The NHS Pension Scheme (NHSPS) explained

 

 

 

 

Read about the NHS pension scheme which forms the bedrock of most GPs financial planning.

 

The NHS Pension Scheme (NHSPS) is one of the finest occupational pension schemes available and forms the bedrock of most doctors’ financial planning strategy.

 

We are assuming at this stage that you will have joined the NHSPS prior to April 2008 and therefore will not have joined the “new” NHSPS.

 

 

CONTRIBUTIONS

Between 5 – 8.5% of your superanuable earnings (depending on the level of your earnings) go towards your pension and your contributions receive income tax relief.

 

Annual Pensionable Pay	Contribution Rate
Up to £19,165	5%
£19,166 - £63,416	6.5%
£63,417 - £99,999	7.5%
£100,000	8.5%

   

 

NHSPS BENEFITS

• Tax free lump sum on retirement
• Inflation-proof pensions (normal, early, widows & dependants) - 60 onwards (55 special classes)
• Death in service gratuity: 2 x pensionable pay

 

CALCULATING PENSION BENEFITS

Hospital post & salaried GP post pension contributions are claculated differently to that of a GP partner. The somewhat confusing term  'Officer' is widely used in the NHSPS literature and refers to anyone who is EMPLOYED (e.g. hospital posts and salaried GPs).

 

General medical practitioner: accrural basis = 1.4% of “total dynamised career averaged NHS pensionable earnings” for each year of service (pension) plus 4.2% as minimum lump sum

1.4% x total dynamised income PLUS a lump sum of (3x Pension). The Dynamising factor takes into account inflation and other variables.

 

Salaried GP: accrural basis = 1/80 x final salary for each year of service PLUS a 

minimum lump sum (of 3 x annual pension)

 

 

Worked example: A hospital doctor that becomes a salaried GP having joined the NHS at age 24 and retiring at 60 years of age.

 

Assume final earnings at retirement are £90,000

 

Ø       Total Service = 36 years

Ø       Pension = 36/80ths x £90,000 = £40,500 pa (Index Linked)

Ø       Lump sum = 3 x £40,500 = £121,500 (Tax Free)

 

Worked example: A GP partner who joined the NHSPS at age 24 and retires at 60 years of age

 

Assume dynamised career average is £ 90,000 pa

 

Ø       Total (revalued) career earnings = £3,240,000

Ø       (36 years x £ 90,000)

Ø       Pension = 1.4% x £3,240,000 = £45,360 pa (index linked for future years but is taxable)

Ø       Lump sum = 3 x £45,360 = £136,080 (not taxable)

Ø       Additional lump sum available subject to computation

 

Pension Simplification was introduced in April 2006 and introduced a Standard Lifetime Allowance (SLA). This was initially set at £1,500,000 and will rise broadly in line with inflation. When an individual takes there pension benefits, the benefits are assessed against the prevailing SLA. Any excess will be subject to the Lifetime Allowance Charge, which in effect is a tax at 55% on the excess.

 

The Practitioners pension benefits shown above would absorb £931,500 or 56.4% of the current allowance

 

NHS PENSION SCHEME (EARLY RETIREMENT)

From April 2010 voluntary early NHS retirement from age 55 is possible, but NHS pension benefits will be actuarially reduced if taken prior to age 60. .

 

No reduction applies for ill health retirement'

 

Please note: If an existing member leaves the NHS for 5 years or more, and then comes back, (a disqualifying break), they are unable to rejoin the existing NHSPS but do have the option to join the “new” NHS Pension Scheme

 

MAXIMUM SERVICE ALLOWED

Pensionable “service” may not exceed….

• 40 years by age 60
• 45 years by age 65
• (different for special classes)
• service after age 70 does not  count and benefits will be paid

 

FUNDING FOR MAXIMUM PENSION BENEFITS (practitioners / salaried NHS appointment)

To obtain maximum benefits from the NHS pension scheme 40 years service at 60 is normally needed.   Doctors do not to qualify at age 20 and therefore will have a pension shortfall at age 60. This can be made up by making additional contribution:

 

NHS EARNINGS             -         NEW ADDED YEARS SCHEME

                                    -           STAKEHOLDER/PERSONAL PENSIONS

 

But be aware of the Standard Lifetime Allowance (SLA) (currently £1.65million) and do not exceed it!

