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?
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
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?
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?
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
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)?
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.
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.
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
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?
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
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
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
I have pension in the 1995 and 2015
I have been working part time for many years . Would it be a good idea to increase to full time now so when changes revert back to the 1995 pension till 2022 my final salary will be at its peak when recalculated ( eg the last year 2021 – 2022) ?
Hi, Jo
There are two elements to your NHS pension:
Salary and reckonable service. The combination of these is how benefits are calculated in the ’95 scheme. Let’s assume you work part-time and you were in the ’95 scheme:
Your pension for those years will be based on reckonable service i.e. you accrue half a year of service for every calendar year, BUT the pension benefit will be based on the ‘Whole Time Equivalent’ salary of your role NOT your part-time income.
Switching back to the ’95 scheme on a full-time basis will not result in you getting the same pension as your full-time colleagues who have worked 35-40 years full-time. Your pension will be based on the full-time salary, BUT you will have only effectively accrued 17.5-20 years of reckonable service, and would therefore receive a pension of half that of your full-time colleagues.
Hope this is clear!
Best wishes, Owen
Hi Owen I went into the pension scheme in 1979 and came out in 1989 I have a small lump sum frozen and a smaa pension frozen I’m still employed by the nhs and IV been told if I want it I have to leave and then come back at the moment I’m on long term sick and on the 15 of Feb I go to know pay do you think there are certain circumstances that can release my pension to help me out thanks Owen regards Stephen
Hi, Stephen
If you were “ill-health retired” you could claim your pension “early”. Alternatively, as has been suggested, you could leave employment and claim your pension. There would be nothing then stopping you applying for your job but obviously, that may no longer be available for you!
If you follow this link, scroll down and click on “ill health” – this will give you more of an idea of whether you meet criteria.
Best wishes, Owen
I am 58years old in the 1995 pension scheme. I was supposed to go into the 2015 in October 2020. This may be frozen and I may continue in the 1995 scheme till Aprill 2023.
If I wanted to retire at 63 or 64, could I take my 1995 pension and freeze my 2015 pension and collect it when I am 67.
Dr Arthur Ogunko
Hi Arthur
Yes, you can take your 95 scheme benefits and delay taking the 2015 section benefits. One thing to remember, currently, if you take the 95 scheme benefits you will be precluded from continuing to contribute to the 2015 scheme.
I hope this helps!
Best wishes, Owen
Hi Owen
I belong to the 1995 section and the 2015 section. In July I will be 58, last year I had a temporary uplift in pay while I covered a colleagues maternity. Am I right in thinking that my 1995 pension will be calculated using the salary I was receiving last year? Secondly, I plan to leave in April 2022 and freeze the pension until I reach 60, so can opt to have the couple of years built up in the 2015 transferred across to the 1995 pension?
Is this a good plan.
Hi, Phil
Your pension in the 95 section is based on the best of the last three years before retirement. So potentially your pension could be greater as a result. However, remember that the pension is based on whole-time equivalent service so you may end up with a pension being based on the same amount but be credited with more reckoning service.
If it was applied to the 2015 scheme, then as this is based on a career average, the pension associated with that year would be more, assuming that the additional income was superannuated.
As for transferring 2015 membership to the ’95 scheme; gut instinct says this must be a good thing but I would say that we have run a few scenarios and it isn’t as clear-cut as one may expect. So my advice would be to seek financial advice before making any sort of decision.
Best wishes, Owen
As I understand the rules if I use ERRBO to reduce my pension age to 65 instead of 68 but was unfortunate enough to take earlier retirement due to permanent ill health the extra amount paid in would effectively be ‘lost’.
Hi Charlotte
You are correct. The ERRBO agreement will have no value and you will not have your additional contributions returned. You will, however, receive your pension early and without reduction.
Here is the NHS document pertaining to ERRBO for your reference.
Best wishes, Owen
I’m 49 and a member of the 1995 scheme, purchasing 5 added years and the 2015 scheme. I’m interested in purchasing the ERRBO to reduce my retirement age in the 2015 scheme to 65 (purchasing two years).
I intend on retiring at 62, so will retire three years early from the 2015 scheme, and two years later in the 1995 scheme…
Will the ERRBO reduce my taxable income? I’d like to use it if I can to try and maintain my tax free allowance as long as possible so to offset its cost.
I would hope that deferring my 1995 scheme by two years will help to offset the reduction in my 2015 scheme.
Hi there
You have a complicated situation and I would be reluctant to give anything but general advice. I would recommend that you meet up with one of our Legal & Medical advisers to have an in-depth meeting. As an alternative to ERRBO you may be able to consider a personal pension, you may want to use ISA’s which, whilst not as tax-efficient have no age limit in terms of withdrawal. You may want to increase a partner’s pension provision because it is more tax-efficient to do so etc, etc. These are all questions that need to be answered, before going down the ERRBO route. Tax relief is granted on ERRBO and does have the added benefit of not contributing to the pension input with reference to annual allowance.
Again, I do urge you to take advice.
