‘Choices’ illusion masks the truth about pension changes
Dr David Bush wonders whether he can be right in thinking the new pension arrangements will ask GPs to work longer and to contribute more
The recent NHS Pension Choice exercise affected 1.96 million members of the NHS Pension Scheme, including over 200 000 doctors, and perhaps 40 000 GP's. This explains the 3 year duration of the exercise and a bill running into many millions (£1.67 million was spent on manufacturing the DVD's alone). Beautifully produced illustrations of benefits invited us to choose between remaining in our current (1995) scheme or transferring to a new scheme that was to be altered beyond recognition by the time you made your choice, the details of which are still to be finalised, so in fact you had no way of knowing quite what you were choosing between. The exercise was therefore fundamentally flawed, a fiasco, futile, and worthy of quite a few more eff's.
‘Negotiations' on changes to our pensions are now in a mess, and few of us predict a satisfactory outcome. Whatever package is agreed will, I fear, be unimportant. That is because of the spectre of the Lifetime Allowance (LTA).
The LTA is the maximum amount we are allowed to collect in our ‘pension pot' without incurring punitive tax charges. It would make no sense to exceed that amount. As GP's we do not collect a tangible pot of money (our cash is hidden within the Treasury coffers). Instead we have a virtual pot, a mathematical device which is a function of our pension benefits accrued to date. You would not want this to exceed the LTA which currently stands at £1.5 million. It is therefore a simple matter to calculate the maximum pension any of us will be able to achieve through the NHS or any other scheme.
Here is the calculation: £1.5m ÷ 23 = £65217 per annum.
It really is that simple. Why 23? Well Douglas Adams was mistaken – 23, not 42, really is the answer to life, the universe and everything.
So, dear reader, I hear you asking two questions: What's the chance of me building up a 1.5 million quid fund? And could I live on that when I retire?
I am a GP approaching my fiftieth birthday and have always earned profits which are just above average, no more. According to my calculations my pot will exceed the LTA at least a year before I reach 60. But here is the rub. We have not factored in inflation.
Our pension benefits, once we draw them, are linked to an inflationary index. They have recently been shifted from the RPI to the CPI for obvious reasons (it is cheaper). But the LTA has not been linked to any index. In fact the government have given no indication that the LTA will increase in future years at all. In 2011 they dropped it from £1.8m to £1.5m, so their intent seems remarkably clear. What effect will this have on our pension pots? Each year your superannuable profits for every year you have worked are multiplied by a dynamising factor, and consequently your pot gets larger. Therefore you will reach the LTA much sooner. I think that my existing contributions may lead to me exceed the LTA, and I've got at least 10 years of work left in me. If the LTA does not increase in future, our maximum acheivable pension will remain at £65k, and when you claim it in 5, 10 or 15 years time, £65k will not buy what it does now.
Now, I am no IFA and would not attempt to advise anyone on matters financial, but if my logic is correct then our new pension arrangements will ask us to work longer and to contribute more for a pension that may be larger, but only if you are prepared to pay a 55% tax penalty on the day that you claim it. I can see that our only option will be to keep an eagle eye on the size of our pension funds (easier said than done) and to stop contributing the day they equal the LTA, deferring pension benefits until your day of retirement. If we do that, then GP's in their 50's will be leaving in droves and trying to find a new home for their saved contributions.
Dr David Bush is a GP in Wolverhampton