 

ILL HEALTH RETIREMENT

Unfortunately, not everyone will work in good health to their normal retirement date and therefore the NHSPS provides pension benefits for those who are forced to retire early on the grounds of ill health. Therefore, we have outlined details of the ill health retirement package.

 

Prior to 31st march 2008 an ill health retirement pension would be payable when permanently incapable of discharging duties efficiently due to physical or mental infirmity. Ill health pension would be enhanced depending upon length of service.

 

From 31st March 2008:

 

Tier Two

• Payable when a member is “permanently incapable of doing both their current job and other regular employment across the general field of employment of like duration”.
• “Their previous training, qualifications and experience, and not just the medical conditions will be taken into account in assessment of their permanent incapacity”.
• Entitlement to early payment of the retirement benefits earned to date could be paid.
• Increase in pension by 2/3rds of the member’s prospective membership to NRD (60 or 65).
• A minimum increase of 4 years capped at 60 until March 2016 (but not for the new scheme).

 

Tier One

• Where a member is assessed as being “permanently incapable of efficiently discharging the duties of their present job in the NHS”.
• Benefits will not be increased.

 

Terminal Illness

A member, who is terminally ill and does not expect to live longer than 1 year, can apply to exchange all of their pension for a one-off, usually tax-free, payment.

 

 

DEATH BENEFITS (Overview)

Worse still death (which the NHSPS class as permanent ill health) can also catch us before we reach or normal retirement date.

 

There are 3 elements - what are they?

1. Lump sum gratuity
2. Spouse’s/civil partners pension
3. Dependants’ allowance

 

DEATH GRATUITY

Death in pensionable employment before 70

• 2 x pensionable earnings.
• Paid to surviving widow or widower or civil partner (unless notice in writing to not do so).
• If no spouse or civil partner (or as above), paid to personal representatives.

 

Death after pension becomes payable

• 5 years pension (less amount already paid).

 

WIDOWS & CIVIL PARTNERS BENEFITS

• 3 months member’s final pay (6 months if 1+ child).
• Then pension of 50% of member’s pension based on ill health retirement.
• In retirement, widow’s/civil partners pension is 50% of non-actuarially reduced pension.

WIDOWERS &  CIVIL PARTNERS BENEFITS

Largely as for widows but only based on service since April 1988.

‘Past’ service may have been bought up to July 1989.

Pre 88 service may be taken into account if demonstrable dependent widower/civil partner.

Widows, widowers and civil partners pension are now known as survivors pension.

 

DEPENDANT CHILDREN’S ALLOWANCES

Child  = under 23 or in full time education

• 25% of member’s pension (50% if 2 or more children).
• 33% and 67% for orphans.
• Dependant’s allowances are based on non-actuarially reduced pensions.

 

 

PENSION SIMPLIFICATION

Pension Simplification introduced an annual allowance, this means that any UK relevant Individual can invest up to £3,600 pa or 100% of their earned income and obtain tax relief on those contributions. This is subject to a cap of £225,000. If an individual has qualifying income in excess of the Annual Allowance, and contributes in excess of £225000 they will normally be subject to an Annual Allowance Charge, which will nullify the excess rate tax relief.

 

NEW JOINERS ON OR AFTER 1/4/08 “NEW NHSPS”

 

• New scheme with different rules and regulations
• Normal pension age 65
• Increased accrual rate (1/60th) – with no automatic lump sum
• Final pensionable pay – average of best 3 consecutive years in the last 10
• Actuarial increase on late retirement after age 65
• Pensionable re-employment allowed
• Changes to Ill Health Retirement benefits

 

 

PENSION FOR A DOCTOR’S SPOUSE  

If a doctor is employing his wife it is important to consider private “stakeholder” pension arrangement, which can be very attractive as both a savings vehicle for retirement, and a way to reduce your tax bill.

• Employer contributions to spouse pension attract tax relief at the employer’s top rate of tax, based on “qualifying” Income.

• Pension fund accumulates virtually tax-free and is returnable to employing spouse/civil partner as tax free fund should spouse die before retirement.
• Use new Stakeholder Schemes - £300 per month.
• Tax-free lump sum of up to 25% of accumulated fund.
• Benefits can be taken at any age after 55 (from 2010).
• A non earning spouse can contribute £300.00 pm and receive basic rate tax relief (ie £240.00 net).

Provided courtesy of Kelvin Turner from Medical Money Management wwww.mmmnet.co.uk