What age is classed as early retirement? Once upon a time, there was only one NHS pension scheme and this meant retiring early for most doctors and dentists, was prior to age 60. We now have three schemes (arguably four if you include NEST) all with different retirement ages.
Normal retirement age with the 2015 NHS pension scheme is linked to the state pension age, so for many of us, we are looking at age 67 plus. But, at what age do you wish to be in a position where you are working through choice and not a necessity? Seldom is the answer, late sixties.
If you consider retirement from a purely financial perspective, there has to be a tipping point. If you keep contributing to age 67, having paid into your NHS pension scheme since your early twenties, it is unlikely you will live long enough to see a return. Of course, we would need to know the point at which you “move on” to calculate the break even point where you have received an income greater than what you have contributed. Normal longevity is around 80 ish. I wonder if a delay in drawing your NHS pension until age 67 is cutting it a little fine. Of course, retirement is not all about the money, work offers its own rewards, but it has to be a consideration.
Before I delve into some of the factors you may wish to consider before taking your pension early, let’s have a quick refresher on the normal retirement ages for each scheme.
As a member of the NHS pension scheme, you’ll have both a normal pension age and a minimum pension age. The normal pension age is the age at which you can take your full pension benefits with no reductions, while the minimum pension age is the earliest at which you can start to draw benefits – but your pension will be reduced.
Both your normal and minimum pension ages depend on which section of the scheme you belong.
|NHS Pension Scheme Section||Normal Pension Age||Minimum Pension Age|
|1995 section||60||55 (but some members can leave at 50)*|
|2015 scheme||65 or state pension age, whichever is higher||55|
* If you joined the 1995 section before 6th April 2006, you can usually take early retirement from the NHS pension at age 50. If you joined the 1995 section on or after that date, your minimum pension age will be 55.
Pay scale, are you at the top?
This is more applicable to salaried doctors than GMP/GDP’s. An awareness of where you sit on the pay scale is important. If you have exposure to the 1995 or 2008 scheme, your pension will be based on your final salary. If you have yet to reach the top of the pay scale, then your pension has not reached its full potential.
The 1995 pension scheme requires you to be on the pay grade for 12 months for it to fully impact your pension. The 2008 scheme looks at the average of the best three in the last ten years, so ideally, you need to be on there for longer.
Be aware of abatements
If you decide to draw your pension earlier than the normal retirement age then actuarial reductions will reduce your pension and possibly the lump sum where applicable. You will be drawing the pension for longer, so they need to factor this in when calculating the benefits. The actuarial reductions vary depending on the scheme and can change year to year. The details of the abatements can be found in the NHS pension scheme booklet. It is a trade off between having a smaller amount in your pocket yet being able to access it earlier.
Early retirement reduction buy-out (ERRBO)
The 2015 scheme is linked to the state pension age and the plan is for this age to increase. Members of the 2015 scheme have the option to pre-emptively ‘buy out’ the reduction that would ordinarily be applied to their pension if they retire early.
Buying out the reduction allows you to retire before the state pension age with full benefits intact.The ERRBO costs depend predominantly on how old you are, and how many years before the state pension age you are planning to retire.
You may wish to factor in whether you are likely to suffer lifetime allowances penalties as this could negate the benefit of the ERRBO.
Our regular readers will know this is a subject that we blog about regularly. I often find the mere mention of the lifetime allowance sends many clients into a spin. It is worth taking the time to understand how it is applied in practice, many find it is not as bad as they first thought. There can be reasons why you may wish to exceed the lifetime allowance. One of those reasons may be that you wish to retire early. If you have breached the lifetime allowance and retire early then the penalties for drawing your pension are applied before the calculation against the lifetime allowance. You could be in a position where the early retirement factors negate the lifetime allowance breach.
Combination of schemes
Many NHS pension members will be in the position where they are a member of two schemes, reaching a point where they can draw one without penalty, whilst potentially suffering penalties on the other. Members of the 2008 and 2015 schemes can even rejoin their pension schemes. Just note that 1995 members can’t, which brings us onto Retire and Return…
Retire and return
Although you may wish to draw your pension early, many seek to return to work. Retiring does not need to be absolute. I am sure many of you will be aware of colleagues who have drawn their pension when they can do so without penalty, returning to the workplace after taking a short break. It seems the move into retirement has become more of a transition than a final line in the sand.
From a financial perspective it can make sense; a triple whammy of receipt of normal pay (awards are typically lost), no further pension contributions AND receipt of a pension. It is not all win win, as your employment rights will change, but can be worth investigating.
As a member of the NHS pension scheme early retirement doesn’t have to be absolute. There is a range of options that allow you to slow down your schedule and retire at your own pace. You could take on fewer hours (known as ‘winding down’) or a less senior position (‘stepping down’) while starting to draw some of your pension benefits.
In a profession where so many genuinely love what they do, this can be a best of both worlds scenario. It allows you to address your work-life balance, without fully relinquishing your vocation just yet.
The McCloud judgement will move people back into their legacy scheme until March 2022, offering an underpin at retirement should this not favour them. This will change the landscape again, arguably favouring many who wish to retire at an earlier age.
There are some areas of early retirement I have not covered such as, the impact of awards and deferred membership through to special classes. It is difficult to cover it all as there is not one solution that fits all. I am of the opinion that it is wise to take advice with the complexity of the pension schemes – ideally five to ten years prior, allowing time to plan.
Are you thinking of early retirement? Let us know by leaving a comment below.