Specialist financial advisor Andrea Sproates outlines why GP partners should exercise caution before opting out of, or leaving, the NHS Pension Scheme
The NHS Pension Scheme has been in the news a great deal lately because of reductions in members’ lifetime and yearly tax-free allowances.
However, the controversy has led to some overly negative perceptions of the Scheme that could result in NHS employees making the wrong choices. Here we set out to bust some myths and half-truths surrounding the NHS Pension for GPs.
Myth 1 – The 2015 Pension Scheme is not worth joining
Those GPs in previous versions of the NHS Pension had a scheme retirement date of 60 or 65 and pension benefits based on their dynamised earnings. Any hospital service was incorporated into the dynamised earnings calculation or alternatively, if better, could be calculated separately on a final salary basis.
The current pension, the 2015 Scheme, has a retirement age linked to the State Pension Age. As a result, many GPs think that this is an inferior scheme and isn’t worth joining.
However, GPs may not appreciate that the 2015 pension scheme works in a similar way to the previous Scheme and the accrual rate of 1/54th of pensionable earnings in each year of active membership is still very generous. With the pension accrued being compounded at a rate of CPI + 1.5% per annum this accrual can be significant.
Those GPs who were in the 1995 or 2008 sections of the Pension Scheme may also be unaware that they can lose out with regard to their existing benefits if they decide not to join the 2015 Scheme, as they are deemed to have left the NHS Pension Scheme completely and therefore will lose their dynamising uplift.
Myth 2 – If l leave I can join a better value scheme
One recent investigation indicated that 245,561 NHS staff had opted out of the NHS pension scheme over the past three years, calculated to represent around 16% of the active membership of the scheme.
Anecdotal evidence suggests that many people are leaving the Scheme based on conversations they are having with colleagues or reports they’ve seen in the media, which perceive the NHS Pension Scheme in a negative light.
However, while there are individual circumstances where it could be beneficial for members to leave the Scheme, it needs to be made clear that for many members the NHS pension represents excellent value and they should stay in it.
According to our calculations, somebody saving into a private pension may need to invest between four and six times the amount they put into the NHS Pension Scheme to achieve comparable benefits.
Myth 3 – Opting in and out of the Scheme is a good option for higher earners
The NHS Pension Scheme is very flexible in that it allows members to opt in and opt out when they choose. There is a general belief that high earning medical professionals should take advantage of this by opting out of the scheme for periods and so being less likely to face tax charges for exceeding the Annual Allowance. However, if they’re in the scheme for shorter periods they will accrue lower pension benefits.
It’s important not to consider possible tax charges in isolation, but to compare them against the extra pension benefits that can be accrued by staying in the Scheme. Put very simply, if the benefits exceed the charges then there is a strong argument for staying put and each individual should check their own position before making a decision.
It’s also important to note that those who opt out won’t benefit from a death in service benefit lump sum or a short term pension which is broadly equivalent to 6 months’ pay. If they are out of the Scheme for more than 12 consecutive months they will also not benefit from any enhancements to their dependants’ and survivors’ pension on death or ill health retirement pension.
Myth 4 – Scheme Pays represents poor value
If GPs in the NHS Pension Scheme face an Annual Allowance tax charge they have the option of either paying it themselves or opting for Scheme Pays, where the tax charge is reflected in a reduction in their income when they take their pension benefits.
With Scheme Pays in England, Wales and Northern Ireland the tax charge is compounded at a rate of CPI + 2.4% per annum from April 2019. This can increase the charge considerably over a number of years. However, it’s important to note that pension benefits within the Scheme are also compounded and if these increase at a faster rate than the Scheme Pays charge, then there is some merit in using this option. The rules in Scotland are calculated differently, but the outcome is largely similar.
Scheme Pays is likely to be a better option for those GPs who are facing a one-off tax charge or older members where there is less time for the charge to compound. It can also be a useful option for those impacted by the Lifetime Allowance as the tax charge is deducted prior to the Lifetime Allowance tax being calculated.
The NHS Pension Scheme is generally excellent value; it provides valuable benefits that are guaranteed by the government and would be expensive to replicate with a private pension. The majority of scheme members should ignore the background noise and remain in the Pension Scheme.
However, for high-earning GPs the pension tax rules can be complex and confusing and there are an increasing number of cases where making the wrong decisions could lead to them missing out on pension benefits or facing a significant tax charge.
We can’t stress enough that one size does not fit all and each GP’s circumstances may result in a different outcome. It therefore makes sense for high earners, and those who have built up significant pension benefits, to take specialist independent financial advice before they make any decisions or take any action.
Andrea Sproates is Head of Chase de Vere Medical
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