Welcome to Part II of our series on the NHS Pension. In Part I we kept things simple, demonstrating how your salary both pays the ‘membership cost’ of belonging to the scheme and dictates how your pension grows. This time, we’ll look at how your money grows in the pension and what you can expect out at the end.

**Inflation and revaluation**

Do you remember eating Freddo bars when you were younger? When we were still young whippersnappers they cost 10p each. Imagine our dismay when we learned they now cost 25p. In 30-odd years, the price of a Freddo bar has risen by 150%. This is an example of inflation: the price of objects rises over time.

Put another way, the purchasing power of your money falls over time. With £1 in the early 90’s you could buy ten Freddos, but £1 now will only buy you four. In the ‘classical’ pension of Part I, the pension pot was invested to make its value grow over time – this is partly to counteract the effect of inflation. The NHS pension has a different tool to do this: *revaluation*. Let’s rope in Dr. Diane from Part I again to demonstrate the effect of this:

**Example 1 (No revaluation)**Dr. Diane earns £54,000 in pensionable pay. In a single year (e.g. 2019) her annual pension grows by 1/54

^{th}of her pensionable earnings = £1,000.

When Diane retires in the future, the pension amount from 2019 will start to be paid out. This would be £1,000/year.

If she had worked for 40 years at the same salary, she would be paid a £40,000/year annuity.

It sounds pretty sweet, right? It is, but we’ve already seen above that money is worth *less* in the future because of inflation. In fact, you can work out that Diane’s £40,000 annuity in 2059 only has the equivalent purchasing power of between £15,000 and £20,000 [assumes 1.5% annual inflation]. Diane’s annuity would have to be £56,000/year in 2059 to actually have the equivalent purchasing power of £40,000.

To combat this, the annual amount you generate as pension is increased (‘revalued’) according to the *revaluation rate.* This rate is defined as: inflation(%) + 1.5%. Let’s see what happens when we apply that to Diane…

**Example 2 (With revaluation)**Dr. Diane earns £54,000 in pensionable pay. In a single year (e.g. 2019) her annual pension grows by 1/54

^{th}of her pensionable earnings = £1,000. As the rate of inflation in 2019 is 1.5%, the revaluation rate is 1.5% + 1.5% = 3%.

Her £1,000 undergoes revaluation for the year 2019 and is thus worth £1,030. This happens to that money

*every year*such that in 2059 that £1,000 is now £3,260.

The revaluation occurs for all 40 years’ worth of pension she generates. In 2059 her annuity is £72,230/year.

You can see the drastic difference this makes and it also beautifully demonstrates the power of compound interest. The good news is that this all happens in the background without you knowing! Don’t forget that you’ll pay tax on your annuity, so you won’t see 100% of it entering your bank account come retirement time. It’s still nice to know that your pension will be growing faster than the rate of inflation so will have maintained, if not improved, its purchasing power come retirement.

**Show me the money, Jerry!**

You hopefully now have a better grasp on how the annuity you can expect from your NHS pension is generated. The thing you’re probably itching to know is: how much will you get when you retire? Unfortunately, the answer to this is not as clear cut as we’d like it to be. There are so many variables that will affect the annuity for any one person: place of work (England, NI, Scotland or Wales), age at starting, inflation during your career, training programme, retirement age and lump sum value to name a few. It’s impossible to provide a one-size-fits-all answer. Even running the numbers for the predicted MedFI journey, the figure that comes out at the end has a fair variation to it. There are, however, a few things that you can do to find out a bit more.

You can see what your actual, bona fide, up-to-date pension amount is by logging on to your total reward statement. It will show you how much annuity you’ll be paid come retirement, as well as some other helpful figures. It only shows you what you’ve generated so far and, if you’re at the early stages of your career, it might seem pitifully small. It also doesn’t help you predict your future pension, though as you approach your planned retirement age it will become more useful. You can request an estimate of your hypothetical pension benefits, which may give you more of a number to hang your hat on, though it will cost you £75-£120 for the privilege.

