should you cease to exist prior to reaching state pension age minus the ERRBO years.

    It is wise with the new pension reforms (i'm on 2015) to have a mix of public\private. Public for great returns upon retirement and private/cash savings to get out early and cover the gap in years. I certainly can't envisage working until I'm what will likely be retirement age of 69,.
    • Flightchecker
    • By Flightchecker 10th Dec 16, 2:37 PM
    • 4 Posts
    • 0 Thanks
    Flightchecker
    Nhs
    This is super expensive ,I once use sppa calculator for my NHS sppa ,it came like thousands to pay just for retiring 1 year earlier, too expensive ,before 2008 you could pay extra to get bigger pension now it is all changed .
    • hyubh
    • By hyubh 10th Dec 16, 3:27 PM
    • 2,317 Posts
    • 1,778 Thanks
    hyubh
    before 2008 you could pay extra to get bigger pension now it is all changed .
    Originally posted by Flightchecker
    New added years contracts ended in 2008, replaced with a non-salary linked additional pension option. The latter still exists - ERRBO is just another (more complicated!) option alongside.
    • louloubelle79
    • By louloubelle79 9th Aug 18, 10:28 PM
    • 374 Posts
    • 198 Thanks
    louloubelle79
    Thanks this is useful
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