Changes to the NHS Pension Scheme Ill Health Retirement Benefits for Hospital Employees and their Impact on your Personal Protection Planning
July 7th, 2009 Downloads, News, Observations, Retirement PlanningChanges to the NHS Pension Scheme Ill Health Retirement Benefits for Hospital Employees and their Impact on your Personal Protection Planning
Each year we get a number of enquiries concerning Ill health Retirement from the NHS pension scheme. As such, we have put together a brief article outlining the main requirements that have to be met in order to be awarded the benefit, along with the amount of benefit a member would receive.
Background
The number of members of statutory pension schemes such as the NHS taking ill health retirement increased significantly through the 1990’s and early to mid 2000’s. So much so that the cost to the public purse was becoming too great and the Government felt that action needed to be taken along with a wholesale restructuring of some of the final salary statutory schemes. These major changes will not be covered here as we will only concentrate on the changes to the Ill Health Retirement (IHR) rules.
The Old System
Prior to the changes, if a member of the NHS pension scheme had at least two years service and qualified for IHR they would receive a pension based on their actual service or an uplifted service record and a multiple of final salary. If the member had been working 2-5 years in the service they would get that number of years service multiplied by 1/80th of their final salary for each year of this service. If they had worked for between 5 and 10 years the number of years service would be doubled.
Thus if they had done 8 years they would be credited with 16 years and would receive 16/80ths x final salary. If they had service between 10 and 20 years they would automatically be credited with 20 years service or have their service enhanced by 6 2/3rd years whichever was the most beneficial. Thus if they had 18 years service they would be credited with 24 2/3rd years. More than 20 years service would result in a pension uplift of 6 2/3rd years up to a maximum of what they could have achieved if they had worked their full career to normal retirement age.
The New System
The new system has become more complicated and there are now two tiers of IHR. Tier 1 and Tier 2. Again members can only qualify if they have at least 2 years NHS pension scheme membership.
Tier 1
Qualification
To qualify for the IHR benefit under Tier 1 the Scheme member:-
• Needs to be accepted by the NHS Pension Schemes medical advisers as being permanently incapable of doing their current NHS job;
• Or a former Scheme member needs to be accepted by the scheme medical advisers as being permanently incapable of earning an income by doing regular work.
Benefits
The benefits payable under Tier 1 are based on the number of years service in the scheme to date with no actuarial reduction for early payment or enhancement for ill health. Thus if a member had 14 years service in the scheme and a pensionable salary of £72,000 they would receive 14/80 x £72,000 = £12,600 pa as an income, plus a tax free lump sum of 3x this figure, so £37,800.
Tier 2
Qualification
To qualify for Tier 2 IHR the NHS pension scheme medical advisers must be satisfied that the member;
Is permanently incapable of both doing their current NHS job AND permanently incapable of regular employment of like duration to their NHS job, taking account of their:
• mental capacity;
• physical capacity;
• previous training; and
• previous practical, professional and vocational experience,
irrespective of whether or not such employment is actually available to them.
Benefits
The benefits under Tier 2 are more generous than Tier1 and are calculated as follows:-
The service record of the member is based on the service to date but is then enhanced by 2/3rd of the prospective membership they could have achieved by normal retirement date.
For members of the 1995 section of the NHS pension scheme who successfully claim IHR before 31st March 2016 (which encompasses the vast majority of our clients) this 2/3rd uplift is subject to a minimum of 4 years but limited to the maximum service they could have achieved by normal retirement date.
Examples of the 1995 section of the NHS Pension Scheme IHR calculations
1. A member of the above Scheme, who has a normal retirement age of 60, is accepted as qualifying for Tier 2 ill-health benefits at age 48, after 28 years’ full time Scheme membership. Their ill-health pension would be calculated using total Scheme membership of 36 years, 28 years actual plus 8 years enhancement (2/3rds of the 12 years’ prospective membership to normal retirement age of 60).
2. A member of the above Scheme, who has a normal retirement age of 60, is accepted as qualifying for Tier 2 ill-health benefits at age 55, after 30 years’ full time Scheme membership. Their ill-health benefits would be calculated using total Scheme membership of 34 years, 30 years actual plus the minimum guaranteed enhancement of 4 years. This is because 2/3rds of the prospective membership to normal retirement age of 60 is less than the guaranteed enhancement.
Conclusion
The main effect of the introduction of the new scheme is likely to ensure that less members going forward will qualify for the “full benefits” available under the new Tier 2 scheme which in essence provides similar benefits to the old single scheme outlined above. In addition to this a tightening of the qualification requirements mean that it is likely that fewer members will qualify for any sort of IHR at all.
The Impact on your Personal Financial Planning
The main impact of these changes is the potential interaction they may have with an individuals personal Income Protection Planning. At present many senior medical staff insure their income based on the assumption that they will qualify for IHR benefits thus reducing the amount of income protection they require. This in itself is not bad advice and historically has been a reasonable assumption to make based on the old IHR scheme rules. This course of action also ensures that the client is also never over insured and thus does not pay a premium on an insurance product for which they may not receive a benefit should the IHR pay out.
However, with the likelihood that new IHR claimants will receive the reduced benefits under the new IHR scheme and the more stringent qualification rules it may be worth clients re-examining their position. The choice that clients are now left with is a trade off between insuring the whole income they earn (or an amount up to which they would require to maintain their lifestyles) to provide “Certainty” for their ongoing lifestyle, or to insure a reduced amount and hope that they receive the IHR under the new rules.
If they choose the first option they run the risk of being over insured if the IHR benefits are paid out because the income protection benefits they receive under their personal PHI policy will be reduced by the amount of IHR they receive*, resulting in possibly years of partly wasted premiums. They will however ensure that they receive the full income they require to maintain the family’s lifestyles irrespective of the outcome of any decisions made with respect to an IHR claim.
If they choose not to insure their full income they will save money each month on PHI premiums but if they become incapacitated and the IHR claim is not paid they are likely to have a considerable shortfall in their income to maintain their lifestyle.
It is therefore a choice the individual client has to make between ensuring the highest degree of “certainty” of outcome for their lifestyle in the event of incapacity and what they are prepared to pay on a monthly basis to achieve this.
Nick Crabbe
Certified Financial Planner and Specialist Adviser to the Medical and Dental Professions
If you would like to know more about the contents of this article or any other financial planning matters relevant to the Medical and Dental professions please call the Baxter Fensham office on 01132583258
Full details of the NHS Ill Health Retirement Guidelines can be found at:-
http://www.nhsbsa.nhs.uk/Documents/Pensions/Ill_health_Rtirement_Factsheet.pdf
*This assumes that the Personal PHI plan has a limitation of benefit clause in the contract. The vast majority of plans do have this policy condition but some older plans do not. It is important to check the status of your policy when taking advice on this subject.
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