GP pensions what can we really expect?
The proposed boost in GP pensions was a very positive feature of the new contract, but will the reality match the promise? asks Dr John Couch
While the theory behind the forecast of a big boost for GP pensions under the new contract seems sound it will be some time before any of us can see whether the reality matches the promise.
Meanwhile other factors have now entered the pension debate. The proposed lifetime earnings cap on pension funds, if introduced as currently planned, will have a large impact on the ability of full-time GPs to make extra pension provision through added years, AVCs and personal pension plans. There have also been 'leaks' that future NHS superannuation contributions may be less valuable at age 60 than past contributions.
So, among all this uncertainty, is there anything GPs should be doing at the moment to ensure their pension plans are maximised?
Future uplift to NHS pensions
The prediction of pensions experts is that the value of GPs' previous pension contributions, and therefore their final pension, could increase by around 50 per cent by 2007. This figure has been reached by starting with the Chancellor's 33 per cent rise in total GP revenue by 2005/6. The increase includes expenses. It is thought expenses are unlikely to rise by as much as 33 per cent which therefore leaves more net profit available for GP drawings, possibly around 50 per cent.
Unlike NHS consultant pensions, which are based on 'final salary', GP NHS pension schemes are based on career earnings. Each year of earnings is increased by a dynamising factor to bring it into line with current average GP earnings. The longer ago the income was earned, the higher the dynamising factor. The dynamising factor is changed each year to take account of GP pay increases. If the forecast increase over current average earnings for 2005/6 is correct, the dynamising factor will increase by around 50 per cent for every previous earnings year.
To calculate a GP's pension at age 60, each year's dynamised earnings including hospital service are added together. At present the average full-time GP reaching 60 has lifetime dynamised career earnings of around £2.4 million, producing a pension of £33,600 a year (£2.4 million x 1.4 per cent) plus a lump sum of three times this amount at £100,800. A 50 per cent uplift in dynamised career earnings would produce a figure of £3.6 million, equivalent to a pension of £50,400 a year and a lump sum of £151,200.
Most GPs are well aware that NHS funding tends to disappear into black holes and the changes that have been made to the new contract to date highlight this. We therefore remain sceptical whether the reality will match the promised large pension hike.
Advice is twofold. First, watch the medical press carefully for news over the next three years. Second, if at all possible avoid full retirement until the 2005/6 figures have been incorporated into the dynamising factors. This may not be until early 2007. Anyone retiring before then will miss out, whatever the increase turns out to be.
Maximise your superannuation
GPs' superannuation contributions will be even more valuable in future. If this were not enough reason to ensure your contributions are accurate, changes to the way that GPs make their superannuation payments will add an extra layer of importance.
From April 2004 GMS practices will no longer have superannuation (6 per cent) deducted at source. Money will be paid gross, along with the PCT 'employer's' contribution (7 per cent). Each practice will then be responsible for paying its own GP principal superannuation. PMS practices already have this system. A monthly payment system must be set up and GMS practices should plan for this now.
It is impossible to predict NHS income accurately. So once the year-end accounts are agreed the practice accountants will calculate any extra contributions that need to be made. This will be based on NHS profits. It will be vital to get this done; if it isn't you face losing out in pension terms. As at present, salaried GPs will have their employed income superannuated by their employer.
Large numbers of GPs now earn NHS income from a variety of different sources. Some work as locums, some as GPs with special interests, some do out-of-hours work. Once again it is essential that each GP ensures the income is superannuated and receives a written record of this. Keep all records.
All GPs should continue to receive annual statements of NHS superannuation contributions. These must be checked and figures that seem incorrect queried. The NHS pensions agency should eventually have secure internet access for all GPs, allowing easy pension forecasts.
Imminent danger to top-ups
As part of the simplification of pensions generally the Chancellor has proposed a lifetime cap of £1.4 million on each person's pension funds, to commence 1/4/05 ('A' day). Any funds in excess of the limit on retirement will face an effective
charge of 55 per cent. The limit will be index linked.
All pensions will be included. A projected NHS pension of £50,400 will be multiplied by around 20 to give a notional pension fund size of £1.008 million (it is not yet clear whether the lump sum will also be included). To this will be added the value of any extra pension funds. Many GPs have already made extra provision via added years, AVCs or personal pension schemes.
If the forecast increase in NHS pensions does indeed come to pass, many older, full-time GPs (especially those who have had larger-than-average list sizes) could be caught by the proposed cap unless they take action.
Although, after much criticism from pension experts, the National Audit Office is looking at the proposal, its introduction remains likely.
As a concession to pension money already invested, individuals will be allowed to ringfence any contributions made before 'A' day.
If registered correctly, these will not be taken into account if the indexed £1.4 million limit is breached at retirement. Experts are recommending that all GPs look to maximise any extra pension provision before 1/4/05. Urgent and continuing advice from a knowledgeable independent pension expert would be sensible.
Following 'A' day it is likely that GPs' thoughts about extra income provision after retirement will shift in order to avoid breaching the cap. While extra NHS pension will reduce need generally, there will be more emphasis on adequate pension for spouses.
Also investments outside the pension umbrella including ISAs, bonds, equities and property.
And there's more
NHS pension calculations may change to take into account a standard retirement age of 65 rather than 60. If true this could mean contributions after the start date (possibly 2006)
will be actuarially reduced if retirement is taken before 65 rather than 60 as at present. Pension contributions up to the start date would be unaffected.
This would not have a large effect on older GPs retiring at 60 but younger doctors would certainly want to have another look at their pension plans if they want to retire at a similar age.
The crucial thing is to act now on the certainties, and as soon as you can as the uncertainties are resolved.
What you should be doing
· Read the medical press carefully for news
· Avoid full retirement before 2005/6
· Make sure your superannuation contributions are accurate
· GMS practices must set up a monthly GP principal superannuation payment system (PMS practices already have one)
· Check with your accountants about any extra contributions that need to be made
· Ensure income from all sources of NHS work is superannuated and keep all records
· Check all annual statements of NHS superannuation contributions
· Where appropriate, take steps to avoid being caught by the proposed lifetime pension cap of £1.4 million
· Investigate opportunities for investment outside
the pension umbrella
· Young GPs may need to reconsider their pensions plans
· All GPs may need to seek advice from independent pensions experts
John Couch is a GP in Ashford, Middlesex