The true value of your NHS Pension

An increasing number of young doctors are deciding not to join the NHS Pension Scheme citing high levels of contribution, increasing retirement ages and the potential of paying additional taxation on their pension.  Pension taxation has also led to a number of senior doctors leaving the scheme, reducing their hours or retiring early.

But what is the true value of the NHS Pension? Should doctors be opting out of the scheme? Or is the scheme still providing the financial security it promises for doctors throughout their career and into retirement?

For some time now NHS Pension contributions have not changed.  However, since October 2022 in England and Wales and November 2022 in Northern Ireland the rates have changed with Scotland expected to follow but with different rates.  The contributions are still based on salary bands and some Doctors will see their contribution increase whereas the highest earners will see their contribution reduce from 14.5% to 13.5%.  Top band will reduce further to 12.5% in phase 2 at a date to be announced probably later in 2023 at the time of writing.  The rates are also due to change in Scotland but currently remain at rates between 5.2% and 14.7%.

TierPensionable earningsContribution rate from 1 October 2022
until introduction of phase 2
1£0 to £13,246.995.1%
2£13,247.00 to £16,831.995.7%
3£16,832.00 to £22,878.996.1%
4£22,879.00 to £23,948.996.8%
5£23,949.00 to £28,223.997.7%
6£28,224.00 to £29,179.998.8%
7£29,180.00 to £43,805.999.8%
8£43,806.00 to £49,245.9910%
9£49,246.00 to £56,163.9911.6%
10£56,164.00 to £72,030.9912.5%
11£72,031 and above13.5%
TierPensionable earningsContribution rate following
implementation of
phase 2 changes
1£0 to £13,246.995.2%
2£13,247.00 to £22,548.996.5%
3£22,549.00 to £27,779.998.3%
4£27,780.00 to £42,120.999.8%
5£42,121.00 to £54,763.9910.7%
6£54,764.00 and over12.5%
Note: The earnings bands listed in this table will be updated following announcement of the 2023/2024 AfC pay award. The bands shown are placeholders only. Revised bandings will be issued as soon as available.

Although these contribution rates may seem high when you also consider that the employer contribution is currently 20.68% in England/Wales, 20.9% in Scotland and 22.5% in Northern Ireland the true cost of membership becomes apparent. 

In the private sector under auto-enrolment, there are minimum contributions that both you (the employee) and your employer must make.  These are a percentage of qualifying earnings.  Employers pay at least 3% and employees pay at least 5% and although both can pay more it is extremely rare that total funding will reach the levels of contribution payable into the NHS pension scheme.

So that’s the contribution issue but what about the increase in retirement age?

The NHS pension scheme is made up of 2 schemes of which one has 2 sections.  Over time as life expectancy has increased the cost to the scheme has also increased as pensions in payment have been payable longer.  To keep the scheme affordable for both members and the government the solution was decided to increase the normal retirement dates. 

Anyone who joined before 1st April 2008 will be members of the 1995 Section and the normal retirement age is 60.  For members of the 2008 section for members who joined after 31st March 2008 but before 1st April 2015 their retirement age is 65.  For anyone who joined after 31st March 2015 they will be members of the 2015 Scheme and the retirement age is the state pension age which currently could be as much as age 68 for younger doctors.  This retirement date also applies to anyone who is an active member after 31st March 2022 irrespective of when they joined the pension scheme as the 1995/2008 scheme closed with effect from 1st April 2022 and all future membership is within the 2015 scheme. 

It’s worth pointing out that any membership in the legacy 1995/2008 Scheme is still increasing in value as it is linked to the members final salary at the point, they either leave the scheme or draw their retirement income.

This does mean that members will need to wait until the state pension age to draw all or an element of their 2015 pension without any kind of early retirement reduction however their original normal retirement dates still remain at age 60 and 65 for benefits accumulated within the 1995 and 2008 sections respectively.

So, the retirement ages have increased is it still worth it?    

The 2015 scheme is calculated differently to the previous legacy 1995/2008 scheme as these legacy schemes were based on the members final salary whereas the 2015 scheme is what is known as a career average revalued scheme (CARE Scheme).  What this means in simple terms is that within the legacy scheme the members final salary and length of service defined their pension. 

