Practice finance diary, September: Should GPs pick NHS or private pensions?
Bob Senior explains how your age impacts on how NHS pensions changes will affect your pot in his first exclusive Finance Diary for Pulse.
This month, the BMA is due to take part in fresh talks with the Department of Health on pensions.
The meetings will focus on contribution increases and retirement age as a review into the safety of NHS workers retiring at 68 begins. With rival unions unlikely to agree to a more equable application of pension contribution increases across the NHS, the BMA has a battle on its hands.
Talking to my GP clients over the past 12 months, it is clear they're all thinking about their pensions an awful lot more than ever before. Precisely which aspect of their pension arrangements is worrying them largely depends on their age.
Many will be considering the pros and cons of a private pension scheme in the months ahead.
Increasing retirement age
For GPs who were within 10 years of their normal retirement age (usually 60) on 1 April this year, the present proposals suggest that they will continue with the 1995 NHS Pension Scheme and their retirement age will not be changed.
GPs aged between 46 years, seven months, and 50 years on 1 April 2012 will be affected by the change in retirement age under the new NHS Pensions Scheme, but not immediately on its introduction in 2015.
For everyone else, the new scheme will be linked to the state pension age and, for GPs born after April 1978, this will mean a retirement age of 68. Most of the GPs I talk to are pretty cynical and expect it to move beyond 68 before they retire.
A lot to lose
Nobody is happy with the proposed changes, but those with the biggest axe to grind are GPs who had hoped to retire – albeit on a reduced pension – in their mid- to late 50s.
The reason for their disquiet is the abatement rules applying to the scheme, which discount the pension for GPs taking early retirement by approximately 5% a year. This means that a GP with a retirement age of 68 taking their pension at 58 could face an almost 50% reduction in the value of their pension. Many of these GPs may consider moving into a private pension scheme in 2015, a prospect that may attract younger GPs too.
While the new NHS Pension Scheme will undoubtedly offer better returns than a private pension, there is more flexibility with the latter. You can pay in as much as you can afford (within limits) rather than being forced to pay up to 28.5% of your NHS income in contributions. A private pension scheme also allows retirement without penalty from age 55 – there are no abatement rules to erode the value of the pension.
Contributions will rise
No GP likes the prospect of having to pay more into their pension, but it appears to be mainly older GPs who are upset about the proposed hike in contributions. Having to pay a fair contribution is not in dispute – but why are senior members of other public-sector pension schemes not paying anything like the same level of contributions as GPs?
Some independent financial advisers have calculated that, to fund an equivalent private pension, a GP would need to contribute around 41% of their NHS income. But the affordability of the NHS Pension Scheme remains in doubt and the problem will only get worse.
Medical students starting their courses this autumn could graduate in five year's time with up to £90,000 of student debt. By then, it is highly likely that mortgage rates will have gone up. Will these doctors be able to afford 28.5% pension contributions? Something will have to give, and many young GPs will opt for a lower-value private pension in return for lower, more flexible contributions. With top earners likely to desert the NHS Pension Scheme, could the viability of the scheme be in doubt?
Bob Senior is the head of medical services at RSM Tenon and chair of the Association of Independent Specialist Medical Accountants