The NHS Pension Scheme Refresher Information
February 15th, 2010 Company News, Investments, News, Retirement PlanningNHS Pension Scheme Refresher Information and Company News
If you are not a member of the scheme then please skip to the Company News section.
We are often asked to confirm minor but very important details concerning the NHS pension scheme to many of our clients. So in this newsletter we will endeavour to cover the main areas that we are most commonly asked for information on, and this will hopefully clear up some of the confusions that exist.
Important Note
Almost all our clients will be members of the 1995 NHS pension scheme, and as such all the information in this newsletter applies to this scheme. If you are a member of the 2008 scheme then you will need to refer to the members booklet on the website http://www.nhsbsa.nhs.uk/Pensions/Documents/Pensions/SD_Guide_V3_-_06.2009.pdf
To ascertain if you are a 1995 member you need to meet the following criteria:-
- You joined the scheme before 1/4/2008
- You have not had a refund of contributions or opted out of the scheme
- Your pension is not in payment
- You have more than 2 years membership
- You have not had a break in membership of more than 5 years and rejoined the scheme after 1/10/2008
Hospital Practitioners
How is the pension calculated?
You will receive a pension and a retirement lump sum based on the best of your last three year’s
pensionable pay.
Your pension is 1/80th of the best of the last three year’s pensionable pay for each year of pensionable membership in the Scheme. Part years will also count towards your pension.
Your pension is calculated as follows:
- pensionable pay x pensionable membership x 1/80 = pension
- Your retirement lump sum is normally three times the pension. It is calculated as follows:
- pensionable pay x pensionable membership x 3/80 = retirement lump sum
Planning Point
Not all payments in your salary are deemed to be pensionable and so some will NOT count towards your pension, below is a list of payments that are:-
- Basic salary
- Clinical Excellence Awards
- Clinical Excellence Gold, Silver and Bronze Awards
- Distinction Awards A+, A and B
- Clinical Directorships
- On call
And those that are not pensionable include:-
- Additional PA’s (over and above the contractual 10 for full time employees)
- Car Allowances
- Refunds of expenses
- Travel costs
Part Time Work
A lot of people ask what if they were to go part time towards the end of their career? Would this then unduly impact on their pension at retirement as it’s based on the best of your last three year’s pensionable pay? The answer to this is no, it will have a modest impact but not a major one.
If you work part time (say 50%) the NHS will credit you with 182.5 days membership of the scheme rather than 365, but the final salary used will be the FULL TIME EQUIVALENT. In other words if you were 57 with 37 years of service in the scheme earning £80,000 pa (pensionable) and decided to work the last three years from 57-60 part time earning £40,000 pa, your pension would be based on 38.5 years of service (37+ 3 x 182.5 days). Your pension would therefore be 38.5/80 x £80,000. So you would lose a year and a half of benefit but your pension would NOT be calculated based on earnings of only £40,000 (your part time salary).
Planning Point
Many people think about the idea of slowing down from 55-60 but are unsure or concerned about the long term impact of such a decision. We have helped many clients look at this option and have successfully planned for many of them to work part time in the later years of their Medical or Dental service by having a structured financial plan in place.
General Medical and Dental Practitioners
You will receive a pension based on your career earnings and a retirement lump sum.
Your pension is based on 1.4% of your re-valued career earnings. This is achieved by recording
your pensionable earnings for each year of membership in the Scheme and applying a
revaluation factor. The revaluation factor used to re-value your earnings each year is 1.5% above
the amount of the annual increase due under the Pensions Increase Acts. The resulting figure is
known as your uprated earnings.
Your pension is calculated as follows:
Uprated earnings x 1.4%
Your retirement lump sum is normally three times the pension.
Example
A GP retires at age 60. Her earnings for each of the years as a Practitioner are re-valued and added together giving an uprated earnings figure of £1,500,000. This total is multiplied by 1.4% to give her annual pension. Her retirement lump sum is three times that amount.
Her pension is:
£1,500,000 x 1.4% = £21,000 per year and a retirement lump sum of £63,000
Increasing your Tax Free Lump Sum on Retirement
As stated above you can receive a tax free lump sum which is normally three times your annual pension. However you also have the option of receiving a larger retirement lump sum (up to a certain limit) and a smaller annual pension.
You have to give up some of your pension to get more retirement lump sum. You will receive £12 of lump sum for every £1 of pension you give up.
The maximum lump sum you can take is 25% of the capital value and the capital value is determined by the HMRC rules and is calculated by multiplying your reduced pension by 20 and adding your total retirement lump sum. In the majority of cases the maximum lump sum you can take works out as approximately 5.36 times your 1995 section pension.
