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Getting your retirement timing right

GPs can retire from the NHS pension scheme either before or after age 60 but early retirement will obviously affect the amount of pension received – Andy Blake of the BMA explains the situation

The normal retirement age of the NHS pension scheme is 60 and any GP can retire at this age and claim their pension and lump sum benefits at an unreduced rate. It is of course possible to take voluntary early retirement; this is available from 50 onwards.

GPs wishing to continue beyond age 60 may remain in the scheme until age 70, subject to them not exceeding the maximum services limits.

Voluntary early retirement

GPs are able to draw their pension and lump sum from age 50 onwards. Note that the pension and lump sum can only ever be taken at the same time.

To reflect the fact that the benefits are being paid before the normal retirement age of 60, an actuarial reduction is applied to the pension and lump sum. This is on a sliding scale and there are different reductions for the pension and lump sum; the pension is reduced by some 4 per cent a year before 60, the lump sum by about 2.5 per cent a year.

To get an idea of the figures involved, I have included three examples of GPs retiring before the age of 60.

Example 1

GP retiring at age 50, total career dynamised earnings £2,500,000:

Accrued pension 1.4% x £2.5m = £35,000

Accrued lump sum 4.2% x £2.5m = £105,000

Reduced pension £35,000 x 0.599 = £20,965

Reduced lump sum £105,000 x 0.747 = £78,435

Example 2

GP retiring at age 55, total career dynamised earnings £3,000,000:

Accrued pension 1.4% x £3m = £42,000

Accrued lump sum 4.2% x £3m = £126,000

Reduced pension £42,000 x 0.754 = £31,668

Reduced lump sum £126,000 x 0.864 = £108,864

Example 3

GP retiring at age 59, total career dynamised earnings £3,400,000:

Accrued pension 1.4% x £3.4m = £47,600

Accrued lump sum 4.2% x £3.4m = £142,800

Reduced pension £47,600 x 0.943 = £44,887

Reduced lump sum £105,000 x 0.971 = £138,659

The minimum age for drawing early retirement benefits will increase to 55 from 2010.

Impact on added years

Added years, while very popular among GPs for obvious reasons – such as the perceived security of the investment – are quite inflexible and not generally seen as a vehicle for funding early retirement. The main reason for this is that an added years contract must be taken out from a given birthday up to either age 60 or 65. If a GP retires before the completion of the contract then it is reduced in two ways.

First, a reduction is made reflecting the fact that the added years contract has not continued to the intended age. A credit is given representing the proportion of the contract which has been completed.

Second, as the benefits are being drawn earlier than the intended age, then the reduced added years credit is also actuarially reduced.

The actuarial reduction factors applicable to added years differ from those used to reduce main scheme benefits.

Late retirement

It is possible to work beyond the normal retirement age of 60 – up to a maximum age of 70 – provided that the maximum service limits of the scheme are not exceeded. The maximum service allowable at age 60 is 40 calendar years and the overall maximum scheme service allowable is 45 calendar years at age 65 or thereafter. There is no extra benefit or enhanced accrual rate for pensionable years of service after age 60.

Abatement

Abatement is a process whereby the pension is reduced until NHS pension and NHS income do not exceed pre-retirement income. Broadly speaking, if a GP's pre-retirement income was £100,000 a year and their NHS pension was £50,000 then they would not be able to earn more than £50,000 a year following re-employment in the NHS.

The good news is that abatement only applies to very few GPs, namely those who return to NHS work following ill-health retirement or redundancy from a salaried post. Even in these circumstances abatement only ever applies up to the age of 60.

It is important to note that abatement only applies to a return to NHS work. Working for any other employer after retirement from the NHS is not affected.

If a GP wishes to return to NHS work after retirement, then it is necessary first to take a break in service, the length of which is dependent upon how much work they will do in the first month of re-employment.

A break in service of just 24 hours is allowed, provided that in the first month of re-employment the GP does not work more than 16 hours a week.

If a GP wishes to return to full-time work or work in excess of 16 hours a week then they would need to take a break of one month before doing so.

Care must be taken to ensure the correct break in service is taken as the pension will be suspended until the NHS Pensions Agency is satisfied that the requirements for returning to work have been met.

Andy Blake is deputy head of the BMA pensions department

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