On 1 April 2022 all NHS Pension Scheme members joined the NHS 2015 Pension Scheme, we explain how the scheme works and the benefits it offers
The first day of April 2022 was a significant one for members of the NHS Pension Scheme. On this day, everyone moved to the reformed version of the 2015 NHS Pension Scheme. Pension rights earned in the 1995 and 2008 sections of the scheme are protected, with pension benefits usually worked out according to your final salary at the point of retirement or on your departure from the scheme. But from April onwards, your future pension rights will build up under the 2015 rules.
It is therefore vital that you understand these rules. Importantly, the 2015 NHS Pension Scheme isn’t a final salary plan; rather it uses a “career average revalued earnings” (CARE) formula. It’s still a defined benefit scheme, providing a guaranteed level of pension benefits, but what you get depends on your earnings throughout your time in the scheme, rather than the last years before retirement.
The CARE approach in practice
In a CARE scheme, the amount of pension you earn each year is determined by the “build-up rate”, usually shown as a fraction of your pensionable earnings. The build-up rate for the 2015 NHS Pension Scheme currently is 1/54th. In other words, each year of membership of the scheme nets you a pension worth 1/54th of your pensionable earnings that year. For example, if your pensionable earnings are £81,000 over the next year of the scheme, which runs from April until March, you’ll earn a pension of £1,500 for the year.
You can start drawing that pension at any age from the minimum pension age – currently 55 – onwards. However, the 2015 NHS Pension Scheme sets a normal pension age: this is the same as the age at which you’re eligible to claim your state pension. If you want to start taking benefits before your state pension age (SPA), they will be reduced to reflect the fact that you’re asking for them to be paid for longer than expected.
Protection from inflation
CARE pension schemes recognise that inflation erodes the value of benefits earned over time, which means that the purchasing power of that money will be reduced by the time you come to claim it.
For this reason, the pension you earn each year will be increased according to a “revaluation rate” over the period before you retire or leave the scheme. This rate depends on Treasury Orders – an instruction from the Government on revaluation. You get this increase which at the time of writing has been the consumer prices index (CPI) plus 1.5 percentage points.
A recent change means that the date the Scheme benefits are revalued will move from the 1 April to the 6 April from April 2023. At the same time the date that dynamising factors are applied to 1995/2008 Scheme practitioner pensionable earnings will move from 1 April to 6 April
Tax year 2022/23 will be a transitional year to facilitate the change. The revaluation to accrued pension up to 31 March 2023 will instead be applied on 6 April 2023 and will be included in the closing value benefits for the 2023/24 tax year.
Members who retire during 2022/23 will receive a ‘leaver index adjustment’ which will include the appropriate proportion of revaluation on 6 April.
In practice, this means that the pension you earn over a scheme year will be increased on 6 April in the subsequent year, and then again on 6 April each year until you retire or leave the scheme. So, if, at the beginning of the year following the one in which you have earned £1,500, Treasury Orders are 2%, the pension you have earned will increase by 3.5% to £1,552.50. The following April, the figure will be increased again, in line with that year’s revaluation rate.
If you leave the 2015 NHS Pension Scheme before you’re entitled to claim your retirement benefits, this annual revaluation exercise stops. Instead, when you retire and start drawing your pension, you’ll be entitled to “Pensions Increase” to protect its value against the cost of living which is currently CPI
Alternatively, you don’t have to start drawing your pension even once you reach SPA. You can continue to build up pension rights in the scheme until you reach age 75 with late retirement factors applied which will increase your pension payment for drawing your pension after SPA; there are no limits on the number of years of pensionable earnings that you can build up towards your final pension.
What the scheme costs
Members make pension contributions based on their pensionable earnings, with higher earners paying higher contribution rates; these rates are set against the NHS’s nationally-agreed pay rates. Contributions are deducted from your pay before tax, so you receive tax relief on your savings; this approach could mean you pay less tax, though this will depend on your contribution rate, how much you earn and the income tax rate you pay.
If you’re looking to increase your pension, you also have the option of buying additional annual pension, either with a lump sum payment or through regular additional contributions deducted from your pay for a fixed period. You can buy as little as £250 worth of extra pension, up to a maximum of £6,500.
Another option is an “early retirement reduction buy out” (ERRBO). This allows you to make a payment in return for your pension not being reduced when you start claiming before the normal pension age. You can buy out this reduction for claims of benefits up to three years before your normal pension age (though not before age 65). What you’ll pay will depend on your age and the number of years’ worth of reductions you want to buy out.
At retirement
From October 2023 the 2015 NHS Pension Scheme gives you the option of drawing 20% to 100% of your pension between age 55 and 75. From April 2023 if you want to take all your benefits, you must end your current contract of employment, or contract for services, and not return to work within 24 hours. From April 2023 the rules also allow members of the 1995 section after a 24 hour break to draw their 1995 section NHS Pension and continue to contribute to the 2015 NHS Pension Scheme. This has always been the case for members with 2008 section pension benefits. From October 2023 members of will be able to do this without taking a 24 hour break and they will be able to draw down between 20% and 100% of their benefits in both the 2008 and 1995 sections.
In practice your options are:
- Before your normal pension age: you may take some or all of your benefits once you reach minimum pension age (currently 55), but these will be reduced in value; if you continue to work, or go back, you’re entitled to continue building up further pension rights.
- At normal pension age: your pension benefits will be paid in full if you choose to take them, either in part or in full; again, you can continue to work, or go back, and continue building up further pension benefits.
- After normal pension age: any benefits you take more than a month after your normal pension age will be uprated to reflect the fact you’re claiming them late; you can also build up further rights if you continue working or go back.
In addition, members of the 2015 NHS Pension Scheme may be able to exchange some of their income entitlement for a tax-free lump sum payment. You’ll receive £12 of lump sum for each £1 of pension foregone. Maximums apply based on individual circumstances.
Other benefits
If you’re too ill to work in your present job, you may be able to retire early and claim your pension benefits, as long as you’ve been a scheme member for at least two years. The minimum pension age does not apply in such cases.
The scheme operates two different tiers of ill-health retirement and your entitlement will also depend on whether you’re well enough to do any other kind of work. Ill-health pensions are then increased each year using the Pensions Increase, with a link to a measure set by the Government which is currently the consumer prices index (CPI).
Terminally ill scheme members are entitled to take their benefits immediately, in the form of a serious ill-health lump sum. But your benefits may be reduced or even withdrawn if you take up further employment after retiring early due to ill-health.
The scheme also offers benefits for your dependants. These include a lump sum payment worth twice your pensionable earnings in the event of your death as an active member, and an adult dependant’s pension that is payable for life to an eligible spouse, civil partner or qualifying scheme partner.
Children’s pensions are payable for up to two eligible children until they reach age 23. If the child is unable to earn a living because of a condition that existed both when you retired and when you died, these payments can be extended indefinitely.
If you want to find out more then please get in touch to arrange a complimentary consultation today.
Content correct at the time of writing and is intended for general information only and should not be construed as advice.