Welcome back for the fourth and penultimate part in our series on the NHS Pension! Having already seen how your pension begins, grows and ends, this segment is aimed at how you can get more money from your NHS pension. There are a few ways of “boosting your pension position” and they each come with an unhelpful business-y name and associated acronym. Some options aren’t available to 2015 Scheme members. For those that are, we’ve provided a single-sentence summary of what the option means followed by a more fleshed-out explanation below.
1 – Buying Additional Pension (AP)
‘I pay the NHS Pension scheme a set amount of extra money now in exchange for a set amount of extra pension in retirement’
In this option, you choose how much additional pension you want up to a maximum of £6,500/year (and in £250 steps i.e. you can’t pay for £3,497.12, you’d have to pay for either £3,250 or £3,500). You can buy this option by either making a single payment or staggering your payments over a period of up to 20 years. How much this will cost you is incredibly variable, so we recommend checking out the additional pension calculator. Have a play with the numbers to see how much extra pension costs.
Of significant note, the additional pension you purchase does not undergo revaluation at the same rate as the rest of your pension – it is only increased by the rate of inflation each year. The additional pension you buy is also subject to reduction if you retire early. For more info. there’s advice from the NHSBSA and the BMA.
Dr. Dave wants to have an extra £5,000/year annuity in retirement. He therefore decides to buy additional pension. This will cost him £37,200 as a one-off payment,
Or £8,304/year for 5 years,
Or £4,608/year for 10 years,
Or £2,808/year for 20 years.
2 – Making Money Purchase Additional Voluntary Contributions (MPAVC’s)
‘I pay a company extra money now that is invested, and I’ll get an unknown amount of extra money later’
AVC’s are not quite as easy as 1, 2, 3. In exercising this option, you’ll first choose which provider you’d like to give your money: Standard Life or Prudential. Next you decide how much you’d like to contribute on a monthly basis (£20 minimum with Standard Life, £1 minimum with Prudential). Finally you decide which of the company’s funds you’d like the money invested in. This method of garnering extra pension is very similar to the ‘classical pension’ we touched on in Part I. Come retirement, you can take 25% of the pot you’ve generated through MPAVC’s as a tax-free lump sum. The rest is used to generate extra annuity.
The major benefit to this option is the tax savings you gain, though you still have to wary of the annual and lifetime allowances. One downside is that, as your money is being invested, you can in theory lose money over time. Furthermore, the fees charged by both Standard Life (0.95% – 3%) and Prudential (0.6% – 1.2%) for their funds are exorbitant when compared to some of the popular all-in-one fund choices.
3 – Entering an Early Retirement Reduction Buy Out (ERRBO)
‘I pay the NHS Pension scheme a set amount of money now in exchange for more pension than I would have otherwise received when I retire early’
This is only useful if you plan on retiring early which, by virtue of reading this blog, you might very well be. As you’ll recall from Part III, claiming your pension early brings with it a percentage reduction in annuity. The ERRBO allows you to mitigate this by buying out some of the reduction that would be applied when you retire early.
The way you do this is by paying more in pension contributions. In Part I we discussed how pension contributions are a percentage of your salary. If you enter an ERRBO agreement, you simply increase this percentage. How much it increases depends on how old you are when you enter into your ERRBO and how many years early you plan on retiring. The scale can be found here. You’ll notice that you can only buy out 3 years’ worth of reductions, so if you plan on retiring earlier than that then you’ll still suffer some reduction.
Dr. Diane is 38 and plans on retiring at 65, 3 years before her state retirement age. Her annuity would be £50,000/year if she retired at 68, but will be reduced to £42,000/year if she retires at 65. In order to mitigate this reduction she enters into an ERRBO. She therefore pays an additional 4.41% of her pensionable salary each month such that when she retires at 65 her annuity will be £50,000/year.
Options, options, options
It’s perhaps a bit difficult to pick which, if any, of the options for garnering more pension is right for you. They’re also not mutually exclusive – you can purchase additional pension and an ERRBO if you like. Part of the problem with any of them is their restrictiveness; you’ll tie up your money in a savings vehicle that you can’t access until 55 at the earliest. Our thought at MedFI is that if we want extra money in retirement there are alternative ways of saving that provide slightly better flexibility, if not the tax benefits too. As ever, whether you decide to buy more pension or not will be a personal decision and our aim is to simply make you aware of the options – now you know! Next time we’ll be releasing the final part of our series, which will cover the NHS Pension in differing circumstances.