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First stop for pension top up is added years

For most salaried and self-employed GPs, 'added years' is probably the best way to increase final pension. But you should act now as it is unlikely the scheme will remain unchanged for long, says Dr John Couch

For most salaried and self-employed GPs, 'added years' is probably the best way to increase final pension. But you should act now as it is unlikely the scheme will remain unchanged for long, says Dr John Couch

With the pensions spotlight firmly focused on the 'A-day' pension changes, the purchase of top-up pension via the NHS added years scheme has faded into the pensions background.

However, for a majority of salaried and self-employed GPs added years remain probably the best way to improve final pension. But if you are interested you should take action soon: the Treasury is pushing for savings on pension costs, and in my opinion it is unlikely that the current scheme will go unchanged for very long. Final pension is partly dependent on years of NHS service.

The earliest doctors graduate is at age 24. Currently, GPs are able to retire at age 60 with no reduction in pension. Members of the NHS scheme who joined before April 1 2004 are able to accrue a maximum 40 years of pensionable service. Without added years, current GPs can therefore only accrue a maximum of 36 years service by age 60. In fact, many GPs qualify later, join the scheme from abroad at an older age, or take career breaks. This reduces the potential years of service even further.

How added years scheme works

The added years scheme allows GPs to increase their tally of years of service, and thus pension, by making extra payments. These are usually made as regular monthly (or quarterly) payments based on a percentage of superannuable income.

There is a facility for a lump-sum payment but this is not always as tax efficient and the amount is often prohibitive.The percentage paid is based on three factors:

  • 1 The age at which you nominate to retire (current choices are 55, 60, 65)
  • 2 The age at which the added years are purchased (the older you are the more you pay)
  • 3 The number of added years you buy (there are limits).

All three of these elements are defined in the NHS Pension Scheme booklet 'Increasing your benefits', available from your PCT pensions officer, direct from the NHS Pensions Agency or via its website (www.nhspa. gov.uk).

A GP aged 35 would pay a regular amount of 0.85 per cent of superannuable income for every added year purchased with a nominated retirement age of 60. A GP aged 45 with the same requirements would pay 1.48 per cent. If each were buying four added years and had a superannuable income of £100,000 they would pay £3,400 pa and £5,920 pa gross respectively.

Net figures would be lower as 40 per cent tax relief would apply to payments. Payments would rise as superannuable income went up over time. Total payments to age 60 retirement would be similar in both cases as the older GP pays more per month but for a shorter period of time. However, starting added years at a younger age does spread the cost.So what difference would the above payments make to final pension at age 60?

For GP partners the final pension would increase by around £5,600 pa assuming average career earnings. The lump sum would also increase by £16,800.In the case of a salaried GP (also buying four added years to top up to 40 years' service by age 60) who earned £75,000 pa in the last year of service, the four added years would increase the final pension by around £3,600 pa and lump sum by £10,800.

The effects of added years, for a GP with a lower amount of years of service, are even more dramatic. A GP joining the NHS at age 35 wishing to retire at 60 would achieve a maximum of 25 years' service. Under current rules, up to 9 per cent of superannuable income can be spent on added years, in this case 10.59 years.

This would give 35.59 years of service and increase final pension by more than 42 per cent. This would represent around £14,500 pa extra pension and £43,500 lump sum in the case of a GP principal with average annual superannuable income of £90,000.There is no perfect pension scheme and added years do have some drawbacks. The pros and cons are listed in our table, far right.

Will 'A-day' affect added years?

The pension harmonisation changes from 5 April place a limit on total pension value. This will be £1.5 million for 2006/7. Most GPs will fall below this limit but those with higher earnings could breach this if too many added years are purchased.

The new rules also allow much larger annual amounts to be paid into a pension, subject to the overall limit above. But individual schemes can still impose their own limit. It is most unlikely that the NHS pension scheme will allow any higher added years payments than at present as there are already concerns about the ability of the NHS and Treasury to fund future NHS pension predictions. It should, however, be possible to buy added years and also make larger payments than at present into a personal pension.

Take advice

Individual circumstance will vary enormously, so all GPs considering pension top-ups must take advice from an independent pensions expert before making any decisions on buying added years and, if they do decide to buy, on the amount.

While it may also be appropriate to include other financing, such as personal pensions, you should be suspicious of any advice that does not include added years.My prediction is that this scheme is bound to be downgraded. So, I repeat, the time to consider added years is now not later.

John Couch is a GP in Ashford, Middlesex

The pros and cons of added years

The pros

  • Added years carry with them all the other benefits of the NHS pension scheme. This means widows' and dependants' benefits, ill-health retirement enhancements, index linking of pension and lump sums are all increased pro rata if added years have been purchased
  • Added years can be purchased in fractions of years.
  • The number of years purchased can be less than that required to give 40 years service by retirement age
  • Percentage of superannuable income paid is fixed and therefore guaranteed
  • Payments attract tax relief.
  • Benefits are guaranteed and not at the mercy of the stockmarket or annuity rates (in recent years a very relevant point).

The cons

  • No payment holidays are allowed so added years are not flexible.
  • Payments are a fixed proportion, so cost rises as superannuable income rises.
  • Payments are currently limited to 9 per cent of superannuable income.
  • Added years are relatively expensive (though in today's pension climate the benefits are virtually unmatchable).

Comment· In my view the added years scheme is bound to be downgraded, so if you are interested, the time to consider added years is now, not later.

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