May 1, 2025 • 22 mins
If you’d like to discuss your finances with a professional, you can connect with Luke here: https://www.viderefinancial.com/contact
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Get your free verifiable CPD for this episode here >>> https://www.dentistswhoinvest.com/videos/how-the-nhs-pension-actually-works-with-luke-hurley
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The NHS pension is often misunderstood—but getting it right is crucial to your long-term financial wellbeing. In this episode, financial planner Luke Hurley demystifies the system and reveals how it fits into your wider retirement strategy.
Learn the real structure of the NHS pension scheme (hint: it’s not a savings pot!), how your benefits are calculated, and what’s changed in 2025. Luke walks through the key differences between the 1995, 2008, and 2015 schemes, explains the revaluation process, and shares vital insight on retirement age reforms, spouse benefits, and how this scheme supports your journey to financial independence.
Perfect for dentists in the NHS at any career stage—and don’t forget, verifiable CPD is up for grabs via the link in the episode description.
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Disclaimer: All content on this channel is for education purposes only and does not constitute an investment recommendation or individual financial advice. For that, you should speak to a regulated, independent professional. The value of investments and the income from them can go down as well as up, so you may get back less than you invest. The views expressed on this channel may no longer be current. The information provided is not a personal recommendation for any particular investment. Tax treatment depends on individual circumstances and all tax rules may change in the future. If you are unsure about the suitability of an investment, you should speak to a regulated, independent professional. Investment figures quoted refer to simulated past performance and that past performance is not a reliable indicator of future results/performance.
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Dr James (00:00):
Hey everyone, welcome to this podcast on the NHS
pension.
We're going to cover how theNHS pension actually works, and
by that I mean the ins and outsand specifics broken down in
layman's terms.
I'm joined by Luke Hurley, whorepresents Videre Financial
Planning.
Luke shares his expertise andwisdom in helping thousands of
(00:20):
clients over the years withtheir NHS pension and also
modelling it from a cash flowperspective.
So looking forward to listeningin and learning.
I'm also super excited today toannounce a brand new feature for
the Dentists Who Investplatform, and that is free
verifiable CPD to all UKdentists who have enjoyed this
podcast episode.
Whenever you've finished theepisode, all you have to do is
(00:42):
click the link in the podcastdescription.
It'll take you right throughthe Dentists Who Invest website.
You'll be able to complete ashort questionnaire and, once
passed, you fill in yourreflections and we'll go ahead
and email over to you yourverifiable CPD certificate,
which is entirely free.
What that means is this podcastepisode will be able to
contribute towards yourverifiable CPD.
(01:02):
Hours during this learningcycle will be able to contribute
towards your verifiable CPDhours during this learning cycle
.
Luke, shall we go ahead and kickthings off?
Luke (01:11):
Sounds like a plan, James the NHS pension and your
financial plan.
So for me, it's alwaysimportant to have some context
and remember why we're doingvarious things, and that
includes saving into the NHSpension.
So if we take a step back froma financial planning perspective
(01:33):
and think, what's it all about?
Financial planning really isabout working out what your
vision is for the future, andfor most people, the number one
financial goal is ultimatelyfinancial independence.
So financial independence isthe point where you've got
enough money.
You're going to work becauseyou want to, not because you
have to.
You've accumulated all theassets and the resources that
will sustain your lifestyle forthe rest of your life without
(01:55):
the risk of running out of money, and it's key and same with all
things, to start with the endof mind.
So for most people, the bigquestion is how much do you
actually need?
What is the cost of yourlifestyle?
Will you have enough?
Will you run out of money?
The problem, I think, James, islifestyle is different for
(02:16):
everyone, isn't it?
Ultimately, I meet lots ofdifferent clients who have
different preferences in termsof how they spend their money
and different visions for thefuture.
So it's about working out whatyou're aiming for, what you want
to achieve and how much yourlife is going to cost from now
until, unfortunately, when youpass away.
(02:37):
So most people, with that inmind, unfortunately don't know
where to start.
But the simple place to startis to work out exactly what
you're spending now and beintentional about it and know
what your outgoings are and makesome assumptions for how that
will change in the future.
So start with what your, yourcurrent outgoings are.
Work out roughly what that youknow might might be throughout
(02:59):
various changes in life.
To give some context, there's a.
There's a national study that'sdone that looks at retirement
living standards across the UKand the last time I looked at
that, the so-called comfortableretirement was pinned at just
under £60,000 per annum net oftax.
So you're looking at 5k for ahousehold, that is, for a couple
(03:22):
to be spending 5K per month netof tax.
For UK standards that's seen asa comfortable retirement.
A moderate retirement is seento be £43,000 per annum and sort
of a minimum retirement which Ireally don't believe, to be
honest, because I don't know howanyone would survive is £22,500
(03:44):
per annum.
So that's actually less thantwo state pensions, which is not
a huge amount of money giventhe current cost of living.
So that's the national average.
Obviously, as I said,everybody's different on that
and it's really about knowingwhat your number is from a
financial planning perspective,what number you're targeting in
(04:05):
terms of being financiallyindependent, um to to sort of
move that forward.
What I was going to do, James,is quickly um show a very short
case study, um using somefinancial planning software, as
to where an NHS pension wouldfit in, um when we actually do
those retirement plans forpeople.
(04:26):
So on screen now.
Hopefully that's showing, is it, James?
Yeah, great.
So on screen now we have afinancial plan, very basic.
I've kept this extremely,extremely simple, and what we do
from a financial planningperspective is we draw up a
timeline for a client and wework out throughout the
(04:48):
different phases of life howmuch they need in retirement.
So for this client they've gotfive years until they wish to
retire at 60.
You've got the ages down thebottom here.
They're looking to spend£60,000, because that's the
national deemed comfortableretirement throughout phase one
of their retirement, which isfrom 60 to 80, and then we've
decided that they're going todrop that down when they're less
(05:09):
active.
In the later years, from 80onwards, they're going to spend
45 000 pounds per annum.
And then we've got some carecosts to this is a husband and
wife, a couple.
We've assumed that they're bothgoing to go into care,
unfortunately in the last fiveyears of life, and it's going to
cost 52,000 pounds per annum.
