How to reduce your NHS pension retirement age

In today’s world many doctors and dentists are working extremely long hours, often under very stressful circumstances so it comes as no surprise some medics are keen to reduce their NHS pension retirement age – but how exactly can you achieve this? And will it cost you money?How you can reduce your NHS Pension retirement age

Where do you start?

Firstly, you need to know what version of the NHS pension scheme you are a member of. This is important as each pension scheme has its own normal retirement age (NRA) and set of rules.

For the 2008 Section, the NRA is 65. For the 2015 version, your retirement benefits will be reduced if you draw your NHS pension before your state pension age.

Under the 1995 Section, your NRA is 60, except for special classes where your NRA is 55.

The earliest age you can draw your NHS pension is 50 in the 1995 section, but you will be penalised for taking benefits before the NRA. As an approximate rule of thumb, it’s roughly 5% pa a year you take your benefits, before your NRA for the scheme you are a member of.

That’s going to be a depressing reading for some.

However,  if you want to retire early and don’t want to suffer the full force of the reduction to your pension income there is a way, so don’t despair.

Did you know that you can buy your way to early retirement if you’re an NHS doctor or dentist in the 2015 NHS Pension Scheme?

Avoid an early retirement penalty with an ERRBO agreement

If you’re a member of the 2015 Scheme and you at least want the option to retire earlier than your state pension age dictates, you can now buy your way out of an early retirement penalty with an ERRBO – or Early Retirement Reduction Buy Out – agreement.

With an ERRBO agreement in place, you or your employer will pay additional contributions to your pension fund that will mean you can retire either 1, 2 or 3 years before your normal NHS pension age (but no earlier than 65). In essence, you buy out the reductions that would apply to your pension benefits if you retired before your state pension age.

Without an ERRBO agreement, you can still take early retirement but reductions to your pension benefits will be applied.

How much will ERRBO cost me?

The additional contributions you will have to pay in order to take penalty-free early retirement are based on:

  • Your age on the 1st April of the year that you entered the ERRBO agreement and,
  • The number of years reduction you are buying out, be it 1, 2 or 3 years; the cost of your additional contributions is a percentage of your salary per year purchased.

If you have already bought or are buying additional pension (AP), you will only be able to make ERRBO contributions up to the allowed overall total value of additional benefits limit

When can I apply for an ERRBO agreement?

For your ERRBO agreement to be effective for or from your first scheme year, you must make the agreement within 3 months of joining the 2015 NHS pension scheme, or alternatively in the first 3 months of the beginning of any subsequent scheme year.

If your application is received after this time, your ERRBO agreement will only be effective from the beginning of the following scheme year. A scheme year starts on April 1st.

Once in place, your ERRBO agreement will automatically roll forward to subsequent scheme years until the agreement is ended. No retrospective applications for earlier scheme years can be made.

How do I apply for an ERRBO agreement?

The ERRBO expression of interest form is now available on the NHS website for members of the 2015 Scheme. There is also a factsheet which the NHS advises you to read first.

What’s the small print?!

Ill Health

If you have to retire due to permanent ill health, the agreement will have no value and you won’t get back your additional contributions. You will, however, receive your pension early and without reduction.

Suspending your ERRBO agreement

Normally you can suspend the agreement for up to 1 year on hardship grounds. If the agreement is not restarted within that period, it will be irreversibly terminated.

Terminating your ERRBO agreement

You may terminate the agreement at any time. If you terminate it:

  • Within the first year, you will be repaid your additional contributions and the agreement will be cancelled;
  • After 1 year, your additional contributions will be repaid and the Buy Out period will be limited to the end of the previous scheme year.

Retiring before your ERRBO retirement age

Beware if you retire before your ERRBO retirement age, you will be heavily penalised. The penalties range from 6% to an eye-watering 45%¹; it all depends on what age you are when you retire and how many years before your ERRBO retirement age that is. It is also worth noting that the penalties reduce your pension benefits in retirement, not your lump sums.

