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This NHS pension age revelation has blown up our financial plans
With NHS pensions back in the news, Mouthy Money decided to look at how the system works. The findings have completely changed editor Edmund Greaves’s long term plans because of the NHS pension age.
I have been pretty complacent about our retirement plans, until I discovered the NHS pension age. For clarity, I don’t get one. But my wife, Ellyn, who is a nurse, does.
Since I’m the money guy in our relationship, I’ve often bugged her to hear more about how it works, being admittedly very limited in my own understanding.
But now, Mouthy Money has taken a deep dive into how the NHS pension system works. You can read the full guide here.
What I found has shocked me (and spurred Ellyn to show me the details in her app!).
State pension Ponzi
I am fairly openly critical about how the state pension works. For me, it is little better than a Ponzi scheme, with current taxpayers paying the benefits of past taxpayers.
It is very misunderstood in that many think there is a pot of cash somewhere the Government is squirreling away for you. This is false.
All that to be said, this creates an issue for the Government, especially given the ‘triple lock’ which guarantees the state pension will increase in line with either inflation, wage growth or 2.5% – whichever is higher – each year.
This in effect builds in unsustainable increases to the system.
The Government is obliged every six years to check on the sustainability of the system. We reported on that here. This is supposed to be a broad-based review of how the benefit is working and how sustainable it is.
But the problem here is that there are four options (that I am aware of) which are the most effective ways of making the system more affordable. Those include:
- Means testing. For instance, taking the top 10% wealthiest retired households out of eligibility would save billions straight away and these households would barely notice.
- Abolish the triple lock. This would make future increases more sustainable as it would then (hopefully) match something singular like inflation. Although arguably this might not go far enough.
- Transition the system away from intergenerational transfers. This would mean creating actual savings pots that people could tap into on retirement. It would be the most effective (and honest) way of reforming the system but it would take time and would probably lead to some disappointment.
- Raise the state pension age so young people get it a lot later.
Can you guess which they (have already several times) will pick?
NHS pension age
So why the meander through state pension reforms, Ed? Well, it turns out that the post-2015 NHS pension system is linked to state pension age. I.e. My wife will only gain access to her pension when she turns 68 (according to her app).
And if the Government review concludes that the age needs to increase because of its affordability problems, then it is possible she could have her access age set even higher.
That the sheer political cowardice of consecutive Governments could come back to haunt us in 25 years, unless we do something now, makes my blood boil. If you’re reading this, it should make yours too because they are stealing from Peter to pay Paul.
In either case, this would be devastating for our long-term retirement plans as they exist now. It means that she will have to potentially work a lot longer than she might want. If she wants to retire earlier, as things currently stand, she will have to rely on MY pension to do that.
Unfortunately too, we won’t know how much pension Ellyn will get until she decides to retire, as NHS pensions are “career average”. This means that they take the average amount she earns over her entire career and divides it by a number.
That, in turn, means my pension is going to have to work a LOT harder to achieve this, on a potentially shorter time frame than I would have liked. It’s pretty devastating to be honest. As such, we have had to reevaluate our entire long-term plan.
The good news is there is something we can do. We are going to set up a SIPP for her to start contributing toward. This we’re going to aim for around £100 a month. Over 25 years with tax relief and compounding, this should be a pretty good nest egg for her.
In turn, I am going to begin dialling up my contributions. My pensions are already looking healthy at around £40,000. I don’t want to start assuming annual compound growth rates and predict a figure for 25 years hence but this is a decent jumping off point.
Initially I did think that using our Lifetime ISAs (LISAs), which we still have from our home purchase, might be a good alternative. But the big problem with that is you can’t contribute any more to your LISA after you turn 50, then you can’t access that money until age 60.
With SIPPs (and my workplace pension) at least that capital will do the work up front for the next 25 years.
Finally, if you work in the NHS, I urge you to get to grips with your pension. It is very complicated unfortunately. If you’re like us, you might want to think about what you can do to ensure you’re not left waiting years extra to retire.
Disclaimer
This article is produced for general informational purposes only. It should not be construed as investment, legal, tax or other forms of financial advice.
If in any doubt about the themes expressed, consider consulting with a regulated financial professional for your own personal situation.
Past performance is no guarantee of future results. Investments can go down as well as up and you may get back less than you started with.
Investments are speculative and can be affected by volatility. Never invest more than you can afford to lose. For more information visit www.fca.org.uk/investsmart
