Retirement saving and pension planning

New NHS Pension Choice at Retirement – More Pension Or More Cash?

In the past when it came to how the NHS paid your pension, it was very simple. You had a pension based on the number of years’ service in the Scheme, your income, and whether you had purchased added years. You also received a tax-free lump sum of three times that pension (although GMPs and GDPs have their pension entitlement calculated on a slightly different basis).

No thought was required when you reached retirement age. You simply signed the form to say you were retiring and waited for the pension payments to reach your bank account.

However, the NHS has given you new options:

1. Just take pension only

2. Take more in tax-free cash and less pension

3. Take the maximum in tax-free cash and even less pension

To calculate how much pension you would receive if you choose option 2 you need to apply a ratio.

The ratio is 12 to 1 and does not change whether you retire at age 60 or 65. So, that is for every £1 of pension you give up, you receive £12 in tax-free cash. The limit in the amount of tax-free cash is 25% of the Capital Value of your Pension Fund.

The remaining 75% provides your pension.

Having had two recent cases of clients coming up to retirement, these new rules give some interesting options. Let’s look at an example, and in the interests of keeping things simple, the figures are approximate.

A Hospital Consultant is retiring age 60 in April. With all debt paid off, the children in their 30s and working, he is really looking forward to spending more time on his boat and brushing up on his golf.

He has amassed around 36 years of NHS service, and with a few distinctions points his salary that the pension would be based on is a little over £111,000 pa.

The next step was to visit the NHS Pensions website calculator and look at the most obvious options are points 1 and 2 above.

These are the figures:

1. £50,000 pa pension plus tax-free lump sum £150,000

2. £40,000 pa pension plus tax free lump sum £270,000

So, as a married man in good health with a spouse 4 years younger than himself, what is his best option?

Well, the first thing to take into account is that he needs £2,600 after-tax income per month to pay the bills and run a car etc. This is equivalent to about £37,500 gross pa. Any extra spending would be on holidays (and he and his wife certainly intend to have quite a few over the next 10 years). So they would need, say, an extra £10,000 pa for this.

Next, it is important to note that any income received above around £41,000 pa is taxed at the higher rate of 40%. So in effect, the real difference between options 1 and 2 is £500 per month inflation proofed income on the one hand, and £120,000 cash on the other. Also, you could sell pension and get a good amount of cash.

Looking at it like this it would appear that it would take approximately 20 years for the pension option to catch up! Of course, we do not know what effect inflation will have over the next 20-30 years, nor what return he will get on his cash, depending on the risks he is prepared to take.

As you will know, we live in interesting times at the moment and interest rates are low on deposit accounts. It is reasonable to assume that he could get 2-3 % pa (gross) in a deposit account over the next 20 years, and pay less tax by putting the money in his wife’s name as she is a lower rate taxpayer.

But what would happen if he died soon after retiring?

Well, with the cash option it is ‘in the bank’. But with the higher pension option, you would assume that his wife would be slightly better off, as the benefits are based on 50% of the pension. The good news is that this is waived by the NHS in the event of his death, and the 50% is always based on the higher pension regardless of whether he took the maximum tax-free cash or not.

Another factor here is that he will receive a State Pension of circa £5,000 pa at age 65 in 2014, and his wife will also benefit with her State Pension for a similar amount starting in 2015 at age 62.

So, even if he takes the maximum NHS tax-free cash, his pensions by age 65 will mean he will be paying higher rate tax.

All this information was entered into his own retirement cash flow forecast (Sat Nav), and he could then make an informed choice confident that all factors had been covered.

So, bearing all this in mind, he is choosing to go for the maximum tax-free cash, and lower pension.

The Financial Tips Bottom Line

Deciding whether to opt for more cash or more pension is a one-off decision. Therefore, make sure you do your homework before making the decision!


If you are approaching retirement, write down all your assets on the one hand, and your anticipated expenditure on the other. Have your adviser build you your own cash flow forecast to show the overall picture and the effects of inflation etc. This ‘Sat Nav’ will give you the context to make one of the most important financial decisions you will ever make – more pension or more cash?

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