With recent changes to the NHS pension and pension taxation, there’s a lot of confusion around the best way to manage pensions.
Our webinar with Circle Medical Services on 30th November covered several essential topics for pension planning, including the benefits included in your NHS pension and pension taxation.
Keep reading to find out the best way to manage your pension so you can retire securely.
History of the NHS pension
The 1995 pension
Under the 1995 pension, the normal pension age (NPA) is 60. Members of this section of the scheme are entitled to an annual pension and a built-in tax-free lump sum.
For practitioners, earnings are based on fluctuating practice profits, while the pension is based on lifetime earnings, adjusted for inflation. For Officers, it’s a more traditional Final Salary scheme based on time in the scheme and the best salary in the final three years.
The 2008 pension
The 2008 section raised the NPA from 60 to 65 and gave officer members more flexibility in the pay used to calculate their pension. There is no automatic lump sum, but you can get one by giving up some of your pension.
This section allowed NHS workers who retired but came back to work to join the pension scheme again, or draw pension without actually having to retire.
The 2015 pension
In order to modernise and address the fact people were living longer, the 2015 section set the normal pension age to the same as your state pension age, currently between 66 and 68.
If you’re under the 1995 section, you can still take whatever you built up under that scheme in full at age 60. In the 2008 section, you can claim pension before 66 but it’ll be reduced. In the 2015 section, you don’t have to work until the state pension age to claim pension.
The McCloud judgement
In April 2015, younger scheme members were put into the new pension scheme. Older members were scheduled to be gradually moved to the new scheme.
McCloud took the government to court on grounds of age discrimination and won, meaning that the entire public sector pension scheme had to change.
In time, people will have a choice whether or not to be in the old scheme between April 2015 and March 2022. Starting April 2022, everyone is under the 2015 scheme. The choice to remain under the 1995 or 2015 scheme for the seven year gap can be deferred until you retire and made based on what will be better for your individual needs.
Increasing your pension benefits
There are several safe ways of topping up your pension, including:
- Added years: Buy added years to make up the difference between the standard 40 years of work and the actual years you worked. This option is now closed, but existing contracts can continue.
- Additional pension purchase: Up to £6,565 in £250 blocks
- ERRBO: 2015 scheme members who only want to work till 63 can buy out their pension reduction
- Money purchase AVCs: Sponsored by the NHS, this method gets favourable rates and ensures you don’t pay as much in commission and admin fees
- Personal pensions: Pensions outside of the NHS
Understanding your pension benefits
The core aim of the NHS pension is to provide you with an income in retirement. It’s paid monthly straight into a bank account, or you can receive a tax-free lump sum.
Benefits for your family
If you pass away before retirement, your family receives a lump sum of two times your salary and part of the pension you’ve accrued to that point.
If you pass away after retirement, part of your pension is paid each month to your spouse as an adult survivor pension.
Sick pay benefits
If you can’t work due to long-term illness, you qualify for sick pay depending on your length of service. If you still can’t work after a period of time, you can apply for a disability pension. There are three tiers:
- Tier One: You’ve been assessed as unable to carry out the duties of your own job. You’re entitled to the early payment of the retirement benefits you have earned to date without any actuarial adjustments.
- Tier Two: You’ve been assessed as permanently incapable of carrying out the duties of both your own NHS job and any other regular employment of like duration. You’re entitled to the accrued pension benefits you have earned to date in the 1995 or 2008 section. You’re also entitled to an enhanced 2015 scheme pension, which is a pro-rata enhancement based on half of your prospective pension to your 2015 scheme normal pension age.
- Tier Three: You have a terminal illness with an expected lifespan of less than twelve months. You can apply to commute the pension to a lump sum, which is normally tax-free.
Look at your total rewards statement through your employer portal or the external NHS website at www.totalrewardstatements.nhs.uk to see your yearly pension, adult dependent pension, lump sum and hypothetical annuity cost.
When drawing from your pension you can choose to give up some of the pension for the lump sum. You don’t have to take the maximum or the minimum — you can go somewhere in between depending on what works best for you.
Pension tax
NHS pension taxation is particularly complicated in part by the McCloud judgement, which will eventually change the way pensions are taxed.
Annual allowance
“With the NHS pension, nothing is ever simple and it isn’t particularly easy to calculate,” said Kirstin D’Cruze, one of the financial advisors at Circle Medical Services.
To calculate the deemed growth within the scheme against the regular, non-NHS contribution allowance of £40,000, take your pension at the start of the year and increase it by inflation. Take your end-of-the-year balance without inflation, and the difference between the two numbers is your yearly growth.
If the number is over £40,000, you potentially have a tax charge. You can go back three years and use up the unused allowance, but after the amount you’re over is added to your income for the year and taxed accordingly.
If you find that you do have a tax charge, you have options for paying for it:
- Scheme pays: Your pension scheme pays for your tax charge and puts it as a debt against your pension scheme. This debt goes up each year in line with inflation, so it might be more by the time you retire.
- Personal payments: Pay from your savings and investments, which can be in combination with the above solution.
- Hokey Cokey: Opt in and out of the pension scheme throughout the year to avoid tax charges.
Lifetime allowance
Your lifetime allowance is the total amount you can hold in all of your pensions. Until 2025/26, the limit is £1,073,100.
Any excess funds are liable for a tax charge when drawn, and taxed at either 25% or 55% depending on the method of drawing the benefits.
If you do scheme pays with annual allowance, it has a positive impact on your lifetime allowance because it reduces payment. It can be beneficial to put annual allowance tax charges onto scheme pays to ensure you’re not double-paying.
If you have a personal pension, this also contributes to your lifetime allowance. Be careful about which order you take your pensions in – if you take lifetime allowance first and it uses up the limit, you’ll pay 55% on personal pensions.
If you plan on working until you’re 65, you might have multiple charges. Retiring early makes your pension lower, which brings you under the lifetime allowance.
What’s happening right now?
There are still things changing with the NHS pension. Contribution rates changed in October 2022, meaning that GPs have different rates from April to September 2022 and October 2022 to March 2023.
Contributions rate changes are scheduled for April or October in 2023 and will be tied to pay rises so you don’t jump into a higher bank.
If you have any questions about planning your pensions as a GP, email enquiries@circlefinancial.co.uk
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