By Louise Misiewicz
Article relevant to the tax year 2017/18
Are you contributing towards the NHS pension scheme?
Are you unsure what the benefits and dis-benefits of your NHS pension?
Pension contributions limits
There are many tax advantages of contributing into a pension for medical professionals such as doctors, locums and dentists as outlined in my previous article here.
The pension contribution annual allowance is currently set at £40,000, but as my other article here suggests, the contribution annual allowance is reduced for people that earn more than £110,000 from April 2016.
It is possible to contribute more than the contributions allowances, but there will be a tax charge in doing so. If the annual allowance charge is £2,000 or less then this will be collected through the self-assessment tax return.
If the below conditions are met and the annual allowance charge is greater than £2,000, then it is possible for this to be paid by the NHS under the Scheme Pay rules, which will reduce the pension value and tax-free lump sum benefits by the paid annual allowance plus CPI + 2.8% for each year that the annual allowance was paid until retirement.
- Annual allowance must be £40,000
- Member must not have taken benefits from the NHS pension
There is a lifetime allowance charge for pensions that exceed £1m unless previously protected.
Someone that retires and has more than £1m still in their pension will be subject to a tax charge of 25% on the excess. If the cash sum entitlement exceeds 25% of the available Lifetime Allowance, the NHS will allow any excess cash sum from their scheme to be taken as a taxed lump sum, in which case it will be subject to a 55% Lifetime Allowance charge.
It is possible to allocate an NHS pension to beneficiaries, which would be payable upon the pension member’s death, therefore reducing the potential lifetime allowance charge. This depends on the members age, beneficiaries age and gender of the beneficiary.
There are other lifetime allowance protection schemes that were available to NHS pensions members, but this is outside the scope of this article.
NHS pension schemes
There are currently two NHS Pension Schemes (NHSPS):
- The ‘old scheme’ comprising the 1995/2008 scheme
- The new 2015 NHS Pension Scheme.
According to the NHS Employers website the following contributions would need to be paid by NHS pension members:
|Tier||Pensionable Pay (whole-time equivalent)||Contribution Rate from
2015/16 to 2018/19
|1||Up to £15,431.99||5.0%|
|2||£15,432.00 to £21,477.99||5.6%|
|3||£21,478.00 to £26,823.99||7.1%|
|4||£26,824.00 to £47,845.99||9.3%|
|5||£47,846.00 to £70,630.99||12.5%|
|6||£70,631.00 to £111,376.99||13.5%|
|7||£111,377.00 and over||14.5%|
It is also possible for NHS pension members to contribute towards the Additional Voluntary Contributions (AVC). It is worthwhile for all NHS medical staff to contact the NHS Pension Agency to see how much they can contribute towards the various types of pensions.
Anyone starting with the NHS after 1st April 2015 will join the later NHS pension scheme.
For those that started with the NHS between 1995 and 2008 may also join the new 2015 NHS pensions scheme, but is dependent on the Normal Pensions Age (NPA) as at 1st April 2012.
The 2015 NHS Pension Scheme is an average revalued salary rather than a final salary scheme. The scheme will have the following benefits:
- Career Average Revalued Earnings (CARE) of all earnings whilst Working with the NHS plus their benefits.
- Revaluation is based on Consumer Price Index (CPI) plus 1.5% for active members and CPI for deferred members
- Accrual rate of 1/54th for each year in service with no upper limit of the number of years that will be taken into account until the age of 75
- Tax-free lump sum equivalent to £12 for every £1 of the pension given up
- NPA early payment that is not subject to a reduction linked to the members State Pension Age (SPA) or at 65 if that is later.
The accrual rate for active members in the 2008 NHS pension was 1/80th of their final salary and 1/60th for 2015 NHS pension.
Final salary calculations for the 2008 NHS pension was based on the best of the last three years salary and for the 2015 NHS pension was based on the average of best three consecutive years revalued in line with inflation.
Our team of accountants & tax advisors are focused on creating greater revenues for your medical professional business such as GPs, locums and dentists, whilst being tax-efficient.
Whilst it is beneficial to look at the NHS pension benefits and relevant tax advantages and disadvantages we must also look at the below benefits for you to work out whether or not the NHS pensions is worthwhile given your personal circumstances:
- Death in service is twice personable pay
- Death in service survivor’s pension
- 1995 NHS pension: 50% of member’s notional tier 2 ill health retirement pension.
- 2008 NHS pension: 37.5% of member’s notional tier 2 ill health retirement pension. Short term pension payable at rate of member’s pensionable pay for the first 6 months.
- 2015: 33.75% of the notional tier 2 ill health pension is under NPA at date of death or 33.75% of the notional age pension if over NPA at date of death.
- Death in service children’s pension
- 1995 NHS pension: 25% (50% shared if 2 or more) of member’s notional tier 2 ill health retirement pension.
- 2008 NHS pension: 18.75% (37.5% shared if 2 or more) of member’s notional tier 2 ill health retirement pension. Short term pension payable at rate of member’s pensionable pay for the first 6 months.
- 2015: 16.875% (33.75% shared if 2 or more) of the notional tier 2 ill health pension.
Full protection and Tapered protection 2008/2015 NHS pension
Active members of the 1998/2015 pension at 1st April 2012 and still active member as at 31st March 2015, whom were within 10 years of the NPA are entitled to full protection and would be entitled to the final salary scheme.
Active members of the 1995/2015 scheme that were more than 10 years away from NPA as at 1st April 2012 but less than 13 years and 5 months would be entitled to the a tapered protection.
This means that the member will join the new 2015 NHS Pension Scheme at a later date than the 1st April 2015 and will be determined by their age. For every month beyond the 10 years of their NPA as at 1st April 2012 the protection is reduced by two months.
Are NHS pensions, albeit diluted, worthwhile?
I would have to say that pensions are worthwhile based on the below:
- Tax relief from your pension contributions
- 25% tax free lump sum benefits at the age of 55
- Death benefits
- Potential IHT benefits
Let’s also see some of the financials with an example of a medical professional working in the NHS with an average salary of £50,000 and contributes towards the pension for 10 years. We will ignore the CPI + 1.5% for the purpose of this example.
Based on the NHS employers website, the person would pay 12.5% into the pension. This being an investment of £6,250. As HMRC adds 20% as tax relief onto the pension £1,250 it will give a total pension value of £75,000 ((£6,250 + £1,250) X 10 years).
How much will the pension be worth to the member?
Based on the above accrual rate of 1/54th for ten years service gives a value of 10/54ths of the average salary of £50,000. This gives an annual taxable salary of £9,259.26.
It would require the person to live for 8.1 years (£75,500 divided by £9,259.26) to make sure that the person breaks even. If the person is single, then the pension will die with them. If they are married as shown above, the pension will be passed onto the beneficiaries.
Nevertheless, it is difficult to make a direct comparison to the amount of money invested into the NHS pension against the money you get back out of the pension.
It depends on your lifestyle and health to determine how many years you survive and take benefit from the NHS.
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