So a thousand pounds per weekper person, which is, uh,
unfortunately the going rate.
Um, that's that's, you know,that's somebody's timeline,
(05:32):
that's their goals, and thenwhat we want to do from a
planning perspective is work outwhat that looks like every year
for the rest of their life froma um, a cash flow perspective.
So've plotted that out.
This is the point at which theystop work at age 60.
Then you've got the first phaseof retirement.
(05:53):
And then you've got the dropdown where their spending
reduces as they become lessactive.
And then you've got phase twoand then the care costs.
And so where does the statepensions fit in to begin with?
So two state pensions, you'relooking at just under £12,000
per person per annum for a statepension.
So there's your first layer ofpassive recurring income in
retirement for this couple.
(06:14):
And then we've got an NHSpension.
So one of the clients here hasa 1995 section NHS pension,
fixed recurring income that'sgoing to hit their account every
year for the rest of their lifeto bring them up to the black
line, which is the 60k, as Isaid, and then dropping down to
45.
So this spike here is becausethe NHS pension, as many of you
(06:37):
will know, you can get a lumpsum out of it as well.
It's not just a recurringincome, and so you can see that
spike of money entering intotheir plan right at the outset.
So to begin with they're goingto be working, which is
employment, and then where arethey going to find the money for
the rest of their years ofretirement?
Well, they're going to have totap into their capital.
So when we're looking at doinga retirement plan for somebody.
(07:00):
We're looking at streams ofincome.
Let say, uh, state pension, asI mentioned, NHS pension, it
might be rental income, uh,that's the regular, uh money
that's going to flow into theiraccounts um, every year, for the
rest of their lives, hopefully.
And then also, what do they havein in the way of capital?
Sometimes I refer to that asthe reservoir in terms of money,
in ices savings, possibly, um,money purchase pensions, also
(07:23):
known, known as SIPs what dothey need to draw down on to
effectively meet that black line, that spending requirement for
the rest of their life?
And if they do that and there'sno red on the plan, which is
the case in this scenario, theclient's not due to run out of
money.
Ultimately, from a from a cashflow perspective, when we chart
(07:44):
their trajectory, the secondpart of the equation, of course,
is what does that look likefrom an asset perspective?
And when we look at the secondchart and I've plotted out their
investments and theirnon-liquid assets, which is
their property, you can you canquite clearly see that their,
their wealth is actually goingup every year until they pass.
(08:06):
So what that tells me straightaway is we either need to do one
of two things we either need towork out a way for them to
spend more money or, ultimately,to gift more money, because if
you die with too much, then yourfamily will be subject to quite
a substantial inheritance taxliability at that point in time.
So that's where real financialplanning comes in in terms of
(08:27):
working out how we can makeadjustments to improve the
situation.
So if I just flick back now,James, to the presentation,
hopefully that's some usefulcontext for everybody.
But if we just move forward, sojust conscious of time, uh, the
(08:52):
NHS pension, how does it work?
So I've you know, we wediscussed this, James, didn't we
back in?
What was it?
2020?
Dr James (09:04):
I think, yeah, 20, 2020, that's right wow and then
we listened to it back, didn'twe?
And we were like, right, it'sdue, due an update, isn't it?
Because a few things have movedaround since then due a refresh
?
Luke (09:14):
yes, definitely, um, so I can't believe that's five years
ago in truth.
Um, how does it work?
Some key considerations.
The first thing, I think, is tounderstand that the NHS pension
, unlike a private pension somepeople will use the term SIP, or
money purchase pension or DCpension the NHS pension is a, as
(09:36):
I mentioned earlier, is apromised future income from the
government.
Remember it's that fixed,regular income that's paid to
you throughout retirement.
That's paid to you throughoutretirement.
It is not, in any way, shape orform, an investment with any
underlying sort of capital valueattached to it.
And I think that's probably thebiggest or certainly one of the
biggest misconceptions at times,particularly those towards the
(09:58):
start of their careers theydon't fully understand that what
you're accumulating is apromised future income from the
government.
Now, that is a fixed,guaranteed and index linked
income from the government Onceyou do start work.
It's going to get paid to youonce you start drawing it, for
the rest of your life ultimately, and so it's closer to a state
(10:21):
pension than a SIP.
As I say, the reason why it'sfixed is you can't sort of
change your levels ofwithdrawals like you could if
you're drawing from a privatepension, but it will go up every
year.
As I've put on the index linked.
It will go up every year withinflation.
It'll be revalued to enable itto keep pace with the cost of
living.
So the biggest takeaway shouldbe please do not expect this to
(10:43):
be a pot.
Lots of people use theterminology my pot.
It's not physically a pot ofmoney, it's an unfunded scheme,
and so you know there is.
There is no capital valuebeneath it.
Some people will attach a valueto it and it's kind of a
theoretical value, particularlywhen the lifetime allowance was
introduced as a means of tryingto attach a value to it.
(11:06):
But but that's actually not howthe pension actually works
itself.
So that's the first point.
The second point contributions.
I think this is possibly, as Isay, second to how it works,
it's probably the biggestmisconception your contributions
that you are paying becausethere is no capital.
It is not going into a pot, itis effectively a membership fee
(11:28):
that is giving you access to thepension.
It is not building up somewherea pot of money that you're now
going to draw down on.
I would say the biggest, orprobably most unfair element of
for me anyway, of the NHSpension is those contributions
are tiered.
So the more you earn, thehigher the percentage of your
(11:51):
earnings you have to pay interms of the membership fee.
And for me, that's alwaysstruck me as being, you know,
unfair because naturally yourcontributions go up if you're
earning more.
They go up by the you knowthere being more earnings there
to be contributing towards.
So bear in mind contributionsare not going into a pot, they
(12:13):
are a membership fee.
There is nothing hidden in thebackground that you are accruing
.
When you get your statement fromthe NHS pension, you will see
on it that it has a pensionfigure.
That pension figure is theannual amount that you are due
to receive at the point that youstart drawing on your pension,
if you're at retirement normalpension age.
(12:34):
So if you're at your normalpension age, the figure on your
total reward statement orpension valuation statement,
that's the amount that you wouldget every year for the rest of
your life.