For example, the pension calculation in the 1995 Scheme is based on 1/80th multiplied by the members final salary.  So, for a member retiring after 35 years’ service on an income of £80,000 per annum the pension would be calculated as 35/80 x £80,000 to give a pension of £35,000 per annum.  Within the 1995 Scheme the member is also entitled to a tax-free lump sum of 3 x the pension so in this example the lump sum would be £105,000.  The calculation is slightly different in the 2008 section as this is based on 1/60th and there is no automatic lump sum. So, as per the previous example the pension would have been 35/60 x £80,000 to give a pension of £46,666 per annum. 

It’s worth pointing out that a GP’s pension calculation is different in the legacy scheme as GP’s pensions are worked out on a CARE scheme basis.  An example of how this works is that a GP’s annual pensionable earnings are added into a pot which his known as the total career earnings.  Each year’s earnings are revalued and dynamised by a rate which is currently CPI + 1.5%.  This pot is then multiplied by an accrual rate which is 1.4% in the 1995 section and 1.87% in the 2008 section.  Therefore, if the total career earnings were £3,000,000 in the 1995 section the calculation is £3,000,000 multiplied by 1.4% to give a pension of £42,000.  The pension can then also be increased to allow for Pre-Practitioner service while the GP was in training.  Under the 1995 Scheme there is also an entitlement to 3 x the pension as a tax-free lump sum.

However, within the 2015 scheme every year of a doctors pensionable earnings count towards their final pension and both Officers and GP’s pensions are calculated in the same way.  Again, put quite simply for each year of service the calculation is currently 1/54th multiplied by the doctor’s actual pensionable income for that year.  Using the example of a doctor on £70,000 per annum of pensionable income the calculation for the year is 1/54 x £70,000 to give a pension of £1,296 per annum.  This pension is then dynamised each year by CPI plus 1.5% all the way up to when the pension is drawn.  This means that the calculation is made each year and all the amounts accumulated each year are added together at the time of drawing the pension to establish the level to be received. 

Those who are looking at the maths may have already worked out that based on a current contribution rate of 12.5% the cost is £8,750 per annum for a return of £1,296 per annum which will continue to increase at a rate above inflation to your retirement date.  This also does not account for the fact that tax relief at the doctor’s highest rate of tax is given at source, so the cost is considerably less depending on where in the UK you are based.  Even allowing for the fact that the pension may be reduced if a doctor wants to draw the pension before their state pension age the value for money considerably outweighs any other form of retirement planning.

What about Pension Tax? 

Pension tax is an understandable concern for those doctors with a high level of earnings and long service.  However, for the majority of doctors the impact of paying pension tax is outweighed by the benefits of membership.  Junior Doctors are unlikely to be affected and the potential to be affected by pension tax should not be a reason to opt out of the NHS pension scheme.  With the Lifetime Allowance abolished Pension tax affects now only affect those doctors who have NHS pension growth added with private pension contributions above the current threshold of £60,000 although this figure can be lower for high earners.  The calculations of the tax thresholds can be complicated and if you require any advice or guidance around this issue, we recommend that you contact a specialist independent financial adviser or a specialist medical accountant.

Any other benefits of being a member of the NHS Pension Scheme?

The pension provides a guaranteed income for life, which increases to keep pace with rising living costs.  It also provides a lump sum on death before retirement and within the first 5 years after retirement and includes a dependents pensions on death before and after retirement.

We haven’t mentioned that it also provides the potential of an ill health retirement pension based on the member being permanently off work due to sickness or disability and therefore unable to perform their job role.  Depending on the severity of the condition the pension can be enhanced to account for future service which cannot be completed.  

Therefore, on the question of value, while today’s doctors, younger doctors especially, may have to work longer and for the higher earners they may potentially suffer taxation on their pension growth, the NHS pension, unequivocally, still offers excellent value for money, certainly when compared to “going it alone” with a private pension – and for every doctor, the NHS pension should still be the main pillar of their retirement planning.

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

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