The lowdown on NHS pensions
Whether running a village GP surgery or patching people up in a busy A&E, NHS employees are a vital part of this country’s healthcare system. To reward them for looking after our health, NHS staff are eligible to join its pension scheme.
How does the NHS pension scheme work?
The NHS Pension Scheme is a type of defined benefit pension known as a career average revalued earnings (CARE) scheme. As the name suggests, this gives you a pension based on your pensionable pay each year, with this amount revalued every year you remain in the scheme.
Employers pay in 14.3% of the individual’s salary, and members of the NHS Pension Scheme earn 1/54th (1.85%) of their annual salary, with this revalued every year at a rate of Consumer Price Index (CPI) inflation plus 1.5%.
As an example, if a doctor’s pensionable pay is £80,000 in the 2015 scheme year (April 2015 to March 2016), they will earn 1/54th of this – £1,481.48 – as pension. This is revalued on 1 April every year, using the CPI rate from the previous September. So, say CPI was 0.5%, the following April (2016) the £1,481.48 would be multiplied by 2% (1.5% + 0.5%), giving an uplift of £29.63 and taking the pension entitlement for the 2015 scheme year to £1,511.11.
The normal pension age is the individual’s state pension age, or age 65 if that is later. Of course, if you don’t join the scheme and contribute towards the pension (and it is voluntary), you won’t get anything from your employer.
How much do NHS staff contribute?
To qualify for a pension, members contribute a percentage of their pensionable pay. This depends on salary level and starts at 5% for anyone earning less than the full-time equivalent of £15,431.99 a year, rising in stages to 14.5% for those on more than £111,377 a year. In the example left, the doctor would need to contribute 13.5% of earnings to the pension scheme.
Can you pay in more?
There are three options available to pay in more. Within the scheme, NHS staff can buy additional annual pension benefit in £250 chunks up to £6,500. The cost, which is determined by the scheme actuary, depends on your age and can be paid with a lump sum or over a fixed term of between one and 20 years.
Also, within the scheme NHS staff can go for an early retirement reduction buy out, or ERRBO. James Davenport, senior communications manager at the NHS Business Services Authority, explains: “Members can pay extra contributions to buy out the reduction that would apply if they claimed their benefits up to three years early.”
However, it is thought that this is to appease members who have seen their pension age increase and, as such, annot be used for those retiring before their 65th birthday.
The extra they would pay depends on age and how many years they want to bring forward their retirement date. For example, a 50-year-old would need to pay an additional 2.84% on top of normal contributions to retire two years early, with the amount increasing to 3.10% if they were 60 when they took out an ERRBO.
The third option is a money purchase additional voluntary contribution (AVC) scheme with Standard Life and Prudential – the NHS AVC providers. While these schemes don’t guarantee
a set income in retirement, they do give NHS staff access to pension freedoms.
Ian Buchan, corporate relationship director at Standard Life, explains: “AVCs can give NHS staff much more flexibility around retirement. As an example, a doctor could use their AVC to fund retirement until their NHS scheme kicks in, allowing them to retire early or reduce the hours they work.”
What are the options for early retirement?
NHS staff who retire early can claim their pension before they reach normal pension age providing they have reached the scheme’s minimum pension age, which is currently 55.
The downside of this is that the amount they would receive will be reduced to reflect this early start date. (ERRBO benefits can only be purchased by those retiring at age 65 or later.)
Are there any catches?
A combination of high earnings and inflated contribution rates means that high earning NHS employees, such as consultants and chief executives, will need to watch out for the annual and lifetime allowances of £40,000 and £1 million respectively. Bust these limits and they would be hit with tax on the excess.
But Mr Buchan says those affected shouldn’t necessarily jump ship if they’re approaching these limits. “Although the tax treatment will change, you can continue saving into your pension beyond the allowances,” he explains. “It’s worth getting advice as you may want to consider other factors such as using your pension for inheritance tax planning.”