For those that have benefits inthe 1995 section, you will see
on there as well a figure for alump sum, which is a tax-free
lump sum.
I'll come on to that in amoment, but that's the key
(12:55):
understanding.
If you're paying contributions,you're not actually putting that
money into a pot with your nameon it.
Those contributions are taxdeductible, so you're paying
them.
You're getting tax relief onthat, in the same way that you
get tax relief on contributionsthat go into a private pension,
a personal pension or a SIP.
The difference, though, is withthose private personal pensions
(13:15):
the money is really is.
It's an investment account andthe money that you're paying in
is going in, and the growth thatyou're getting is according to
how much you've paid in and howmuch investment growth you've
had on the assets that sitinside the pension.
With the NHS pension, there isno investment element to it, so
(13:39):
that's key growth.
How is the pension actuallygrowing?
Well, ultimately, the growth inyour NHS pension is determined
by two main factors.
The first is your earnings.
So, as I said earlier, yourearnings.
You'll find that when you lookat your NHS pension statements,
they will have a clear record ofall the earnings that you've
had in the NHS and thoseearnings are then converted into
the annual pension using anaccrual rate.
(14:02):
So let's use the 2015 sectionas an example.
If you just joined the NHSpension for this tax year, your
earnings if your earnings are£100,000, those earnings would
be converted into an annualpension for this year of £1,850.
So for the current tax year,you've earned £100,000 in the
NHS.
(14:22):
You've therefore accumulated anannual pension for when you get
to retirement of £1,850 paid toyou every year for the rest of
your life.
In the next tax year, let's say, you earn £100,000 again,
you've now got another £1,850that's built up in your pension
and you're just going to addeach year's accrual together to
get the pension that you'regoing to be paid in the future.
(14:45):
So that's the first thing.
Earnings are the key engine,the key driver of growth in your
pension.
The second is the fact that theprevious pension that you've
accumulated is ultimately goingto be revalued every year.
So if you're an active memberof the pension scheme, they'll
look back at the previousbenefits that you've built up
and they will be revalued withCPI plus 1.5%.
(15:07):
So everything that you'veaccumulated.
The whole idea is to keep pacewith inflation, but you actually
get more than the rate ofinflation.
But you actually get more thanthe rate of inflation.
If at any point you come out ofthe NHS pension, you become
what's called a deferred memberand you stop contributing, then
what you've built up will bering-fenced and it will grow
just with inflation.
It won't get that extra 1.5%.
And so where somebody mighthave built up a reasonable
(15:30):
amount in the NHS pension, oftenit makes sense, even if they
switch to fully you know themajority of their earnings
switch to being private.
Sometimes it does make sense tosort of still do a very small
amount of NHS work because youget that extra 1.5% revaluation
factor being applied to allprevious pension benefits which,
if you've got a reasonable sumaccumulated in the pension, is
(15:53):
quite sizable.
So bear that in mind.
So, yes, growth, just alwaysremember growth is tied to
earnings.
It's not tied to contributionsSections.
So there's three sections in theNHS pension.
There's the original section,the 1995 section, there's the
(16:15):
2008 section they will often bereferred to as your legacy
sections and then you've got the2015 section, which is what
you'll be contributing to.
Now.
I'm not going to go into it,but there was a big court case
which meant that people'stransition from their legacy
section either the 95 or the2008 into the 2015 section, uh,
(16:39):
was impacted by, uh, by thatcourt case, and and there was a
ruling against agediscrimination, um, and so the
exact makeup of your you know,of your pension benefits really
is individual to you, um,depending on when you join the
pension, um, and so just bear inmind, though, what, when you,
when you look at your valuations, you will often have actually
(17:00):
two is split into two.
So you'll see, the firstsection of your valuation will
be, for most people, theirlegacy section, and then you
have to scroll down to see whatyou've accumulated in the 2015
section, which, confusingly, formost people, will be the
benefits that they've built upsince 2022 rather than 2015.
But, as I say, let's not delveinto that now.
(17:23):
How do those sections differ?
Well, what they really did whenthey've reformed the pension
and that's the 95, they'vereformed.
It turned it into the 2008, andthen they reformed it, turned
it into the 2015.
And eight, and then theyreformed it, turned it into the
2015.
Um, they changed the mechanismfor how your pension builds up,
as I said to you before aboutthe, the accrual rate and how
(17:44):
the pension is converted fromearnings into pension.
They played around with thatmechanism effectively to change
how it, how it worked.
Um, the biggest change they?
They also changed the normalpension age, which is the age at
which you can draw on thepension without having a
reduction.
So the 95 pension, that's 60,then it went to 65 for the 2008,
(18:04):
and then it's state pension agefor the 2015 section.
That's not the age at which youhave to draw the pension.
You can actually draw it beforeor after, but if you take it
before your normal pension age,then you will be subject to
early retirement factors.
Notice, I have not useddeliberately, have not used the
word penalty, because you arejust.
(18:26):
It's just a mathematicalcalculation to say if you're
taking the pension earlier, thenit should start off at a lower
factor, a lower rate.
So it shouldn't be seen as apenalty.
It's just working out what's afair reduction based on the fact
that you're drawing on itsooner, the lump sum.
So in the 95 you've got astandard three times pension
(18:46):
lump sum and you could take abit more than that, up to about
5.3 times the pension as a lumpsum.
If you gave up some more of theannual pension, you you got some
, some some tax free lump sum Inthe 2008, 2015,.
There is no automatic lump sumand instead you have to what's
called commute give up some ofyour annual pension, the pension
(19:07):
that's going to be paid to youevery year for the rest of your
life to get that lump sum.
And whether that's a gooddecision for you or not is it's
different for everybody.
But the reason why you do seepeople taking the lump sums is
because, one, it's tax free andtwo, they want to bring that
money inside their estate andensure they get value from the
pension scheme before they getolder.
(19:28):
Because, as we'll touch onlater, the biggest risk of the
NHS pension ultimately is thatyou die earlier in retirement
and you've had less value fromit.
And so by taking the lump sum,it's ensuring that you and your
family are getting that moneyout of the pension that you've
paid into for so long and youknow you can go and do various
things with it.
