This article is supplementary to the webinar on the same subject, which you might find extremely useful as we were joined by Andrew, a pensions expert from Wesleyan.
We also address the very important question, “Should I leave the NHS pension scheme?”
What is a pension?
A pension scheme is a tax-efficient way of saving for retirement. It works by deferring the income tax you would pay on your earnings to when you retire, ideally attracting less tax. In employer pension schemes, the employee and employer both contribute to the scheme to build up a pot.
Types of Pensions:
Defined Contribution Schemes: This is the most common type of scheme at the moment in the private sector. It entails having a finite pot of money that has been built up using employee and employer contributions that have been invested by the pension provider. This means the value of the pension can go up or down and it is not a guaranteed value. Once the pension pot is exhausted, there is no access to a further pension. As such, there may be a period in retirement where there is no pension income from the pension scheme before death.
Defined Benefit Schemes: These have been phased out in the private sector and few are left in the public sector. They are very generous as they guarantee to pay out until death and are (now) based on an average of your earnings over time. They used to pay out on the average of earnings in the last 3 years before retirement, however, they are now valued using a career average. In these schemes, the employee contributes a % of their salary based on their pensionable salary and the employer contributes a certain %. These act as a fee for the scheme to run rather than as a defined contribution as they have no bearing on the value of your pension at the end. There are additional benefits including death in service, dependents’ and spouse pensions.
State Pension: set by the UK government and given to those who are eligible by retirement age. The current pension amount is £137.60 per week, a small amount by most standards. It is a comparatively low sum by most Western European standards and is not necessarily a sum of money that can be relied on completely to support yourself in retirement.
Key Terms and Definitions
|Pensionable Salary||Your basic salary excluding overtime, OOH, weekend premia, etc|
|Pension Contribution||The amount deducted from your pre-tax salary which acts as a fee to be part of the pensions scheme and has no bearing on your final pension value|
|Annual Defined Benefit||The predicted value of each year’s pension payment is based on your average earnings and time spent contributing to the scheme|
|Lifetime Allowance||Currently £1,055,000.|
The maximum value of your tax-free pension pot (calculated as 20 times the annual defined benefit of your pension)
The 2015 NHS Pension Scheme Simplified
Employee contributions are based on basic salary and are in bands. These have no bearing on the value of your pension and act as a fee to be a member of the scheme:
|Annual Salary||% Contribution|
|Up to £15,431.99||5.0%|
|£15,432.00 to £21,477.99||5.6%|
|£21,478.00 to £26,823.99||7.1%|
|£26,824.00 to £47,845.99||9.3%|
|£47,846.00 to £70,630.99||12.5%|
|£70,631.00 to £111,376.99||13.5%|
The NHS contributes 20.6% of our basic pay to the scheme as well. This, again, has no bearing on the value of our pension. The contributions are taken pre-tax, which reduces our taxable income and so our income tax deductions while we are earning. We then pay income tax when we retire on our pension payments and these attract less tax as we still benefit from the tax-free personal allowance as a lower-income banding. Retirement triggers access to our pension and the retirement age is aligned to state pension retirement age.
The NHS 2015 has additional benefits including a benefit to dependents in the event of your death in service, early (but reduced) pension access if you are unable to work due to illness, and continuing pension for your spouse after you die. You can also opt back into the 2015 pension scheme if you have previously opted out (which was not the case for the earlier schemes).
Should I leave the NHS pension scheme?
‘Should I stay or should I go?’ is one of the main questions regarding the NHS Pension Scheme. There is considerable confusion about what the scheme entails, with many questioning if it is worth staying or opting out, especially when seeing 9.3% of salary being deducted from their payslips each month.
Whilst it is of course everyone’s personal decision about whether to stay in the scheme, it is worth staying in for a variety of reasons. The NHS pension, in the world of pensions, is a relic of a bygone age in its generosity and guarantees to pay you, once retired, a monthly sum of money until death.
I highly recommend that you remain opted into the NHS Pension Scheme and think very carefully if you are planning to opt out. Andrew from Wesleyan explained that to have an equivalent pay-out amount from a private pension would require significantly higher contributions and would lack the added benefits that come with the NHS pension. Remember, especially for tax purposes, even though you are taking home less pay now, you are also paying less income tax than if you weren’t paying a pension contribution. It can be annoying seeing that figure on your payslip being deducted but you are investing in your retirement at a very favourable rate- keep an eye on the long-term!
Changes to the Pension Scheme in 2015
Whilst the current NHS scheme is still generous it is not as generous as it was in the past. The main change that occurred to create the 2015 scheme was that now it is based on your average career earnings rather than your earnings from the last 3 years. In short, this means that those who will be retiring on the 2015 will be potentially receiving less than their predecessors, as you will most likely be earning more at the end of your career rather than your career average.
One of the most pressing issues facing Consultants and those currently reaching retirement age is legislation and taxes on pensions. Consultants who earn over £110,000 are facing large tax bills of £40-50,000 with many senior Consultants deciding to retire or reduce their sessions to avoid a large bill. Despite appeals to the government to change this decision and concessions designed to exempt doctors from the 2016 changes, these have not been sufficient to ensure that Consultants will not face extra tax charges. This is especially significant at a time where Consultants are being encouraged to take on additional work to help clear long waiting lists for appointments and procedures.
Developments to the NHS Pension
As some of you may be aware, there are proposed changes to the NHS pension scheme. As it stands there is very little information available about what these changes are other than some increases and decreases to the amount that members are expected to pay. It is those in the earlier stages of their career earning between £27,780 to £42,120 who will feel the increase most sharply with their contributions rising from 9.3% to 9.8%. In contrast, those earning between £47,846 to £54,763 will see their contribution drop slightly 12.5% to 11.6% as will those in the top category, over £111,377 who will also see a drop in their contributions 14.5% to 13.5%.
- NHS Business Services Authority
- Which: NHS Pensions Schemes
- Wesleyan NHS Pension Scheme Guide
- Gov.uk – NHS Pension Scheme – Proposed changes to member contributions
- Gov.uk – State Pension
- Commons Library Parliament UK – Impact of pension tax rules on GPs & Consultants explained
- BMA.org.uk – NHS Pnesion annual allowance
Written by Dr Cyra Asher & Dr Gabriela Di Scenza
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