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With the demise of the majority of private sector final salary schemes, the NHS pension scheme is acknowledged as one of the best available. Make the most of it, writes Dr John Couch
Dr John Couch
From April 2006 there will be major changes to all pensions. Also a review of NHS pensions is due to report in the next 12 months. One of the main factors it will take into account is increasing longevity so there are no prizes for guessing that the new scheme will not be as attractive as it is currently. You should aim to maximise the current scheme now as well as the new scheme when details are available.
How the NHS scheme works
For GPs the final NHS pension is based on total superannuable earnings over a whole NHS career. Each year of earnings is then 'dynamised' to take into account increases in GP remuneration. The dynamising factor is different for each year.
For example, a full-time GP with no breaks in service retiring at age 60 may have a dynamised total career earnings of £2.4 million. This figure is multiplied by 1.4 per cent to give an annual pension of £35,000. In addition to this a tax-free lump sum of three times the annual pension is awarded or £105,000 in this case (different rules apply to older GPs for pre-1972 service which may reduce the lump sum slightly).
In addition to this the NHS pension scheme has a number of other benefits.
-Pension is increased annually to allow for cost of living rises.
-Pre-GP NHS service qualifies
-Death in service lump sum to dependants (appx 2x average annual superannuable pay)
-Death in service pension to dependents
-Death after retirement pension to dependents
-Lump sum in certain circumstances following death soon after retirement or leaving NHS scheme
-Enhanced pension if forced to retire early on ill-health grounds (unless in scheme for less than five years)
-Enhanced lump sum if likely to die in less than one year
-Ability to buy 'added years' to enhance final pension (subject to some limits)
-Ability to take unreduced pension from age 60 and reduced pension from 50 upwards (it is these benefits that are likely to change when the new proposals are made known)
-Ability to take pension at age 60 and then return to work after one month with no reduction in pension.
All GP principals pay 6 per cent of their superannuable income into the NHS scheme annually. This is topped up by another 14 per cent employer's contribution. The 6 per cent employee contribution used to be deducted monthly by PCTs from a variety of the fees and allowances making up old GMS. From April last year the superannuable figure was based on a practice's NHS profits. These will only be known after the financial year end so an estimate must be made with monthly payments in advance and a balancing payment (if applicable) part-way into the next financial year.
In addition to this, practices now also pay the 14 per cent employer's contribution direct. PCTs have estimated the amounts and should have included this in global sums or PMS budgets. If practices do not pay the correct amounts final GP pension will be inaccurate.
Under the extra funding from the new contract it has been forecast that from April 2006 GP superannuable incomes, and therefore pensions, should rise considerably. Dynamising factors will be adjusted to take this into account. Increases of between 25 per cent to 50 per cent have been forecast. If correct, using 25 per cent, the pension figure above would increase to £43,750 index-linked with a lump sum of £131,250. To achieve these figures via a private money purchase scheme the pension 'pot' would have to be worth at least £1,000,000, costing considerably more in contributions over a career. This is why the NHS scheme is so good.
What you should do
If you are a new full-time principal, qualifying around age 24, with no breaks in service you should confirm with your practice manager that monthly payments, of 20 per cent (6 per cent employee + 14 per cent employer) of estimated NHS superannuable profit (or best calculation) will be made in your behalf. These should be for the equivalent of your NHS profit share. Superannuable 'prior share' earnings should also be included.
You should write to the NHS pensions agency to ensure that they have details of your previous NHS employment. It is much easier to sort this out now rather than in 30 years' time! Keep a record of all correspondence. Also ask for copies of the relevant NHS pension scheme booklet. Make an allowance for any balancing payment. In the first couple of years of nGMS this could be £1,000. It is also possible that the 14 per cent employer's payment will have come out of QOF and enhanced service payments.
If you already have breaks in service or were a mature student you should explore buying added years now. There are no guarantees that this benefit will be available once the pensions review comes into force.
Principals taking maternity leave or sabbaticals must ensure that their pension contributions continue.
By September 30 each year you should receive a statement of your previous year's superannuation contributions and superannuable income from the PCT. Get your practice manager to chase this if needed. The figures must be checked against those actually made by your practice and any discrepancy queried. File all of these statements carefully. It is also worth checking the NHS pension agency website from time to time. In due course all GPs will be able to track their individual contributions and forecast NHS pension via this route.
For all younger GPs, changes to the scheme are likely to mean early retirement without abatement of pension will be pre-65 rather than pre-60. If you want to retire before 65 on a decent pension it is wise to plan at the earliest stage possible; for a new principal that effectively means now. If you have a partner who is also in a pension scheme you can take this into account.
Take independent advice on pension top-ups. The BMA can be a useful starting point. Remember that all pension contributions are tax deductible at top rate.
Look at the current NHS added years scheme first. Contributions are lower the younger you join and the extra pension guaranteed.
As you are a Schedule D taxpayer, a proportion (which increases with age) of any non-superannuable profit can be paid into a private pension.
National changes will cap total pension savings on retirement to £1.5 million, with an amnesty for schemes already breaching this figure and registered by April 5, 2006. Stringent tax penalties will be applied if the cap is breached. This maximum will be increased over the next few years and then index linked. The NHS pension will be taken into account by multiplying the final NHS annual pension by 20 and adding the lump sum. Most GPs will not breach the cap but each individual must monitor their position regularly. You can also consider other methods of topping up retirement funds, remembering that the bulk of the capital from private pension funds is not available to you or your estate for other purposes. There are a variety of other methods of saving such as ISAs, property, stocks and shares.
Your own position should never be considered in isolation. Although your partner will benefit from 50 per cent of your NHS pension this may be inadequate, especially if you work part-time or they have no employer's pension. If funds are tight you may need to decide between topping up your pension and making provision for them. A stakeholder pension may be an option here. Finally, monitor your pension regularly.
John Couch is a GP in Ashford, Middlesex
NHS Pensions Agency
Lancashire FY7 8LG
Tel: 01253 774774