The one to 12 factor.
That doesn't mean that you knowyou can look at that and say,
(19:50):
well, if I'm giving up one poundof annual pension pay to me for
the rest of my life for 12pounds of lump sum, then as long
as I live 12 years I'm betteroff.
It's not as simple as thatbecause, one, the lump sum is
tax free, the pension is taxable, so you've got to factor in tax
.
And two, you could do differentthings with that lump sum.
(20:10):
Obviously you could invest it.
You'll get growth on it, and soyou've got to factor that in as
well.
Ok, then we've got the spouseand partner pension, the
difference between the sectionsin the 95 more generous.
If you passed away spousepartner would get 50 percent.
That was then reduced to 37.5percent and then reduced even
(20:35):
further in the 2015 section to33.75 percent, so effectively a
third.
You know it's quite clear tosee how they've gone about
trying to save money as they'vereformed that section, the new
section of the pensionadvantages.
Uh, well, I've sort of touchedon this as I've, as I've gone
through the, the main.
You saw it on the on thefinancial plan on the case study
, you've got a clear, fixed,guaranteed, um, genuinely
(20:59):
passive.
You know people talk aboutpassive income.
Well, this money really isgoing to hit your bank account
um like clockwork, um.
It's index linked.
The biggest risk of retirementand wealth building in general,
in fact, is inflation, and soyou've got an income that's
going to keep pace with the costof living going up.
In fact, on that point I lookback at notes from when I last
(21:23):
looked at that data onretirement living standards and
I believe some about four orfive years ago it was 47,500 was
deemed a comfortable retirement.
So that is quite a significantshift and it just really
reiterates the importance ofaccounting for inflation when
(21:43):
you're planning out a retirement.
It won't run out.
People might say, oh well, whatif the government doesn't?
Well, the UK government inreality has not defaulted on its
debts and if it did, then a lotof the other things that you
could put your money into willalso be worthless at that moment
in time because the you knowwe'll be in a dire situation.
(22:03):
And if you compare it to thecost of an annuity which they do
do on your statement they giveyou like a comparison figure
which is really to say you knowif, to replicate the output from
the NHS pension, this is howmuch you'd have to have in a
private pension.
Effectively, you'll see thatit's.
You know it's attractive andthe reason being is because
(22:26):
ultimately the government issubsidising that.
Because ultimately thegovernment is subsidising that.
So to replicate the outputwhich is the closest thing to it
on the private market would bean annuity.
So not going into the nittygritty of how you can access a
private pension, but one of theoptions is to convert your pot
as such into a fixed income forlife, an annuity.
When you do that comparison,you can see the benefit of how
(22:50):
the government is subsidizingthat, that pension.
The disadvantage is don't forgetthe tax.
So, as I alluded to earlier,the, the, when you look at your
statements, the pension figure,that is taxable income.
The lump sum is tax-free butthe pension is taxable.
So you've got to account forthat.
The uh, the software I showedyou earlier.
We we have that built in, so weknow what.
(23:10):
We can net things out and workout how people achieve their
numbers net of tax, the lack offlexibility.
So it's a fixed income,although it's going up with
inflation.
It's not like you can front loada retirement with it.
You know you're more active inthe earlier phase of retirement
and therefore, typically, as afinancial planner, I would want
(23:31):
my clients to plan for morespending when they're more
active.
So, let's say, on average, youmight spend 40 percent less in
your 80s than in your in your60s.
So we should, we should accountfor that.
Well, the NHS pension is is,you know, is going to be fixed
all the way through, so it's notlike you can make those
adjustments.
Um, the spouse partner pensionuh, as I said earlier, that's
(23:53):
that's been.
Um, that's tied in with thenormal pension age.
Normal pension age, um, if yournormal pension age in the 2015
section is tied to your statepension, and your state pension
is is 68, lots of people mightturn around and say i'm'm going
to be in 12 years' time, I'mgoing to be 80.
If I draw this at normalpension age, after 12 years I'm
(24:16):
going to be 80 years old and forsome people that's not
palatable.
If you die, as I alluded toearlier, if you die early in
retirement, then you've had poorvalue from your NHS pension.
If you paid into it for manyyears and you, let's say, you're
in the 95 section, you draw itat 60 and you die at 65.
Have you had good value?
(24:36):
No, not really, because yourpension is going to be halved
and it's going to significantlyimpact on on whether that was a
good resource for you and yourfamily, and because they've
reduced those, uh, the thespouse partner pension provision
, from 50 down to what iseffectively a third.
(24:58):
That only, you know, makesthings, makes things worse on
that front.
They've pushed back the pensionage and they've reduced the the
spouse partner pensionprovision, um, so just bear that
in mind, the value that you getback from the pension is tied
in with your longevity, uh,ultimately, uh, unlike a you
know a comparison with a anotherresource, whether it be a
(25:20):
rental property or maybe it's a,a private pension or an
investment portfolio which youcan pass on to children um and
people often mention this itcould be reformed, it has.
You know, when I started, um, itwas just at the point of the
transition from 95 to 2008 andthe choice exercise that went
(25:42):
with that, and then, since then,we've already had another round
of reform, uh, bringing in the2015 section.
So could the government reformit again?
Yes, how far can they go withit without losing votes, given
that this is not just um, apension scheme, this is not just
the NHS pension.
When governments make thosereforms, they're making it for
all public sector pensionschemes.
(26:02):
Uh, you know, clearly there's a.
There's a level at whichthey're going to start getting
um bad press and ultimatelygovernments are interested in
getting re-elected, aren't they?
So you just have to bear thatin mind.
But they are the coredisadvantages.
Very quick checklist James, Iknow you've got a downloadable
checklist, if people want it, ofsomething that we've done
(26:25):
previously.
So people can certainly reachout, can't they, to get that if
they haven't already the?
The main thing for me from afinancial planning perspective
is make sure you get a valuation, um on a on an annual basis and
keep track of of your pensionand know exactly what's what's
(26:46):
there, what you can expect fromit.
If you don't have thatinformation and it's a
reasonable resource for forretirement provisions then how
are you going to do a properfinancial plan unless you know
what you stand to benefit fromin the future by way of the NHS
pension scheme and check yourmembership extract so you can
actually request a spreadsheetthat shows the record of
(27:07):
earnings that they've got andwhere those earnings have come
from.