Another helpful tool is this NHS Pension calculator. It won’t show you a total annuity for your whole career, but will show you an annual amount generated for a given salary (/stage of training). As an aside, you should check out the entire junior doctor finance website, an excellent resource for improving your financial literacy as an NHS employee. Another thing you could do is to speak to a professional financial advisor, ideally one well versed in the intricacies of the NHS Pension.

**When will I get my pension?**

You will be able to claim your full NHS pension when you reach State Retirement Age. This is not necessarily a fixed age, and we suggest checking using either Which?’s calculator or the government’s calculator to find out for yourself. For most it will be somewhere between 65-68yrs, although the actual age may change in the course of time. Ill health and redundancy are two circumstances in which you can claim your pension earlier. There are also differences to your pension if you voluntarily decide to claim it early – more on this in Part III!

**Starting to come together**

That’s a wrap on Part II of our NHS Pension series. You now know how your pension is generated from your salary and how it is revalued to outstrip the inflation rate. We’ve provided some tools to try and gauge how much you might get in retirement and also when you can start claiming your pension. In Part III, we’ll move on to some considerations for FI(RE) with regards to the NHS Pension.

TTFN,

Mr. MedFI

Massive thanks for tackling such a complex topic Med FI.

I’m basically trying to get a global picture of our finances (work pensions, ISAs, LTDs, wife accounts etc). Given the high contributions to the NHS pension scheme and the alarming drop off rates (16%), the ultimate question is: “Is NHS pension worth paying?”

So explaining at least how the scheme works is super useful. Based on my chats with NHS people, I think NHS has room for improvement when it comes to educating the staff on their pension benefits.

Is the NHS pension better than investing in a personal pension? My intuition tells me yes but have you run the math by any chance?

My (very quick) take:

If we assume a £54,000 salary, and contribute to a SIPP instead (12.5%, so £6,750 per year) for 40 years, and a (nominal) annual return of 7%, we end up with £1.4m at retirement age.

I’m not sure how to value an annuity, let alone in 20-40 years from now. But according to the 4% rule of thumb, £1m in invested assets should be able to produce a £40k income for 30 years. It also gives you the inheritance option.

Having said that, NHS gives you an annuity which is guaranteed and needs zero maintenance. Also, who knows if the market gods will return a 7% (~5% real). A 5% nominal return leaves us with just £840k after 40 years.

Furthermore looks like NHS pays some inheritance if you get hit by a bus after retirement (within 5 years). Tough question! So many assumptions here and thanks for the inspiration 🙂

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Massive thanks for tackling such a complex topic Med FI.

I’m basically trying to get a global picture of our finances (work pensions, ISAs, LTDs, wife accounts etc). Given the high contributions to the NHS pension scheme and the alarming drop off rates (16%), the ultimate question is: “Is NHS pension worth paying?”.

So explaining at least how the scheme works is super useful. Based on my chats with NHS people, I think NHS has room for improvement when it comes to educating the staff on their pension benefits.

Is the NHS pension better than investing in a personal pension? My intuition tells me yes but have you run the math by any chance?

My (very quick) take:

If we assume a £54,000 salary, and contribute to a SIPP instead (12.5%, so £6,750 per year) for 40 years, and a (nominal) annual return of 7%, we end up with £1.4m.

I’m not sure how to value an annuity, let alone in 20-40 years from now. But according to the 4% rule of thumb, £1m in invested assets should be able to produce a £40k income for 30 years.

Having said that, NHS gives you an annuity which is guaranteed and needs zero maintenance. Also who knows if the market gods will return a 7% (~5% real). A 5% return leaves us with just £840k after 40 years.

It’s good that NHS leaves some inheritance money behind if you get hit by a bus (albeit only within 5 years of retiring).

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Thanks for your comment! I agree that there’s definitely room for improvement in staff education on the NHS Pension, hence the series!

I think the short answers to your question for us at MedFI are: yes it is worth paying into the NHS Pension. Obviously this might be different depending on an individual’s circumstances. We’ll be making an NHS Pension vs SIPP post in the future so keep your eyes peeled for that one.

The returns on a SIPP are indeed more unpredictable – the (2015 Scheme) NHS Pension guarantees you an ‘investment’ that will outstrip the CPI by 1.5% p.a., which isn’t too shabby in the grand scheme of things.

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