Best wishes, Owen
Do I get tax relief on ERRBO contributions ?
Hi there,
Yes, you do get tax relief on ERRBO contributions.
Best wishes, Owen
Hi. I have 15 years in 1995 section and will have 21 years in 2015 section when I wish to retire at 60.
Can I retire at 60 and draw my 1995 pension with lump sum, whilst freezing 2015 pension and taking this later when I reach NPA. Effectively I would no longer contribute to 2015 but wouldn’t be taking the benefits earlier either. Would I incur any penalties?
Hi, there
Yes, you can take the ’95 section benefits at 60 independently of your 2015 scheme benefits. If you leave your 2015 scheme benefits to NPA (currently 67/68), you will not suffer any actuarial reduction (penalty) of your 2015 benefits.
I hope this helps
Best wishes, Owen
I have a split pension between 1995 and 2015. My plan was to retire at 60 on the 1995 and take the 7-year penalty for the 2015. But I then thought, if I do the ERBO I could buy 2 years, retire at 60 and only have 5 years penalty instead of 7. This would cost me 3.04% for 13 years – a total cost of about 20k (ignoring tax etc). But then I looked at the sliding scale of contributions. If I held off doing the ERBO until I was 55 years old the % contribution would increase to 3.16% but the overall cost would reduce to about 7.5K (about 12.5K cheaper). Or I could hold off until 58 years old when the % contribution increases to 3.22% but the overall cost is less as I’d only have to pay for a couple of years (total cost about 3K and about 17K cheaper than paying from 47).
These figures seem absolutely farcical. Why would someone pay it for years and years when they could just do it for the last few years before retirement? They’d save themselves thousands.
Or have I completely understood. I keep doing the maths and it makes no sense!
Hi there,
Please see the link: NHS Pensions – Early retirement reduction buy out (ERBO). ERBO is linked to the normal retirement age for you personally linked to the State retirement age (so 65,66,67 or 68). If your normal retirement age was 67, then you would be required to pay ERBO to the age of 65 to give yourself two years of buy out by the time you reach 65.
You DON’T pay for ERBO up until the time you would like to retire, rather the age that you are “meant” to retire.
I hope this helps!
Best wishes, Owen
This is a very good point that has been made, but the final sentence of your answer , Owen, does not reassure me.
The link you have given does not clarify this either.
You surely cannot continue to pay the ERRBO up until the age you are ‘meant’ to retire if you have already retired.
I am in the exact position as the person who posted the above comment and will have to continue paying the ERRBO until I am 65 (2 years earlier than SPA)
If I had left it until much later to start the ERRBO I would have paid out much less in total but for exactly the same benefit.
Hi there
ERRBO allows you to have a lower pension age on service accrued. Therefore if you start ERRBO at age 35, then the lower pension age (65) will apply to the next 30 years of contributions up until age 65. If you started ERRBO at age 60, then the annual amount you pay is not that dis-similar to age 35, BUT only the pension accrued in the 5-years up to age 65, would have the earlier pension age of 65 applied. All the previous years between the ages 35 and 60 would have the normal pension age (NPA) of 67/68 applied. (I’ve attached a link to the ERRBO data sheet, which shows the factors used. The sheet also covers what happens to ERRBO in different circumstances, including retirement for instance). ERRBO >
Best wishes, Owen
I am currently 26 years of age.
Although I cannot be sure to have a career until I’m 67 (likely more) years of age, I am interested in using any part of NHS Pension Schemes that could benefit me in the long term.
I’m a little confused about how the ERRBO works. Looking at the chart, I can either start paying around 4.2% now (for the rest of time) or I can start paying 4.8% when I’m 60 years of age.
Surely I’m significantly waiting until I’m 60 before I consider starting an ERRBO agreement, only paying for 5 years but reaping the benefits of retiring 3 years early with no reductions.
Thank you for any advice or information you can offer.
Hi there,
ERRBO allows you to have a lower pension age on service accrued. Therefore, if you start ERRBO at age 35, then the lower pension age (65) will apply to the next 30 years of contributions up until age 65. If you started ERRBO at age 60 then the annual amount you pay is not that dissimilar to age 35 BUT only the pension accrued in the 5 years up to age 65, would have the earlier pension age of 65 applied. All the previous years between the ages 35 and 60 would have the normal pension age (NPA) of 67/68 applied. (I’ve attached a link to the ERRBO data sheet which shows the factors used. The sheet also covers what happens to ERRBO in different circumstances including retirement for instance). NHS Pensions – Early retirement reduction buy out (ERBO) >
I hope this helps,
Best wishes, Owen
Hello,
What would happen if I paid into the ERRBO scheme with the intention of reducing my retirement age by 3 years, which would enable me to retire at 65, but then, having reached 65, I decided to keep working until I was 68 after all?
Thank you
Hi there
Please find attached the link to the NHS document you require. I think page 5 answers your question: NHS Pensions – Early Retirement Reduction Buyout (ERRBO)
I hope this helps!
Best wishes, Owen