And it's definitely aworthwhile exercise for you to
just cast an eye over that andsense, check it and make sure
that it tallies up with whatyou're expecting, because you
know mistakes do happen and it'simportant that you get make
sure you get credit for all ofthe years that you've been a
(27:27):
member.
Hey everyone, welcome to this podcast on the NHS
pension.
We're going to cover how theNHS pension actually works, and
by that I mean the ins and outsand specifics broken down in
layman's terms.
I'm joined by Luke Hurley, whorepresents Videre Financial
Planning.
Luke shares his expertise andwisdom in helping thousands of
(00:20):
clients over the years withtheir NHS pension and also
modelling it from a cash flowperspective.
So looking forward to listeningin and learning.
I'm also super excited today toannounce a brand new feature for
the Dentists Who Investplatform, and that is free
verifiable CPD to all UKdentists who have enjoyed this
podcast episode.
Whenever you've finished theepisode, all you have to do is
(00:42):
click the link in the podcastdescription.
It'll take you right throughthe Dentists Who Invest website.
You'll be able to complete ashort questionnaire and, once
passed, you fill in yourreflections and we'll go ahead
and email over to you yourverifiable CPD certificate,
which is entirely free.
What that means is this podcastepisode will be able to
contribute towards yourverifiable CPD.
(01:02):
Hours during this learningcycle will be able to contribute
towards your verifiable CPDhours during this learning cycle
.
Luke, shall we go ahead and kickthings off?
Luke (01:11):
Sounds like a plan, James the NHS pension and your
financial plan.
So for me, it's alwaysimportant to have some context
and remember why we're doingvarious things, and that
includes saving into the NHSpension.
So if we take a step back froma financial planning perspective
(01:33):
and think, what's it all about?
Financial planning really isabout working out what your
vision is for the future, andfor most people, the number one
financial goal is ultimatelyfinancial independence.
So financial independence isthe point where you've got
enough money.
You're going to work becauseyou want to, not because you
have to.
You've accumulated all theassets and the resources that
will sustain your lifestyle forthe rest of your life without
(01:55):
the risk of running out of money, and it's key and same with all
things, to start with the endof mind.
So for most people, the bigquestion is how much do you
actually need?
What is the cost of yourlifestyle?
Will you have enough?
Will you run out of money?
The problem, I think, James, islifestyle is different for
(02:16):
everyone, isn't it?
Ultimately, I meet lots ofdifferent clients who have
different preferences in termsof how they spend their money
and different visions for thefuture.
So it's about working out whatyou're aiming for, what you want
to achieve and how much yourlife is going to cost from now
until, unfortunately, when youpass away.
(02:37):
So most people, with that inmind, unfortunately don't know
where to start.
But the simple place to startis to work out exactly what
you're spending now and beintentional about it and know
what your outgoings are and makesome assumptions for how that
will change in the future.
So start with what your, yourcurrent outgoings are.
Work out roughly what that youknow might might be throughout
(02:59):
various changes in life.
To give some context, there's a.
There's a national study that'sdone that looks at retirement
living standards across the UKand the last time I looked at
that, the so-called comfortableretirement was pinned at just
under £60,000 per annum net oftax.
So you're looking at 5k for ahousehold, that is, for a couple
(03:22):
to be spending 5K per month netof tax.
For UK standards that's seen asa comfortable retirement.
A moderate retirement is seento be £43,000 per annum and sort
of a minimum retirement which Ireally don't believe, to be
honest, because I don't know howanyone would survive is £22,500
(03:44):
per annum.
So that's actually less thantwo state pensions, which is not
a huge amount of money giventhe current cost of living.
So that's the national average.
Obviously, as I said,everybody's different on that
and it's really about knowingwhat your number is from a
financial planning perspective,what number you're targeting in
(04:05):
terms of being financiallyindependent, um to to sort of
move that forward.
What I was going to do, James,is quickly um show a very short
case study, um using somefinancial planning software, as
to where an NHS pension wouldfit in, um when we actually do
those retirement plans forpeople.
(04:26):
So on screen now.
Hopefully that's showing, is it, James?
Yeah, great.
So on screen now we have afinancial plan, very basic.
I've kept this extremely,extremely simple, and what we do
from a financial planningperspective is we draw up a
timeline for a client and wework out throughout the
(04:48):
different phases of life howmuch they need in retirement.
So for this client they've gotfive years until they wish to
retire at 60.
You've got the ages down thebottom here.
They're looking to spend£60,000, because that's the
national deemed comfortableretirement throughout phase one
of their retirement, which isfrom 60 to 80, and then we've
decided that they're going todrop that down when they're less
(05:09):
active.
In the later years, from 80onwards, they're going to spend
45 000 pounds per annum.
And then we've got some carecosts to this is a husband and
wife, a couple.
We've assumed that they're bothgoing to go into care,
unfortunately in the last fiveyears of life, and it's going to
cost 52,000 pounds per annum.
So a thousand pounds per weekper person, which is, uh,
unfortunately the going rate.
Um, that's that's, you know,that's somebody's timeline,
(05:32):
that's their goals, and thenwhat we want to do from a
planning perspective is work outwhat that looks like every year
for the rest of their life froma um, a cash flow perspective.
So've plotted that out.
This is the point at which theystop work at age 60.
Then you've got the first phaseof retirement.
(05:53):
And then you've got the dropdown where their spending
reduces as they become lessactive.
And then you've got phase twoand then the care costs.
And so where does the statepensions fit in to begin with?
So two state pensions, you'relooking at just under £12,000
per person per annum for a statepension.
So there's your first layer ofpassive recurring income in
retirement for this couple.
(06:14):
And then we've got an NHSpension.
So one of the clients here hasa 1995 section NHS pension,
fixed recurring income that'sgoing to hit their account every
year for the rest of their lifeto bring them up to the black
line, which is the 60k, as Isaid, and then dropping down to
45.
So this spike here is becausethe NHS pension, as many of you
(06:37):
will know, you can get a lumpsum out of it as well.