Various other factors need to be taken into account as well, especially for pre-April 2008 joiners of the 1995 NHS pension scheme. These are best considered in a more detailed discussion with your financial adviser based on your individual circumstances and retirement plans.

So is ERRBO good value for money?

That’s a hard one to answer! The old, now defunct Added Years could have been argued as expensive but, for most people, the cost wasn’t necessarily the deciding factor. It came down to taking advantage of an available, additional option and using it in conjunction with other pension provisions.

In much the same way, the ERRBO is considered a good idea; not on its costs but because it gives doctors and dentists another way to plan for earlier retirement and safeguard their retirement aspirations.

There are ways of ‘making up’ the reduction if you take your pension early, such as saving into ISAs, but these are subject to the markets, so if you expose them to this sort of risk, returns can not be guaranteed. Cash ISAs are more steady but real growth rates are so low you are unlikely to get the return necessary.

You could contribute to a personal pension but given the limitations of the Annual Allowance, this could create unwanted tax bills. So not ideal.

One thing remains certain…..there has never been a more important time to review your overall retirement planning and benefits with your IFA!

Would you consider entering an ERRBO agreement so that you can retire before your state pension age? Let us know by adding a comment below.

Source: ¹ NHS Business Services Authority

11 thoughts on “How to reduce your NHS pension retirement age

  1. Keshav Swarnkar

    This is new to most of us. Considering that there is a pension cap which is continually being reduced, what implications it has if one contributed to Errbo?
    How relevant is this for doctors in this situation?

    Reply
    1. Max Spurgeon

      Hi Keshav. This is new to all of us. If you are evaluating ERRBO then i am guessing you dont wish to retire at age 67+. We believe that people wishing to retire early may need to accumulate a notional pension value in excess of the lifetime allowance(LTA). I know this sounds counter intuitive, but without ERBBO you suffer penalties (earliest retirement age is 65 via ERRBO). We are led to believe that these penalties are 5% for every year you go prior to your normal retirmement age. How you are measured against the lifetime allowance is done at the point when you draw your pension. Therefore you could be in a position where your notional fund is reduced to the LTA after penalties. The ERRBO would mean that some or all of your pension may not suffer these penalties. The question may be, what is the better route, suffering the penalties or paying for ERRBO?

      Reply
  2. William

    I’m in both sections where my 95 section is frozen and I am now in 2015 section. I had special class status but they took it away in 2006 because I worked for the PCT though still a nurse and managed a team of nurses so I am currently appealing that . At stage 2 as they refused to give it back to me at stage 1 ( wrongly I believe) it’s a complicated world

    Reply
  3. Ian Welsh

    Assuming a retirment age of 68, then purchasing 3 years ERRBO gives a retirement age of 65.
    If i wanted to retire at 63 would i be penalised 2 years of penalties worth (65) or 5 years of penalties worth (68)?

    Reply
    1. Owen Beswick

      Hi Ian

      Without knowing your personal circumstances, my first thought would be why are you purchasing ERRBO? Its effect (or not) in relation to annual allowance* and lifetime allowance for instance, are reasons why I would think long and hard about purchasing ERRBO.

      In answer to your question. You buy ERRBO to reduce your retirement age. Using your figures of 3 years ERRBO and retirement age 68:

      Service up until you stop buying ERRBO ie years of service between 2015 and age 63 have an “Effective” Normal Pension Age of 65 rather than 68. You have decided to retire at 63 therefore the actuarial reduction is that associated with the number of years away from your effective NPA of 65 ie 2 years ie 11%.

      This link shows the various actuarial reductions NHS Pensions – Actuarially Reduced Early Retirement >

      I hope this is clear.

      Best wishes
      Owen

      * ERRBO contributions do not count towards the annual limit of tax relief on pension contributions, although high earners may need to consider the overall limit for annual allowance and lifetime allowance purposes as it applies to their normal NHS Pension benefits.

