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Doctors, have the demands of the pandemic made you consider early retirement?

The number of UK doctors considering leaving the NHS early has more than doubled in 10 months, according to practitioner research by the British Medical Association.

Nearly a third of doctors (32%) are considering early retirement as many continue to deal with the stress and burnout caused by the demands of the pandemic. A similar survey by the BMA in June 2020 found that 14% were contemplating early retirement.

According to practitioner research by the British Medical Association.

Making the right pension choice is crucial

Given the severe pressure within the NHS at present, with the financial pressures facing the country and NHS funding some doctors may choose to stop practicing? If they do, they will need to think about their pension planning because early retirement will undoubtedly  mean accessing your NHS Pension.  

Doctors have said they need space and time to rest and recuperate – especially as we look ahead to tackling the frightening backlog of care of millions of patients following the pandemic, which will make it much more challenging to treat patients.

It is likely that some doctors will decide this is the moment to stop working – to sell their share in the practice as a GP or to retire earlier than they had previously planned. But what will this mean for their NHS Pension Scheme benefits? How do they access their savings – and should they do so?

Get scheming 

In practice, there are lots of different factors to take into account here. For example, many doctors will have built up benefits in more than one section of the NHS Pension Scheme – the 1995 or 2008 sections, say, or the 2015 scheme. They’ll need to consider whether to access all of these benefits simultaneously or whether to treat each section individually. Another consideration and confusion is in relation to the outcome of the McCloud Judgement.  The judgement means that the age discrimination which was part of the introduction of the 2015 Scheme will need to be removed. To achieve this, eligible members will be given the choice about whether they would like to receive their 1995/2008 Section benefits or 2015 Scheme benefits for the period between 1 April 2015 to 31 March 2022.  In the interim all NHS members will see their pension reverted back to their legacy scheme for the period from 2015 to 2022.  A choice can then be made when the member retires from the NHS Pension and draw their benefits.

Look out for reduction to your pension if accessed early

Another issue is the potential cost of accessing pension benefits early and receiving a lower level of pension. Different sections of the scheme carry different actuarial reductions for early access – and charge them in different circumstances – so this could have a big impact.

Imagine, for example, that you are a 59-year-old member of the 1995 section of the NHS Pension Scheme and that you have accrued rights to a pension worth £48,000 a year and a lump sum worth £144,000. If you chose to retire now, one year early under the terms of the scheme your benefits would reduce to £45,830 and £127,872 respectively. If you were 55 and had accrued the same benefits, they would reduce to £38,400 and £144,000 if you retired five years early.

Despite the initial reduction in pension benefits the actuarial reduction is not designed to be punitive. The actuarial calculation is designed to adjust the value to take into account the fact that fewer contributions have been paid and you receive the pension for a longer period. It depends on the age at which you die but the total level of pension receipts are often similar in value

Some doctors will have private pension entitlements in addition to the benefits they are due from the NHS Pension Scheme. At first glance, taking an income from these plans, rather than accessing the NHS scheme to avoid penalties from the latter, may seem to make sense. But this can lead to additional taxation penalties for some doctors when drawing their NHS Pension, which could mean that this course of action is not the most suitable for all.

Access to benefits

Many of these questions are not straightforward and doctors should certainly consider taking financial advice on how to make the right decisions. Bear in mind that even the normal retirement age – the age at which members can access benefits without penalty – in the different NHS schemes varies:

  • In the 1995 section, the normal pension age is 60, but savers are entitled to access their benefits from age 50 onwards if they were members of the section on 5 April 2006 or 55 if they joined after this date
  • In the 2008 section, the normal pension age is 65, with benefits accessible from age 55 onwards
  • In the 2015 section, the normal pension age mirrors the state pension age. This is currently around 66 but is increasing gradually over time. Members can begin accessing benefits from age 55.

One added complication to keep an eye on here is that the government has published proposals to increase the age at which people can access their pension without a tax penalty from 55 to 57 in April 2028.

Smaller adjustments thanks to ‘McCloud’

As mentioned earlier reforms to public sector pension schemes, including the NHS Pension Scheme, implemented in 2015 were challenged in court in 2018; the “McCloud judgement” ruled the proposals breached discrimination laws, promoting the government to respond with a different approach.

As a result, a device known as a deferred choice underpin (DCU) will operate. When eligible scheme members reach retirement, they will have a choice.  The members pension initially will revert to their legacy scheme for membership between 1st April 2015 and 1st April 2022 with  membership in the 2015 Scheme then accruing from 1st April 2022.  At retirement when the member draws their pension  an option will be to take their benefits, specifically those accrued between 1 April 2015, when the original reforms came into effect, and 31 March 2022 with membership accrued within the 2015 Scheme for this period and thereafter.

You’ll get this choice if you were a member of the NHS Pension scheme on 31 March 2012 and continued in service between 1 April 2015 and the 31 March 2022 (or your retirement date if earlier). If you were a member of the scheme on 31 March 2012, left service, but then returned within five years, you will also be eligible.

One result of these changes is that you need to look at the overall benefits in terms of choosing the legacy scheme or choosing the reformed scheme which can add another layer of complexity to your decision to retire and draw your pension.

For example, where pension benefits are changed retrospectively, this could also affect your annual allowance charge – a tax on pension benefits above a certain value accrued over the course of a single tax year.

Other factors to consider

Given all these complexities, any doctor contemplating early retirement would benefit from good quality financial advice. There are other wrinkles to consider too. For example, if you take early retirement from the 1995 or 2008 sections, it is not possible to pay to avoid the application of the actuarial reduction. If you are buying added years or additional pension these will also be subject to an initial actuarial reduction on account of non-completion of the contracts.  Its worth remembering the point previously stated that the long term impact is that a similar pension is received over the period it is payable depending on your date of death.  It’s also worth mentioning that any initial early retirement reduction is applied prior to measuring the pension against the Lifetime Allowance which in some circumstances can result in a tax saving. 

Also, while you will still be entitled to pension increases each year if you retire early, if you retire before age 55 from the 1995 section, payment of these increase will be delayed until your 55th birthday.

Finally, do not overlook the question of dependants’ benefits as you consider your option. These still apply in full if you do decide to retire early.

Content correct at the time of writing and is intended for general information only and should not be construed as advice.

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