It's not just a recurringincome, and so you can see that
spike of money entering intotheir plan right at the outset.
So to begin with they're goingto be working, which is
employment, and then where arethey going to find the money for
the rest of their years ofretirement?
Well, they're going to have totap into their capital.
So when we're looking at doinga retirement plan for somebody.
(07:00):
We're looking at streams ofincome.
Let say, uh, state pension, asI mentioned, NHS pension, it
might be rental income, uh,that's the regular, uh money
that's going to flow into theiraccounts um, every year, for the
rest of their lives, hopefully.
And then also, what do they havein in the way of capital?
Sometimes I refer to that asthe reservoir in terms of money,
in ices savings, possibly, um,money purchase pensions, also
(07:23):
known, known as SIPs what dothey need to draw down on to
effectively meet that black line, that spending requirement for
the rest of their life?
And if they do that and there'sno red on the plan, which is
the case in this scenario, theclient's not due to run out of
money.
Ultimately, from a from a cashflow perspective, when we chart
(07:44):
their trajectory, the secondpart of the equation, of course,
is what does that look likefrom an asset perspective?
And when we look at the secondchart and I've plotted out their
investments and theirnon-liquid assets, which is
their property, you can you canquite clearly see that their,
their wealth is actually goingup every year until they pass.
(08:06):
So what that tells me straightaway is we either need to do one
of two things we either need towork out a way for them to
spend more money or, ultimately,to gift more money, because if
you die with too much, then yourfamily will be subject to quite
a substantial inheritance taxliability at that point in time.
So that's where real financialplanning comes in in terms of
(08:27):
working out how we can makeadjustments to improve the
situation.
So if I just flick back now,James, to the presentation,
hopefully that's some usefulcontext for everybody.
But if we just move forward, sojust conscious of time, uh, the
(08:52):
NHS pension, how does it work?
So I've you know, we wediscussed this, James, didn't we
back in?
What was it?
2020?
Dr James (09:04):
I think, yeah, 20, 2020, that's right wow and then
we listened to it back, didn'twe?
And we were like, right, it'sdue, due an update, isn't it?
Because a few things have movedaround since then due a refresh
?
Luke (09:14):
yes, definitely, um, so I can't believe that's five years
ago in truth.
Um, how does it work?
Some key considerations.
The first thing, I think, is tounderstand that the NHS pension
, unlike a private pension somepeople will use the term SIP, or
money purchase pension or DCpension the NHS pension is a, as
(09:36):
I mentioned earlier, is apromised future income from the
government.
Remember it's that fixed,regular income that's paid to
you throughout retirement.
That's paid to you throughoutretirement.
It is not, in any way, shape orform, an investment with any
underlying sort of capital valueattached to it.
And I think that's probably thebiggest or certainly one of the
biggest misconceptions at times,particularly those towards the
(09:58):
start of their careers theydon't fully understand that what
you're accumulating is apromised future income from the
government.
Now, that is a fixed,guaranteed and index linked
income from the government Onceyou do start work.
It's going to get paid to youonce you start drawing it, for
the rest of your life ultimately, and so it's closer to a state
(10:21):
pension than a SIP.
As I say, the reason why it'sfixed is you can't sort of
change your levels ofwithdrawals like you could if
you're drawing from a privatepension, but it will go up every
year.
As I've put on the index linked.
It will go up every year withinflation.
It'll be revalued to enable itto keep pace with the cost of
living.
So the biggest takeaway shouldbe please do not expect this to
(10:43):
be a pot.
Lots of people use theterminology my pot.
It's not physically a pot ofmoney, it's an unfunded scheme,
and so you know there is.
There is no capital valuebeneath it.
Some people will attach a valueto it and it's kind of a
theoretical value, particularlywhen the lifetime allowance was
introduced as a means of tryingto attach a value to it.
(11:06):
But but that's actually not howthe pension actually works
itself.
So that's the first point.
The second point contributions.
I think this is possibly, as Isay, second to how it works,
it's probably the biggestmisconception your contributions
that you are paying becausethere is no capital.
It is not going into a pot, itis effectively a membership fee
(11:28):
that is giving you access to thepension.
It is not building up somewherea pot of money that you're now
going to draw down on.
I would say the biggest, orprobably most unfair element of
for me anyway, of the NHSpension is those contributions
are tiered.
So the more you earn, thehigher the percentage of your
(11:51):
earnings you have to pay interms of the membership fee.
And for me, that's alwaysstruck me as being, you know,
unfair because naturally yourcontributions go up if you're
earning more.
They go up by the you knowthere being more earnings there
to be contributing towards.
So bear in mind contributionsare not going into a pot, they
(12:13):
are a membership fee.
There is nothing hidden in thebackground that you are accruing
.
When you get your statement fromthe NHS pension, you will see
on it that it has a pensionfigure.
That pension figure is theannual amount that you are due
to receive at the point that youstart drawing on your pension,
if you're at retirement normalpension age.
(12:34):
So if you're at your normalpension age, the figure on your
total reward statement orpension valuation statement,
that's the amount that you wouldget every year for the rest of
your life.
For those that have benefits inthe 1995 section, you will see
on there as well a figure for alump sum, which is a tax-free
lump sum.
I'll come on to that in amoment, but that's the key
(12:55):
understanding.
If you're paying contributions,you're not actually putting that
money into a pot with your nameon it.
Those contributions are taxdeductible, so you're paying
them.
You're getting tax relief onthat, in the same way that you
get tax relief on contributionsthat go into a private pension,
a personal pension or a SIP.
The difference, though, is withthose private personal pensions
(13:15):
the money is really is.
It's an investment account andthe money that you're paying in
is going in, and the growth thatyou're getting is according to
how much you've paid in and howmuch investment growth you've
had on the assets that sitinside the pension.
With the NHS pension, there isno investment element to it, so
(13:39):
that's key growth.
How is the pension actuallygrowing?
Well, ultimately, the growth inyour NHS pension is determined
by two main factors.
The first is your earnings.
So, as I said earlier, yourearnings.
You'll find that when you lookat your NHS pension statements,
they will have a clear record ofall the earnings that you've
had in the NHS and thoseearnings are then converted into
the annual pension using anaccrual rate.
