NHS Pension Choices – The Key Factors
If you are a member of the NHS pension scheme, you will soon be asked to make a very important decision.
That is, should you remain in the current version of the scheme (applies if you were a member pre-April 2008) or should you transfer to the new version (post-April 2008).
To help, the NHS have produced ‘Your NHS Pension Choice’ Guide. You will not receive individual advice in the guide, rather it’s up to you to read it through and really understand whether you should stay as you are in the current scheme or switch to the new version.
You will receive your own NHS Pension Choice Pack between now and March 2012. The pack includes an Explanatory Booklet, a Choice Statement (showing a comparison of benefits in the 1995 and 2008 Section)and a DVD (although if you joined the scheme after April 2008 you will not receive a pack as you have no decision to make).
It states – “Understanding your choice and the factors that are important to you”.
So what does all this mean?
Well, it is asking you to choose between staying in the current (old) scheme, called the 1995 Scheme, or moving to the (new) 2008 Scheme.
So, let’s look at the main components of both schemes to see what the main differences are.
The definitions are taken from the NHS Guide.
The first thing to take into account is that the 1995 scheme has a normal retirement age (NRA) of 60. The 2008 version is age 65. This is the most basic and important difference, and is likely to mean for the vast majority of current NHS members with many years service, that they choose to stay with the 1995 scheme.
Another main area is on the subject of the pay that your pension is based on. To quote the NHS, in the 1995 scheme:
For salaried people, it is the best pay that you received in any one of the three years before retirement known as Final Year’s Pensionable Pay).
The 2008 version says:
The annual average of the best three consecutive years pay in the last ten years, re-valued by the increase in the Retail Prices Index (known as reckonable Pay). This is key. If you are hospital based and have attained seniority payments or Excellence Awards, your income can be increased significantly in the final (say) 6 years of membership. So, in our opinion, this means a tick for the 1995 scheme.
We then come to Voluntary early retirement.
Your pension is reduced if you take benefits before 60.
Your pension is reduced if you take benefits before 65. The big difference between the two is that with the 1995 scheme you’ll be able to retire earlier than the new version. And, I’m sure you’ll agree, 5 years is a massive difference!
What about the issue of flexible retirement?
The current 1995 scheme:
Your pension is only payable when you retire from the NHS.
The 2008 version:
On up to two occasions you can take part of your pension whilst still working and earning pension. You can earn further pension if you return to work after taking your benefits. For anyone interested in flexible working as described here, the 2008 version sounds a good bet. Although please note that voluntary retirement in the current scheme is from age 50 (although if you joined the scheme after April 2006 the age of the 1995 scheme will increase to age 55 from April 2010), and the 2008 version is from age 55.
And Ill-health retirement?
Tier 2 ill-health benefits provide an enhancement of 2/3rds prospective membership to age 60.
Tier 2 ill-health benefits provide an enhancement of 2/3rds prospective membership to age 65. For ill health retirement, again, the 2008 version offers more potential benefits as they would be based on a longer time period.
Similarly, Death in Service dependants benefits are likely to be higher in the 2008 version, although the lump sum is 2 times salary on both schemes if you die during service.
What if you are likely to leave the NHS scheme before retirement whilst not taking any benefits, and to then have what are known as deferred benefits? As a deferred member you do not earn any further benefits but those that you have earned are held in the Scheme and paid to you when you claim your benefits.
If you move to the 2008 Section and then leave the NHS before you retire, but do not return, your benefits are likelyto be lower than if you stay in the 1995 Section. This is because benefits in the 1995 Section are paid from 60 but benefits in the 2008 Section are not paid until 65.
If you do not expect to remain in NHS employment/retain NHS earnings until you retire, the Guide states you will most likely NOT benefit from moving to the 2008 scheme.
The document also discusses the subject of Late retirement. A new issue here is that:
If you work on past age 60 in the 1995 scheme, there are no extra pension benefits given other than 1 year is awarded for 1 year’s service.
In the 2008 version, if you work on past age 65 and do not take your pension, your benefits are increased. For example, if you work on to age 68, and then take your pension, it will be increased by 17%.
In the 1995 scheme this does not apply. In practice, however, the vast majority of medics and dentists retire below age 65. It is also very debatable whether you would delay taking your pension beyond this age even if you continued to work, as any increase in the final pension would have to be compared to missing out on taking, say, £50,000 pa multiplied by the number of years you continue to work.
Then we come to members that decide they need added benefits, and buy additional pension. Both schemes offer this, but again the 2008 scheme does not allow you to take any extra benefits before age 65. For the 1995 version, it is age 60. Once again we cannot emphasize enough this difference; that both in the standard scheme, and any additional pension you buy, you need to be very confident that you will work until age 65.
If you transferred to the 2008 scheme, say in your 40s, and took retirement ‘early’ at age 60, on page 10 of the guide the position is starkly shown. The pension for a retiring doctor or dentist would be 26% lower at age 60 than in the 2008 scheme.
This would reduce the £50,000 pa pension to £37,000 pa!
So far, the guide discusses the options generically, making no distinction between hospital individuals and those such as General Dental or Medical Practitioners.
When we contacted the Helpline to check on this, the answer was ‘we do not know’.
We will chase this and provide an update in a future article.
Taking this as a whole, we cannot see any main advantage for a doctor or dentist to switch to the 2008 scheme.
Even though some of the death and ill health benefits in the new scheme may offer more cover, the fact that the current 1995 scheme has a normal retirement age of 60 is absolutely crucial. As is the fact that many hospital based medics and dentists receive pay rises above inflation in their 50s.
So for the vast majority it will be a matter of thanks but no thanks. As ever, make sure you read the guide thoroughly to make sure!
Here’s the NHS Helpline number: 0300 123 1601.
The Financial Tips Bottom Line
The regime you opt for is a final one, so make sure you check all the factors to ensure you make the right choice for you!
Read your guide thoroughly Listen to the DVD Check your Pension Choice Statement Call the Helpline if unsure Question your financial adviser
Ray Prince is an Independent Financial Planner with Rutherford Wilkinson ltd, and helps UK Resident Doctors and Dentists get the best deals on mortgages, protection and investments, as well as helping them achieve their financial objectives. Just visit http://www.medicaldentalfs.com to get your free retirement planning guide. Rutherford Wilkinson ltd is authorised and regulated by the Financial Services Authority.