The lowdown on NHS pensions

Whether running a village GP surgery or patching people up in a busy A&E, NHS employees are a vital part of this country’s healthcare system. To reward them for looking after our health, NHS staff are eligible to join its pension scheme.

How does the NHS pension scheme work?

The NHS Pension Scheme is a type of defined benefit pension known as a career average revalued earnings (CARE) scheme. As the name suggests, this gives you a pension based on your pensionable pay each year, with this amount revalued every year you remain in the scheme.

Employers pay in 14.3% of the individual’s salary, and members of the NHS Pension Scheme earn 1/54th (1.85%) of their annual salary, with this revalued every year at a rate of Consumer Price Index (CPI) inflation plus 1.5%.

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As an example, if a doctor’s pensionable pay is £80,000 in the 2015 scheme year (April 2015 to March 2016), they will earn 1/54th of this – £1,481.48 – as pension. This is revalued on 1 April every year, using the CPI rate from the previous September. So, say CPI was 0.5%, the following April (2016) the £1,481.48 would be multiplied by 2% (1.5% + 0.5%), giving an uplift of £29.63 and taking the pension entitlement for the 2015 scheme year to £1,511.11.

The normal pension age is the individual’s state pension age, or age 65 if that is later.  Of course, if you don’t join the scheme and contribute towards the pension (and it is voluntary), you won’t get anything from your employer.

How much do NHS staff contribute?

To qualify for a pension, members contribute a percentage of their pensionable pay. This depends on salary level and starts at 5% for anyone earning less than the full-time equivalent of £15,431.99 a year, rising in stages to 14.5% for those on more than £111,377 a year. In the example left, the doctor would need to contribute 13.5% of earnings to the pension scheme.

Can you pay in more?

There are three options available to pay in more. Within the scheme, NHS staff can buy additional annual pension benefit in £250 chunks up to £6,500. The cost, which is determined by the scheme actuary, depends on your age and can be paid with a lump sum or over a fixed term of between one and 20 years.

Also, within the scheme NHS staff can go for an early retirement reduction buy out, or ERRBO. James Davenport, senior communications manager at the NHS Business Services Authority, explains: “Members can pay extra contributions to buy out the reduction that would apply if they claimed their benefits up to three years early.”

However, it is thought that this is to appease members who have seen their pension age increase and, as such, annot be used for those retiring before their 65th birthday.

The extra they would pay depends on age and how many years they want to bring forward their retirement date. For example, a 50-year-old would need to pay an additional 2.84% on top of normal contributions to retire two years early, with the amount increasing to 3.10% if they were 60 when they took out an ERRBO.

The third option is a money purchase additional voluntary contribution (AVC) scheme with Standard Life and Prudential – the NHS AVC providers. While these schemes don’t guarantee a set income in retirement, they do give NHS staff access to pension freedoms.

Ian Buchan, corporate relationship director at Standard Life, explains: “AVCs can give NHS staff much more flexibility around retirement. As an example, a doctor could use their AVC to fund retirement until their NHS scheme kicks in, allowing them to retire early or reduce the hours they work.”

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What are the options for early retirement?

NHS staff who retire early can claim their pension before they reach normal pension age providing they have reached the scheme’s minimum pension age, which is currently 55. The downside of this is that the amount they would receive will be reduced to reflect this early start date. (ERRBO benefits can only be purchased by those retiring at age 65 or later.)

Are there any catches?

A combination of high earnings and inflated contribution rates means that high earning NHS employees, such as consultants and chief executives, will need to watch out for the annual and lifetime allowances of £40,000 and £1 million respectively. Bust these limits and they would be hit with tax on the excess.

But Mr Buchan says those affected shouldn’t necessarily jump ship if they’re approaching these limits. “Although the tax treatment will change, you can continue saving into your pension beyond the allowances,” he explains. “It’s worth getting advice as you may want to consider other factors such as using your pension for inheritance tax planning.” 

In addition, membership of the scheme gives NHS staff access to ill health benefits and life assurance.

Have there been any changes recently?

Yes. The new scheme, outlined above, came into force in April 2015 as part of the government’s reform of public sector pensions. Andy James, head of retirement planning at Towry, says it is not as generous as previous ones. “The government wanted to cut costs so it’s increased the amount staff have to pay in and shifted the pension age upwards. It means they’re paying more for a smaller pension.”

For example, on the 2008 NHS Pension Scheme, the normal pension age was 65 rather than state pension age, and someone earning £80,000 would have paid 12.3% of their pensionable pay compared to 13.5% under the new scheme.

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Also hurting some NHS employees is the shift to a CARE scheme, albeit one with an accrual rate of 1/54th rather than the previous 1/60th. Although GPs would have had this previously, the earlier scheme for NHS employees was based on final salary.

“An employee who rises up the career ladder would have been better off under the final salary scheme,” adds Mr James. “The new scheme reflects their salary throughout their career rather than the high earning years at the end.”

For employees who started pension saving prior to April 2015, there are complex transitional rules in place – some will be moved across, others won’t.

How does it compare to other schemes?

The NHS Pension Scheme remains one of the most generous workplace pension schemes available. “Yes, the new scheme has made it more expensive to fund retirement, but it’s still a very good pension,” says Mr James. 

Where can I get advice?

Given the complexities of the NHS Pension Scheme, especially if you were a member of a previous scheme and have protection in place, it is sensible to take advice. NHS Business Services Authority recommends contacting Unbiased.co.uk or The Personal Finance Society (Findanadviser.org) to find a qualified adviser.