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?
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?
What’s the small print?!
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.
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