(14:02):
So let's use the 2015 sectionas an example.
If you just joined the NHSpension for this tax year, your
earnings if your earnings are£100,000, those earnings would
be converted into an annualpension for this year of £1,850.
So for the current tax year,you've earned £100,000 in the
NHS.
(14:22):
You've therefore accumulated anannual pension for when you get
to retirement of £1,850 paid toyou every year for the rest of
your life.
In the next tax year, let's say, you earn £100,000 again,
you've now got another £1,850that's built up in your pension
and you're just going to addeach year's accrual together to
get the pension that you'regoing to be paid in the future.
(14:45):
So that's the first thing.
Earnings are the key engine,the key driver of growth in your
pension.
The second is the fact that theprevious pension that you've
accumulated is ultimately goingto be revalued every year.
So if you're an active memberof the pension scheme, they'll
look back at the previousbenefits that you've built up
and they will be revalued withCPI plus 1.5%.
(15:07):
So everything that you'veaccumulated.
The whole idea is to keep pacewith inflation, but you actually
get more than the rate ofinflation.
But you actually get more thanthe rate of inflation.
If at any point you come out ofthe NHS pension, you become
what's called a deferred memberand you stop contributing, then
what you've built up will bering-fenced and it will grow
just with inflation.
It won't get that extra 1.5%.
And so where somebody mighthave built up a reasonable
(15:30):
amount in the NHS pension, oftenit makes sense, even if they
switch to fully you know themajority of their earnings
switch to being private.
Sometimes it does make sense tosort of still do a very small
amount of NHS work because youget that extra 1.5% revaluation
factor being applied to allprevious pension benefits which,
if you've got a reasonable sumaccumulated in the pension, is
(15:53):
quite sizable.
So bear that in mind.
So, yes, growth, just alwaysremember growth is tied to
earnings.
It's not tied to contributionsSections.
So there's three sections in theNHS pension.
There's the original section,the 1995 section, there's the
(16:15):
2008 section they will often bereferred to as your legacy
sections and then you've got the2015 section, which is what
you'll be contributing to.
Now.
I'm not going to go into it,but there was a big court case
which meant that people'stransition from their legacy
section either the 95 or the2008 into the 2015 section, uh,
(16:39):
was impacted by, uh, by thatcourt case, and and there was a
ruling against agediscrimination, um, and so the
exact makeup of your you know,of your pension benefits really
is individual to you, um,depending on when you join the
pension, um, and so just bear inmind, though, what, when you,
when you look at your valuations, you will often have actually
(17:00):
two is split into two.
So you'll see, the firstsection of your valuation will
be, for most people, theirlegacy section, and then you
have to scroll down to see whatyou've accumulated in the 2015
section, which, confusingly, formost people, will be the
benefits that they've built upsince 2022 rather than 2015.
But, as I say, let's not delveinto that now.
(17:23):
How do those sections differ?
Well, what they really did whenthey've reformed the pension
and that's the 95, they'vereformed.
It turned it into the 2008, andthen they reformed it, turned
it into the 2015.
And eight, and then theyreformed it, turned it into the
2015.
Um, they changed the mechanismfor how your pension builds up,
as I said to you before aboutthe, the accrual rate and how
(17:44):
the pension is converted fromearnings into pension.
They played around with thatmechanism effectively to change
how it, how it worked.
Um, the biggest change they?
They also changed the normalpension age, which is the age at
which you can draw on thepension without having a
reduction.
So the 95 pension, that's 60,then it went to 65 for the 2008,
(18:04):
and then it's state pension agefor the 2015 section.
That's not the age at which youhave to draw the pension.
You can actually draw it beforeor after, but if you take it
before your normal pension age,then you will be subject to
early retirement factors.
Notice, I have not useddeliberately, have not used the
word penalty, because you arejust.
(18:26):
It's just a mathematicalcalculation to say if you're
taking the pension earlier, thenit should start off at a lower
factor, a lower rate.
So it shouldn't be seen as apenalty.
It's just working out what's afair reduction based on the fact
that you're drawing on itsooner, the lump sum.
So in the 95 you've got astandard three times pension
(18:46):
lump sum and you could take abit more than that, up to about
5.3 times the pension as a lumpsum.
If you gave up some more of theannual pension, you you got some
, some some tax free lump sum Inthe 2008, 2015,.
There is no automatic lump sumand instead you have to what's
called commute give up some ofyour annual pension, the pension
(19:07):
that's going to be paid to youevery year for the rest of your
life to get that lump sum.
And whether that's a gooddecision for you or not is it's
different for everybody.
But the reason why you do seepeople taking the lump sums is
because, one, it's tax free andtwo, they want to bring that
money inside their estate andensure they get value from the
pension scheme before they getolder.
(19:28):
Because, as we'll touch onlater, the biggest risk of the
NHS pension ultimately is thatyou die earlier in retirement
and you've had less value fromit.
And so by taking the lump sum,it's ensuring that you and your
family are getting that moneyout of the pension that you've
paid into for so long and youknow you can go and do various
things with it.
The one to 12 factor.
That doesn't mean that you knowyou can look at that and say,
(19:50):
well, if I'm giving up one poundof annual pension pay to me for
the rest of my life for 12pounds of lump sum, then as long
as I live 12 years I'm betteroff.
It's not as simple as thatbecause, one, the lump sum is
tax free, the pension is taxable, so you've got to factor in tax
.
And two, you could do differentthings with that lump sum.
(20:10):
Obviously you could invest it.
You'll get growth on it, and soyou've got to factor that in as
well.
Ok, then we've got the spouseand partner pension, the
difference between the sectionsin the 95 more generous.
If you passed away spousepartner would get 50 percent.
That was then reduced to 37.5percent and then reduced even
(20:35):
further in the 2015 section to33.75 percent, so effectively a
third.
You know it's quite clear tosee how they've gone about
trying to save money as they'vereformed that section, the new
section of the pensionadvantages.
Uh, well, I've sort of touchedon this as I've, as I've gone
through the, the main.
You saw it on the on thefinancial plan on the case study
, you've got a clear, fixed,guaranteed, um, genuinely
(20:59):
passive.
