NHS pension confusion

[Monstermoomin]

Hoping someone can advise.

I was reading about the NHS pension as people are opting out due to cost of living crisis. I hasn't realised that the money you pay in isn't actually what you pay in.

You pay 9.8% for example of your monthly wage so this could be around £350, but, only 1/54th or 1.85% of your salary is paid into you pension pot. So for the above example, only £720 would be paid in per year despite having £4200 deducted for your pension.

So can someone explain to me where the remaining £3480 taken a year actually goes?!?

Thanks

What you’re missing is that the pension accrued then gets paid every year for life once you retire. So if you’re retired for 20 years and get £720 each year that’s over £14000 and that doesn’t even take into account any inflation proofing. So that’s where the rest of the money (plus the employer’s contribution) goes!

What you pay in goes to those who are claiming their pension. There is not pot of money, like there is with a Defined Contribution pension scheme. With a Defined Benefit scheme, you get paid a set amount (the benefit) for however long you live, not a pot of money from which you arrange to spend (drawdown) which runs out.

There are 3 different NHS schemes I think, maybe more if you counted each Trusts scheme separately. So different schemes have different rules and people may be a member of more than one scheme. Read the scheme rules for the scheme that applies to the situation. Later schemes are not as generous as older ones but a defined benefit scheme is still good to be in, as you do not know how long you will live following retirement.

@nannynick thanks that makes sense, I wasn't aware that's how it worked I thought there was a pot as such.

Further to that. Yes the money paid in generates 740 every year you are retired. What's more, assuming g that is a salary if £40k, the contribution is £2889 after tax relief. So basically for everything you pit in, you receive a payment of 25% for every year your are retired. That increases with tax relief at 40%

Hence why opting out has to be a desperate move

The 1/54th of salary is what you will receive as pension x however may years service. So, 25 years service at £25,000 (assuming no pay rises as the scheme is career average) will equal a pension of roughly £11,500 per year for life (25/54 x £25000). Of course over 25 years the career average is likely to rise with promotions/pay rises - this is just a calculation to show where the 1/54 comes from. The £720 figure you have on your TRS is how much your pension is worth now, if you retired today.