NHS pension changes

As you may be aware the NHS pension scheme changed in April 2008 amending the existing scheme as well as a new scheme for new entrants.

The previous NHS scheme was an “unfunded” scheme where the pensions in payment are paid for by the contributions being received from working members. The cost of providing these benefits has increased due to greater longevity and increasing numbers of retirees.

The employee contribution is now increasing for both members in the existing scheme and for entrants to the new NHS pension scheme. As of 2008 contributions are tiered depending on your level of full time equivalent earnings. For doctors this means that the starting contribution is 6½ % up to £65,000, 7½ % if your earnings are above £65,000 but less than £102,500, and 8½ % if your pensionable pay is £102,500 or more.

Under the old scheme there was previously an option to buy guaranteed added years but this option has now expired (unless you registered an interest before 31/03/2008). From 1^st April 2008 it is now possible to buy additional pension subject to a maximum of £5,000 extra pension. The alternative to this scheme is to fund either an additional voluntary contribution or a personal pension which can both be best described as ‘money purchase’ schemes. In other words your payments are invested and build up a fund which gives you the ability to take some tax free cash and additional income.

Under the existing scheme you achieve a pension of 1/80^th of your full time equivalent salary (plus any pensionable awards) for each year worked. Therefore if you work 40 years you achieve a pension of 40/80ths i.e. 50% of your pensionable pay. In addition a lump sum is also payable of 3 times the pension.

Under the new scheme there is a faster accrual rate. This means that for each year that you work you will achieve a 60^th of your salary. Therefore, 40 years service achieves 40/60ths i.e. 66% of pensionable pay. The catch is that there is no automatic lump sum and you have to commute part of this pension to obtain a lump sum.

To look at an example of this, if you were earning £100,000 and achieved 40 years service you would receive a pension of £50,000 and a lump sum of £150,000 under the old scheme. Under the new scheme with 40 years service you would achieve a pension of £66,666. If you want to have a tax free lump sum you can commute part of your pension at a rate of 12-1 to obtain it. If, for example, you wanted to draw a lump sum and were happy to receive a pension of around £50,000 (in line with that which would have been given under the old scheme), you would commute £16,666 of your pension, which, at a ratio of 12-1, would give you a lump sum of £199,992 and a pension of £50,000. On the face of it this appears to be an improvement on the existing scheme, but it will now also be possible to take a larger lump sum from the existing scheme under a similar commutation calculation – although the terms are less attractive.

Before switching into the new scheme, it is worth remembering that the retirement age under the new scheme is set at 65 not 60 and retirement before 65 results in an ‘early retirement’ reduction. This is a reduction in your pension based not only on the fact that you will have less service, but also because you are drawing the pension earlier than 65 and the calculations are amended to reflect the fact that they are likely to pay you for more years than would have been the case if you drew it at 65. Nevertheless there is a case for an existing member to consider changing to the new scheme if they are committed to working to age 65 anyway (for example, a consultant with younger children going through private education or university who feels that the chance of retiring at 60 is minimal). Of course new entrants to the scheme will have no choice but to accept the new rules and the retirement age of 65 that now applies.

If you are committed to retiring earlier than 65 and are a new entrant, then the best option is probably to build up a significant personal pension fund that can either make up for any reduction in NHS pension that comes about due to drawing the benefit early, or better still, allows you to fund your lifestyle for the five years between 60 and 65, so that the main scheme benefits can be deferred to 65 if you cease working before that age. These are areas that need careful consideration and discussion with a financial adviser.

Ill health retirement changes

A further change that applies to both the existing NHS scheme and the new scheme is in the form of significant alterations to the ill health retirement benefit. Up until now, should you become unable to continue working in your role within the NHS, you could apply for an ill health pension which is calculated on the basis of the number of years service you have (as 80^ths) plus an enhancement. Under the new rules these enhancements are changing and a new two tier ill health scheme applies.

Basically if you have more than 2 years service and your illness makes you permanently incapable of any regular work, the pension is increased by the addition of 2/3rds of the actual membership that you could have got had you continued working until your normal benefit age. This is added to your actual membership at the time of sickness. To give an example, if you could have worked 40 years (assuming you qualified at 25 and were likely to work to 65), but you fell ill after only 10 years, you will receive an additional 20 years added to the 10 that you already have, giving you 30/60ths i.e. a pension of ½ pay. This is an improvement on the existing scheme where you would have received an ill health pension of 20/80ths i.e. ¼ pay.

However, under the previous scheme you could apply for an ill health pension if you were unable to carry out your job in the NHS, under the new scheme this enhancement is only payable if you are unable to do any form of regular work on a permanent basis. If you are permanently incapable of doing your present NHS job because of ill health, the ill health pension is simply calculated on the basis of your entitlement to pension without any additional enhancement.

These changes are on one hand less generous to those who are incapable of working in their normal employment but on the other hand more generous to those who are so ill that they are unable to do any form of work. It seems likely that the majority of claims for ill health pension would now fail to be treated under the first category and therefore lose the enhancement that would otherwise have applied. This has repercussions in the way in which you calculate your income protection requirements as insurance companies have always insisted that the ill health pension be calculated and taken into account in arriving at the maximum benefit to which you are entitled and for which you can insure yourself. As the ill health pension is likely to be less generous for the majority of claimants there is probably a requirement to review and possibly increase your income protection cover. Again this is an area you should discuss with your financial adviser.

Marc Woodward

Managing Director,

Legal and Medical Independent Financial Advisors

http://www.legalandmedical.co.uk

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