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Pensions - your questions answered

I used to pay 6% of my income to the NHS Pension scheme; now I am paying 22½% – is it really that good?

Quite simply, yes.

Since April 2008, personal contributions to the scheme were increased.  Previously, the standard payment was 6% of profits; now the personal contribution levels depend on income, varying from 6.5%, up to 8.5% on incomes over £100,000.

There is also the issue of the employer’s contributions.  Before the GP contract was introduced in April 2004, employers’ contributions of 14% of income were paid “behind the scenes” and were not directly accountable to the practice.  Since the contract’s introduction, the employer’s contribution were part of the global sum received by the practice, and in a time of rising profits, these employer’s contributions were easily payable without unnecessarily affecting the individual GP’s bottom line.

Now, with pressure on profits and the global sum not increasing in line with expenses, payment of the employers’ contributions is now contributing towards a lower personal income for GPs.

If you consider that for these contributions you get a guaranteed index linked pension and tax free lump sum at retirement, widow’s benefits and potential ill health retirement benefits, it is still excellent value for money.

A couple of years ago, we asked pension and investment company Clerical Medical, to calculate how much one ought to contribute to a Private Pension to replicate the benefits of a scheme like the NHS Scheme.  They came up with a figure in excess of 26% of income – this would not, however, produce the guaranteed benefits of the NHS scheme. They may be better; they may be higher – what you would get back depends on what you put in!    To replicate benefits fully, one would need to buy additional Income Protection and life assurance benefits as well.

So we’ve all got to work to 65, have we?

Not necessarily.  For members of the NHS Pension Scheme prior to 01 April 2008, the standard retirement age remains 60.  The standard age of 65 only applies to members of the new NHS Pension; i.e. for those joining post 01 April 2008 and for existing members who transferred to the new Scheme after that date.  Right now, the earliest that one can retire is age 50, although this earliest retirement age will be increasing to 55 for everyone  (irrespective of which NHS Pension Scheme you are a member) from 6th April 2010.  For those seeking early retirement, significant early retirement penalties apply, and you should seek independent financial advice to discuss the implications.

I’ve missed out on Added Years; what can I do to boost my NHS Pension?

You are right – the Added Years scheme was suspended at the end of March, but a new scheme of Additional Voluntary Contributions (AVC) was launched to replace it.  The AVC, amusingly referred to as the “son of Added Years”, is designed to boost your NHS Pension by up to £5,000 (indexed) per annum and is available to all scheme members under age 65.

You can buy additional units of £250 of extra pension, to a maximum of 20 units. This can be enhanced to allow for 50% payable as widow’s benefits; i.e. up to a maximum of £5,000 main pension plus £2,500 widow’s pension.

The AVC can be funded as either a one-off lump sum, or spread over a maximum term of 20 years.  To give an idea of costs, for a 35 year old male GP wanting to buy the maximum pension benefits to retire at age 60, a cost of £346 per month (over 20 years) or a lump sum of £48,600 would be charged.

In addition to the AVC, you could also consider the NHS Money Purchase AVC scheme, a Stakeholder Pension, Personal Pension or Self invested Personal Pension (SIPP). Other non-pension investments might also be considered, such as ISAs and unit trusts.  Each of these has different features and benefits, positive and negative, and you should seek independent financial advice from someone who is well versed in all of the options, NHS or otherwise.

Haven’t they scrapped Ill Health Retirement benefits?

They have been amended rather than scrapped.  The amount you now might qualify for depends on the severity of the condition, average income to date and service to date. 

If you are a current member, have at least 2 years membership, and become permanently incapable of doing your present job because of ill-health, you may be entitled to pension benefits.  Termination of your contract because of sickness or injury will not automatically lead to the early payment of a pension.

There are two tiers of ill-health benefits.

·         Tier 1 is entitlement to the retirement benefits you have earned to date, paid without any actuarial reduction for early payment. This level of benefit is payable if you are:

o        a Scheme member accepted by the Agency’s  medical advisers as permanently incapable of doing your current NHS job; or

o        a former Scheme member accepted by the Agency’s medical advisers as permanently incapable of earning an income by doing regular work.

·         Tier 2 is entitlement to the retirement benefits you have earned to date enhanced by two thirds of your prospective membership up to reaching your normal retirement age. This level of benefit is payable to you only if you are a Scheme member and accepted by Scheme medical advisers as being permanently incapable of both doing your current NHS job AND permanently incapable of regular employment of like duration to your NHS job, taking account of your mental and physical capacity, previous training and practical professional and vocational experience. This would be irrespective of whether or not such employment is actually available to you.

Therefore, if someone with a normal pension age of 60 retires on ill-health grounds at the age of 45 after contributing to the NHS Pension Scheme for 20 years, their benefit will be based on 20 years' service for Tier 1 and 30 years for Tier 2 (10 plus two thirds of 15 - the number of years left until normal pensionable age). The number of years is then used to calculate the pension.

Payment of these benefits would probably affect the payment of benefits from an Income Protection policy, and you should seek independent financial advice from someone who is well versed in the rules of the scheme, if you are concerned about this.

Should I have a private pension as well as the NHS Pension?

Whether you should will depend on individual circumstances, but the fact is that you can pay into a private pension, whether Stakeholder, Personal Pension or SIPP.  These modern pensions should have low charges (particularly the Stakeholder), are very tax efficient, and above all, very flexible.  The allow you to invest regularly or by lump sum.  You should be able to increase, decrease or suspend payments at will, and make ad-hoc payments as and when you choose.  Again, seek independent financial advice to get an understanding of the features and benefits of each.