The Pension Cost of Working Longer
The British Medical Association has recently published a modeller of Dr Tony Goldstone’s that illustrated the financial cost of working longer. The piece is entitled “Peri-retirement modeller for those aged 59+ on the 1995 NHS pension.”
It seeks to highlight how you can shoot yourself in the foot by carrying on working. Whilst this sounds counter-intuitive, you can end up with a lower pension by working longer. It’s mainly to do with current economic conditions.
The modeller examines final salary type arrangements for NHS Consultants who have already reached the normal retirement age in the 1995 scheme of 60.
Assume current pensionable pay of £110,000 and 35 years of service and that gives you a 1995 pension, at 35/80ths, of £48,125. After 31 March 2022, no further service will go into the 1995 scheme, but a final salary link will remain.
NHS pay is expected to go up by 2% this year, so, if the pension were taken in 2023 rather than 2022, the pension based upon £112,200 of pay would be, at 35/80ths, £49,088.
If the pension had been taken now, however, it will receive an index-linked cost of living increase next year.
With inflation currently running at 7%, expected to hit double digits later in the year, the increase to an in-payment public sector pension next year will be quite high. Even supposing it remains at 7%, the £48,125 pension is taken now will increase to £51,494 in 2023; more than the £49,088 it would be if the pension had not been drawn until next year.
There are lots of caveats around this. By staying in the scheme for another year you will earn the year of the 2015 scheme pension. That, however, would attract a significant early retirement reduction if you wanted to draw it at the same time as your 1995 benefit, would cost another year of contributions, subject to tax relief, and may also exacerbate a Lifetime Allowance issue.
Conversely, the lump sum from deferring the 1995 pension for a year will increase. But, then again, if you take the pension, you could invest the lump sum and potentially have a decent investment return. And there are further significant complexities if you want to build in early retirement factors and Annual Allowance pension tax charges.
Any form of model used to predict pension positions in the future is going to be subject to the assumptions used within it and can never be a substitute for taking the right advice from specialist healthcare independent financial advisors and tax advisors.
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