I work in the NHS. How can I boost my retirement savings?

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Ask the experts. Rachel Vahey is here to answer questions on pensions. If you’d like a question considered for a future edition send it in now.

Or alternatively leave a rating for the article and include your question in the comment box.

I work for the NHS, and I want to know how best to save alongside my NHS personal pension?
I have a Lifetime ISA which I aim to fill over the year but many people I know (outside the NHS) also have SIPPs. Within the NHS we have access to an ‘AVC scheme’ for Additional Voluntary Contributions. 

Would this be a good way for someone in the NHS wanting to put additional money aside for retirement? Are there benefits of one over the other?

Adam

 

Rachel Vahey, AJ Bell Head of Public Policy, says:

The NHS pension is a valuable way to save for retirement. As a defined benefit workplace scheme, it will provide an income from your pension age of 67, based on your salary and how long you have been a member. This should provide a good retirement income, but it is worth considering whether you need to save more. You may want to increase your income in retirement or retire early, using additional savings to bridge the gap until your NHS pension or state pension begins.

Balancing pensions and other savings vehicles

  • An NHS pension is valuable, but you may want extra savings for more income or earlier retirement.
  • Buying extra NHS pension will often provide the best guaranteed income and includes inflation protection.
  • An NHS MPAVC builds an invested pot, usually used to buy an annuity.
  • A SIPP also builds an invested pot but offers more choice and flexible withdrawals.
  • Compare charges, investment options and access rules. Watch the £60,000 pension annual allowance.
  • ISAs offer tax-free, flexible savings alongside pensions.

 

The NHS offers different ways you can increase your pension. If you’re an active member of the 2015 scheme, then you can buy extra annual pension with either a single one-off payment or by paying regular monthly payments for an agreed period. This extra pension can be just for you, or it can also be paid to your dependants after you die. You can ask the NHS pension scheme for more information of how much it would cost to buy some extra pension.

Boosting your NHS pension is often the better route

The actuarial assumptions made when pricing this extra pension, with its built-in inflation increases, mean that if you want to maximise retirement income, in most cases, buying extra NHS pension, is the better route. The costs are based on your current age, and so will increase with age. The costs will be taken from your salary and will get full tax relief at the point of payment.

If, on the other hand, you’re looking for a pool of capital at retirement you could pay into a money purchase additional voluntary contributions (MPAVC) fund where your contributions will be invested. You can access your pension from age 57 (from April 2028) and take up to 25% of the fund as a tax-free lump sum (in addition to the lump sum you get from your main pension). The rest is used to buy you an annuity which pays a guaranteed income alongside your main NHS pension income.

You could also pay into a personal pension such as a SIPP. Like an MPAVC, this builds a pot of invested money. However, rather than using it only to buy an annuity, you could also take flexible drawdown withdrawals when needed. This gives you greater control over your retirement income, but you would be responsible for managing the investments both while building the pot and when taking money from it.

When comparing an NHS MPAVC with a separate SIPP, compare the charges, investment choices on offer and the options available when you access your pension.

Remember to watch how much you are paying in. The annual allowance is £60,000 a year and covers the total increase in the value of your pensions. This includes the increase in your NHS pension, which your provider can confirm, as well as your contributions to an MPAVC or SIPP and the tax relief added.

You can also choose an ISA to save for later life. You are already saving in a Lifetime ISA which gives a 25% bonus on money paid in (up to a maximum £1,000 bonus). You can’t access this money before 60 without paying a 25% penalty, unless you are buying your first home.

Making use of another ISA

You could also use an adult ISA to save or invest in. You won’t receive any tax relief on the money paid in, but the money you take out will be tax free and can be accessed at any time. You can pay up to £20,000 a year into ISAs, including your Lifetime ISA payment which can be up to £4,000 a year.

All these options offer something a bit different. But you can mix and match, certainly when it comes to saving in a pension alongside an ISA.

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Rachel Vahey

Rachel Vahey: Head of Public Policy

Rachel is AJ Bell's Head of Public Policy. She helps financial advisers and planners understand the changing pensions and savings environment, as well as how new legislation and regulation affects them and their clients.

Rachel...

These articles are for information purposes and should only be used as part of your investment research. They aren't offering financial advice, so please make sure you're comfortable with the risks before investing. Tax benefits depend on your circumstances and tax rules may change.