In addition, membership of the scheme gives NHS staff access to ill health benefits and life assurance.
Have there been any changes recently?
Yes. The new scheme, outlined above, came into force in April 2015 as part of the government’s reform of public sector pensions. Andy James, head of retirement planning at Towry, says it is not as generous as previous ones. “The government wanted to cut costs so it’s increased the amount staff have to pay in and shifted the pension age upwards. It means they’re paying more for a smaller pension.”
For example, on the 2008 NHS Pension Scheme, the normal pension age was 65 rather than state pension age, and someone earning £80,000 would have paid 12.3% of their pensionable pay compared to 13.5% under the new scheme.
Also hurting some NHS employees is the shift to a CARE scheme, albeit one with an accrual rate of 1/54th rather than the previous 1/60th. Although GPs would have had this previously, the earlier scheme for NHS employees was based on final salary.
“An employee who rises up the career ladder would have been better off under the final salary scheme,” adds Mr James. “The new scheme reflects their salary throughout their career rather than the high earning years at the end.”
For employees who started pension saving prior to April 2015, there are complex transitional rules in place – some will be moved across, others won’t.
How does it compare to other schemes?
The NHS Pension Scheme remains one of the most generous workplace pension schemes available. “Yes, the new scheme has made it more expensive to fund retirement, but it’s still a very good pension,” says Mr James.
Where can I get advice?
Given the complexities of the NHS Pension Scheme, especially if you were a member of a previous scheme and have protection in place, it is sensible to take advice. NHS Business Services Authority recommends contacting Unbiased.co.uk or The Personal Finance Society (Findanadviser.org) to find a qualified adviser.
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).
The tax levied on the total value of your estate after you die. IHT has to be paid by the beneficiaries of your estate before they can receive any of the money from it. The money can’t be taken from the value of the estate _– it has to be paid before any money can be released. There is an IHT threshold – known as the “nil-rate band” – below which no tax is levied (£325,000 in 2011/12). Any amount above the nil-rate band is subject to tax at 40%. If your estate totals £600,000, there is no tax on the first £325,000; however your estate will pay 40% tax on the remaining £275,000, a total of £110,000. Prudent tax planning can reduce your IHT liability, so always consult a specialist solicitor.
This is more usually a feature of car insurance but it can also crop up in contents, mobile phone and pet insurance policies. An excess is the amount of money you have to pay before the insurance company starts paying out. The excess makes up the first part of a claim, so if your excess is £100 and your claim is for £500, you would pay the first £100 and the insurer the remaining £400. Many online insures let you set your own excess, but the lower the excess, the more expensive the premium will be.
Defined benefit pension
Often referred to as a “final salary” pension, benefits paid in retirement are known in advance and are “defined” when the employee joins the scheme. Benefits are based on the employee’s salary history and length of service rather than on investment returns. The risk is with the employer because, as long as the employee contributes a fixed percentage of salary every month, all costs of meeting the defined benefits are the responsibility of the employer. (See also Final Salary).
The Consumer Price Index is the official measure of inflation adopted by the government to set its target. When commentators refer to changes in inflation, they’re actually referring to the CPI. In the June 2010 Budget, Chancellor announced the government’s intention to also use the CPI for the price indexation of benefits, tax credits and public sector pensions from April 2011. (See also Retail Prices Index).
Generally thought of as being interchangeable with insurance but isn’t. Assurance is cover for events that WILL happen but at an unspecified point in the future (such as retirement and death) and insurance covers events that MAY happen (such as fire, theft and accidents). Therefore you buy life assurance (you will die, but don’t know when) and car insurance (you may have an accident). Assurance policies are for a fixed term, with a fixed payout, and unlike life insurance have an investment aspect: as a life assurance policy increases in value, the bonuses attached to it build up. If you die during the fixed term, the policy pays out the sum assured. However, if you survive to the end of the policy, you then get the annual bonuses plus a terminal bonus.