      Reply
  4. Anne

    I’m 49 with 1995 and 2015 scheme contributions. If I were to take out an ERRBO for the 2 year reduction and decide to retire at age 60 claiming the 1995 pension and ‘freezing’ the 2015 pension.
    1. What then happens the ERRBO – does it become null and void as I won’t be making payments for that 5 year period (or can I?)
    2. Will I still be able to claim the 2015 pension at age 65 with no reduction or will there be a 5 year reduction applied
    What I’m trying to ascertain is will the ERRBO payments made from age 49-60 be worthless and would I be better taking out a stocks and shares isa rather than ERRBO. At this stage I don’t intend working to 65 or 67.

    Reply
    1. Owen Beswick

      Hi Anne

      If you take your ’95 benefits you can’t continue to contribute to the 2015 scheme – therefore ERRBO and regular pension contributions would have to stop.

      Assuming that you take out an ERRBO contract now, service up until you stop buying ERRBO ie years of service between 2018 and age 60 have an “Effective” Normal Pension Age (NPA) of 65 rather than 67. Years between 2015 and 2018 are “non-ERRBO’d” and therefore have an “associated” NPA of 67 so will suffer an actuarial reduction if you take the benefits associated with these years before 67.

      With regards to ISA or ERRBO – I’d hesitate to say one or the other without knowing a lot more detail about you and your finances. If you buy ERRBO, it won’t be worthless but it may give you less than you had imagined/hoped for! Why not give us a call and speak to an adviser who will get some details from you so that you can make an informed decision?

      Best wishes
      Owen

      Reply
  5. Chris

    Hi
    I am 37 and have about 10 years of the 1995 pension and now on the 2015 scheme.
    My overall hope is to retire at 60 and start the ERRBO next April to bring my retirement age down to 65 from 68 without being penalised financially.

    I would then obviously be hit by the reduction of about 20% of my pension should I retire five years earlier than that at 60.

    Is this a realistic plan?

    Does anyone have any thoughts on this?

    Reply
    1. Owen Beswick

      Hi there,

      ERRBO is one of the options that you can consider for “reducing” your retirement age. However, this is a big decision and I would look at alternatives such as a personal pension, ISA contributions, additional pensioning in a partner’s name, etc. before committing to ERRBO.

      These alternatives may have a degree of “investment” risk attached to them but they are also flexible and potentially suited to your future circumstances when you consider likely taxation in the future, for instance. In addition, 25% is likely to be the reduction in pension income, when you are 5 years “early” retired.

      It may be worth having a chat with your financial adviser.

      Best wishes
      Owen

      Reply
  6. William King

    Dear Owen & the team,
    Thank you for the article. Very interesting.
    I have 14 x 1995 years, active added years and ongoing ERRBO for the 2015 years that I started right at the beginning. I understand when the Judges/firefighters won their court case we will have the option to have back seven years of the old 1995 pension until 2022. I understand ERRBO will be refunded for those years and taxed.

    Firstly It looks like as ERRBO is not a pension contribution the only option is for a refund?

    Secondly will there be a clever calculator developed to know if it will be better to not have the seven years of old 1995 pension back but keep the accrued 2015 years that are also protected by ERRBO. I understand the 2015 years may be better value as they will have annual uplift and ERRBO vs. having seven years of 1995 back that are reliant on final salary that may not rise with inflation?

    Many thanks
    Best Wishes
    Will

    Reply
    1. Owen Beswick

      Hi Will

      All correct!!

      ERRBO still “allows” retirement at age 65 on the appropriate amount of years and therefore, whilst some of your 2015 years may be “converted” into 1995 years, you will still have service in the 2015 scheme. I think as I said previously, this situation is evolving but a refund may be one option or a recalculation of the amounts required to fund ERRBO, done by the NHS for individuals, another option. This recalculation could then take into account money already contributed therefore reducing an ongoing payment, for instance.

      The rate of accrual in the 2015 pension scheme is “generous” but don’t forget that it doesn’t come with an automatic right to lump sum like the 95 scheme. But the short answer is “yes” someone in the NHS is going to be very busy calculating if it is better for individuals to have stayed in the 2015 scheme or accumulate more years in the 1995 scheme!

      Best wishes, Owen

      Reply

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