You know people talk aboutpassive income.
Well, this money really isgoing to hit your bank account
um like clockwork, um.
It's index linked.
The biggest risk of retirementand wealth building in general,
in fact, is inflation, and soyou've got an income that's
going to keep pace with the costof living going up.
In fact, on that point I lookback at notes from when I last
(21:23):
looked at that data onretirement living standards and
I believe some about four orfive years ago it was 47,500 was
deemed a comfortable retirement.
So that is quite a significantshift and it just really
reiterates the importance ofaccounting for inflation when
(21:43):
you're planning out a retirement.
It won't run out.
People might say, oh well, whatif the government doesn't?
Well, the UK government inreality has not defaulted on its
debts and if it did, then a lotof the other things that you
could put your money into willalso be worthless at that moment
in time because the you knowwe'll be in a dire situation.
(22:03):
And if you compare it to thecost of an annuity which they do
do on your statement they giveyou like a comparison figure
which is really to say you knowif, to replicate the output from
the NHS pension, this is howmuch you'd have to have in a
private pension.
Effectively, you'll see thatit's.
You know it's attractive andthe reason being is because
(22:26):
ultimately the government issubsidising that.
Because ultimately thegovernment is subsidising that.
So to replicate the outputwhich is the closest thing to it
on the private market would bean annuity.
So not going into the nittygritty of how you can access a
private pension, but one of theoptions is to convert your pot
as such into a fixed income forlife, an annuity.
When you do that comparison,you can see the benefit of how
(22:50):
the government is subsidizingthat, that pension.
The disadvantage is don't forgetthe tax.
So, as I alluded to earlier,the, the, when you look at your
statements, the pension figure,that is taxable income.
The lump sum is tax-free butthe pension is taxable.
So you've got to account forthat.
The uh, the software I showedyou earlier.
We we have that built in, so weknow what.
(23:10):
We can net things out and workout how people achieve their
numbers net of tax, the lack offlexibility.
So it's a fixed income,although it's going up with
inflation.
It's not like you can front loada retirement with it.
You know you're more active inthe earlier phase of retirement
and therefore, typically, as afinancial planner, I would want
(23:31):
my clients to plan for morespending when they're more
active.
So, let's say, on average, youmight spend 40 percent less in
your 80s than in your in your60s.
So we should, we should accountfor that.
Well, the NHS pension is is,you know, is going to be fixed
all the way through, so it's notlike you can make those
adjustments.
Um, the spouse partner pensionuh, as I said earlier, that's
(23:53):
that's been.
Um, that's tied in with thenormal pension age.
Normal pension age, um, if yournormal pension age in the 2015
section is tied to your statepension, and your state pension
is is 68, lots of people mightturn around and say i'm'm going
to be in 12 years' time, I'mgoing to be 80.
If I draw this at normalpension age, after 12 years I'm
(24:16):
going to be 80 years old and forsome people that's not
palatable.
If you die, as I alluded toearlier, if you die early in
retirement, then you've had poorvalue from your NHS pension.
If you paid into it for manyyears and you, let's say, you're
in the 95 section, you draw itat 60 and you die at 65.
Have you had good value?
(24:36):
No, not really, because yourpension is going to be halved
and it's going to significantlyimpact on on whether that was a
good resource for you and yourfamily, and because they've
reduced those, uh, the thespouse partner pension provision
, from 50 down to what iseffectively a third.
(24:58):
That only, you know, makesthings, makes things worse on
that front.
They've pushed back the pensionage and they've reduced the the
spouse partner pensionprovision, um, so just bear that
in mind, the value that you getback from the pension is tied
in with your longevity, uh,ultimately, uh, unlike a you
know a comparison with a anotherresource, whether it be a
(25:20):
rental property or maybe it's a,a private pension or an
investment portfolio which youcan pass on to children um and
people often mention this itcould be reformed, it has.
You know, when I started, um, itwas just at the point of the
transition from 95 to 2008 andthe choice exercise that went
(25:42):
with that, and then, since then,we've already had another round
of reform, uh, bringing in the2015 section.
So could the government reformit again?
Yes, how far can they go withit without losing votes, given
that this is not just um, apension scheme, this is not just
the NHS pension.
When governments make thosereforms, they're making it for
all public sector pensionschemes.
(26:02):
Uh, you know, clearly there's a.
There's a level at whichthey're going to start getting
um bad press and ultimatelygovernments are interested in
getting re-elected, aren't they?
So you just have to bear thatin mind.
But they are the coredisadvantages.
Very quick checklist James, Iknow you've got a downloadable
checklist, if people want it, ofsomething that we've done
(26:25):
previously.
So people can certainly reachout, can't they, to get that if
they haven't already the?
The main thing for me from afinancial planning perspective
is make sure you get a valuation, um on a on an annual basis and
keep track of of your pensionand know exactly what's what's
(26:46):
there, what you can expect fromit.
If you don't have thatinformation and it's a
reasonable resource for forretirement provisions then how
are you going to do a properfinancial plan unless you know
what you stand to benefit fromin the future by way of the NHS
pension scheme and check yourmembership extract so you can
actually request a spreadsheetthat shows the record of
(27:07):
earnings that they've got andwhere those earnings have come
from.
And it's definitely aworthwhile exercise for you to
just cast an eye over that andsense, check it and make sure
that it tallies up with whatyou're expecting, because you
know mistakes do happen and it'simportant that you get make
sure you get credit for all ofthe years that you've been a
(27:27):
member.
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Crime Junkie
Does hearing about a true crime case always leave you scouring the internet for the truth behind the story? Dive into your next mystery with Crime Junkie. Every Monday, join your host Ashley Flowers as she unravels all the details of infamous and underreported true crime cases with her best friend Brit Prawat. From cold cases to missing persons and heroes in our community who seek justice, Crime Junkie is your destination for theories and stories you won’t hear anywhere else. Whether you're a seasoned true crime enthusiast or new to the genre, you'll find yourself on the edge of your seat awaiting a new episode every Monday. If you can never get enough true crime... Congratulations, you’ve found your people. Follow to join a community of Crime Junkies! Crime Junkie is presented by audiochuck Media Company.