Example
An employee decides to take a larger retirement lump sum when she retires.
Original pension £10,000
Original lump sum £30,000
She receives £12 of lump sum for each £1 of annual pension given up, in this example she chooses to exchange £500 of her annual pension to get an extra £6,000 lump sum, (£500 x £12 = £6,000)
Her benefits are now:
Pension £10,000 – £500 = £9,500 per year
Retirement lump sum £30,000 + £6,000 = £36,000
The maximum lump sum she could take is £23,571 higher than her normal lump sum. (£10,000 x 33/14)
She would have to give up £1,964 (£23,571 / 12) of her annual pension to get this so her benefits would be:
Pension £10,000 – £1,964 = £8,035 per year
Retirement lump sum £30,000 + £23,571 = £53,571
Planning Point 1
Whether you choose to take the larger lump sum or not will depend on your circumstances at the time you retire and your longer term objectives. A structured financial plan will enable you to identify whether or not the larger lump sum option would in fact be beneficial or detrimental to your situation. If you are a higher rate tax payer in retirement this option may provide tax advantages as the extra lump sum can be invested to provide tax free income whereas all pension income is taxed at your highest marginal rate.
Planning Point 2
If you elect to take the bigger lump sum and lower pension your widows/widowers benefits when you die in retirement are however still based on the full pension figure before it was reduced due to taking the bigger lump sum. This means that less life cover is required to maintain the spouses income in retirement following the first death and needs to be considered within your family life planning models.
Early Retirement
If you joined the 1995 scheme before 6 April 2006 you can choose to take voluntary early retirement from age 50 and receive reduced benefits. Your pension and retirement lump sum are reduced because they are being paid earlier than expected. Your dependants will still get any benefits they are entitled to in full.
If you joined the 1995 section on or after 6 April 2006 your minimum retirement age will change to 55 on 6 April 2010. If you returned to the Scheme after 6 April 2006 this may also apply to you.
The following table shows how much your pension and lump sum is reduced by if you choose to retire early. If you retire between the ages shown the benefits payable will vary.
Scheme fact
If you have Special Class Status and you retire voluntarily before age 55 your benefits will be
reduced as if your normal retirement age was 60.
| Age | 59 | 58 | 57 | 56 | 55 | 54 | 53 | 52 | 51 |
| Pension | 6% | 11% | 16% | 20% | 24% | 28% | 31% | 38% | 40% |
| Lump Sum | 4% | 7% | 10% | 13% | 16% | 19% | 24% | 27% | 29% |
Financial Planning Point
If you plan to retire early, due to the significant reductions applied to NHS pensions, it may be better to accrue significant savings in other tax efficient vehicles over your working life and to live off these proceeds between the date of retirement and age 60, this way you avoid the penalties. However, depending on your other income sources, your expected life expectancy and any pension your spouse may have it may still be better to take the penalty at 55 as it takes about 15 years (or age 70 if you retire at 55) before you recoup the money by delaying the pension to 60. A structured forecast and financial plan using our analytical pension and early retirement tools will enable you to ascertain your best course of action and the affordability of such an objective.
Company News
You are all aware that we bought the company three years ago and have spent a lot of time and money restructuring it to provide better financial planning and investment propositions for our clients. Since we bought the business we have entered in to the New Model Adviser ‘IFA of the year’ awards and have for the last 3 years been runners up in the Northern region. This means we have been recognised as being one of the top five companies in the region for the last three years demonstrating a consistently high level of advice and client service since the business was acquired. With over 330 entrants to the competition although we once again missed out on top spot we are very pleased with the nomination once again.
Imelda De Bruin
Mel who heads up our Financial Planning Analyst department must be congratulated on being awarded her Certified Financial Planners Licence and she now becomes one of only 1,117 financial Planning Professionals who has been awarded this high level qualification. Of these 1,117 only 913 are actually practicing and we are happy now to report that Baxter Fensham have 5 of these 913 in the company.
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/Pensions/Documents/Pensions/SD_Guide_V3_-_06.2009.pdf
Baxter Fensham Limited is authorised and regulated by the Financial Services Authority
The guidance and/or advice contained in this website is subject to UK regulatory regime and is therefore restricted to consumers based in the UK.
Sources
All information concerning the NHS pension scheme was taken from the above website. Figures for the number of CFP qualified individuals was obtained from the IFP (www.financialplanning.org.uk) on 26/1/2010.
