Despite the headlines in some publications about pensions being less generous than they used to be, the NHS pension is still a very valuable scheme. But unfortunately, some members are leaving the scheme because they may not be fully aware of the value it provides.
There are an estimated 1.5 million NHS staff across the UK, and those employed directly by the NHS will most likely be members of the NHS pension scheme. For context, this is fewer people than employed at American retailer Walmart.
Over the years there have been a number of changes to the NHS scheme. It now comprises three sections: the 1995, 2008 and 2015 schemes. Most members will be reliant on the income from their NHS pension and the state pension in retirement.
Depending on the employee’s age and when they joined the NHS, workers may just be in the latest 2015 Section of the scheme or a combination of the sections.
The 1995 section of the scheme has a normal retirement age of 60 and the benefits built up in the scheme are based on service and final salary (best of the past three years) using an 1/80th accrual rate. The 1995 section closed to new members from 31 March 2008, and includes a standard pension commencement lump sum entitlement of three times the pension.
The 2008 section has been available for new joiners since 2008 or to those who decided to move from the 1995 section under ‘pension choice’, although there was a very small take-up on this. The 2008 section has a normal retirement age of 65 and was closed to new entrants from 31 March 2015.
The 2015 scheme was introduced in April 2015. Anyone fewer than 10 years from their normal retirement age as at April 2012 will have protection and remain in their existing scheme. Anyone else will have either automatically joined the new scheme or be transitioned to the new scheme at some point between now and 2022, depending on their date of birth.
The big difference between this section and the others is that it is a career average revalued earnings scheme with an accrual rate of 1/54th. This was a great improvement on 1/100ths, and the 1/60ths initially proposed by the Treasury.
The retirement age is later for the scheme at age 67 and will increase in line with the state pension age. So it could actually be higher than that for employees far away from retirement age.
All the schemes offer some level of spouse’s pension and dependents’ pension for children under 23 and in full-time education. However, the NHS pension scheme is not just a pension.
It also offers other potentially valuable family benefits, such as death in service, and there are options should an individual need to retire on the grounds of ill health. Sometimes members are not aware of these other benefits.
For example, a typical full-time NHS employee in the 1995 scheme’s employee contribution rate ranges from 5% to 14.5% depending on pay scale. A nurse earning £25,000 per year would have gross contributions of £1,775 (7.1%) per year.
Their accrual rate is 1/54th a year so they will have accrued £462.96 per year. Benefits will increase in line with the consumer prices index (CPI) plus 1.5% each year to state pension age.
Pros and cons
Advisers should tell NHS employee clients their pension is not reliant on stock market returns. It is inflation proofed to CPI and the government guarantees the annual pension is in payment.
This equation gets a lot more complicated, especially for senior consultants, when there are other factors to consider. These include the tapered annual allowance, annual allowance charges and potential lifetime allowance taxes.
This can become a very complex area of planning. But effectively for these people, the cost of being in a defined benefit scheme has increased.
David Murphy is a chartered financial planner at Cavendish Medical