Is the property market a 
good alternative to NHS pensions?

As part of a diversified financial portfolio you would expect to see property and pensions represented well, with property normally being your main residence, and some form of pension planning e.g. the NHS pension scheme in the mix.

However, with NHS Pension Scheme contributions as high as 14.5% of pay for some, penalties of c. 5% per year if you want to take benefits ‘early’, and possible tax charges if your NHS Pension causes you to breach your annual or lifetime allowances, you could be forgiven for asking if you should prioritise property over pensions.

But even contemplating such a swing is fraught with difficulty. In trying to choose between the two, the problem you have is that you are comparing apples with bananas. The NHS pension scheme is a gold plated benefit that is guaranteed to pay you an income in retirement. You contribute to the scheme on a monthly basis, building up benefits over a period of time which is increased by inflation each year. When you take your pension, this is further protected by inflation increases payable for the rest of your life.

If you expect to have annual or lifetime pension allowance issues in the future, the excess tax charges that you’ll incur will affect the generous nature of the NHS Pension.

Investing in property over time has traditionally been a very good way of getting a return on your capital, but history has also shown things can go wrong. Property crashes and difficulty in borrowing are now in most people’s remembrance. Property isn’t a cast iron investment. Because it is so familiar to many, inherent risks are often overlooked. What if interest rates make the mortgage repayments unaffordable? What if you end up in negative equity because local prices have fallen since you bought, consuming your equity? If you buy as an investment rather than your main residence only, what if the rental market stalls and your rent no longer covers your mortgage and running costs? What about the tax implications of your capital gain and rental income on a buy to let?

So is the NHS Pension scheme good value for money?

Let’s start by comparing apples with apples! Is the NHS Pension the right kind of pension for you?

On the one hand, the new pension freedoms have made personal pensions the obvious, more attractive alternative haven’t they? The simple answer is ‘no’. The NHS Pension Scheme’s fringe benefits are hard to replicate elsewhere. Benefits such as the Ill Health Retirement Pension, Life Cover (death in service, although beware the caveats regarding GP locum work), and uplifts for any spouses pension are not included within a personal pension arrangement and if they were purchased as standalone policies could be more expensive.

To try to illustrate whether the NHS Pension Scheme is still good value for money, here are 3 age dependent examples*: age 25, 35 and 45.

As most are now in the 2015 scheme, I have based all examples purely looking at a contribution within that scheme.

You’re 25 years old

(hypothetical - too young to be a GP!)

  • Your basic pay is £30,000. Your planned retirement age is 68 (state pension age).
  • NHS Pension vs Personal Pension for a 25 year old
  • 1 year’s NHS Pension contribution will give you an NHS Pension of £2,356.25 per annum (index linked) at age 68.
  • To provide an equivalent pension at age 68, you would have to pay 29.2% of your basic pay that year into a personal pension. That’s 19.9% more than the 9.3% contribution that you currently pay into your NHS Pension.

You’re 35 years old

  • Your basic pay is £45,000. Your planned retirement age is 65 (earlier than state pension age and 2015 scheme pension age).
  • NHS Pension vs Personal Pension for a 35 year old
  • 1 year’s NHS Pension contribution will give you an NHS Pension of £1,920.91 per annum (index linked) at age 65.
  • To provide an equivalent pension at age 65, you would have to pay 35.3% of your basic pay that year into a personal pension. That’s 26% more than the 9.3% contribution that you currently pay into your NHS Pension.

You’re 45 years old

  • Your basic pay is £80,000. Your planned retirement age is 60 (much earlier than state pension age; early retirement penalties will apply.
  • NHS Pension vs Personal Pension for a 45 year old
  • 1 year’s NHS Pension contribution will give you an NHS Pension of £1,558.74 per annum (index linked) at age 60.
  • To provide an equivalent pension at age 60, you would have to pay 40.7% of your basic pay that year into a personal pension. That’s 27.2% more than the 13.5% contribution that you currently pay into your NHS Pension.

So, is the NHS Pension Scheme still good value for money?

With the examples above, it would take either some extreme investment choices or high contributions to match the equivalent NHS Pension. Not only is the NHS Pension Scheme still good value for money, importantly, a major part of your retirement planning is taken care of for you.

Other considerations worth noting

If you expect to have annual or lifetime pension allowance issues in the future, the excess tax charges that you’ll incur will affect the generous nature of the NHS Pension. Financial advice should be sought if you think that these allowances may affect you now or in years to come.

You should also note that, if annuity rates increase, the outcome of the NHS Pension ‘value for money’ debate may well change. For that reason alone, it’s worth keeping up-to-date and regularly reviewing both your retirement plan and your overall financial planning.

So as with most things in life, over reliance on one thing is not advisable. Attempting to choose between pensions of any kind and property is to deny yourself tools that will be of undoubted of use in the unknown future we all face. With the irreplaceable benefits of being a member of the NHS Pensions scheme on offer, plus the ability to partake in the advantages of property with your own main residence without adding complication to your tax situation seems to continue to fit the bill. Any deviation away from this route plan would need very strong arguments and great thought.

The locum pension paradox – annualising days not covered by death in service

Our articles are designed to be informative but do not constitute financial advice. We recommend seeking specialist advice before making a decision.

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The Financial Conduct Authority does not regulate offshore investments, tax advice, estate planning and some forms of mortgages. The tax reliefs referred to on our articles are those currently applying in the United Kingdom to UK Tax Residents. These tax reliefs are liable to change. The value of any tax relief available will depend upon the individual circumstances of the taxpayer.

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