Top-up your pension
The NHS pensions scheme is one of the best in the business, but you have to understand it and keep a check on it to ensure full value, says Dr John Couch
We will all retire sooner or later, unless the grim reaper beats us to it. With a majority of today's GPs hanging up their stethoscopes at or before age 60, an average 20 years of retirement should be enjoyed. The current NHS pension scheme makes this possible.
Average life expectancy continues to rise. When state pensions were introduced six decades ago the average male could expect only three years of retirement before dying. Pension provision was therefore a much cheaper option. Not only do 21st century schemes have to pay out for much longer, fund values also took a huge blow with the stockmarket crash four years ago. Although some recovery has occurred, future fund growth is predicted to be much lower than the last 30 years.
There are two main types of non-public sector occupational pensions: final salary and money purchase. The former guarantees to pay a pension and lump sum linked to an employee's final salary and years of service. A full-time employee working their whole career with one company could expect a pension up to two-thirds final salary. These generous schemes are closing rapidly. It is unlikely any will still be open in five years time.
With a money purchase scheme, pension contributions are placed in a fund that belongs to that employee only. The final pension will depend on the fund performance. If this is poor, as many have been, the pension can be considerably less than anticipated.
The current NHSPS is in effect a final salary scheme and while many occupational pensions have extra benefits, few match those of the current NHS offering.
·Pension currently payable from retirement at age 50 upwards
·Pension is index linked from age 55 onwards, ie rises with inflation
·You can retire at 60 with no actuarial reduction in pension or lump sum
·Index-linked spouse/partner pension paid if you die after retirement
·Index-linked enhanced spouse/partner pension and lump sum paid if you die before retirement
·Extra pension if you die with other dependants, eg children
·Uplift to pension and lump sum if you retire early due to ill-health
·Ability to buy added years to increase pension (subject to maximum 40 years service by age 60)
How does it work?
The NHSPS does not have a pension fund. This means it is not at the mercy of interest rates and the stockmarket. Pensions are paid by the contributions of current NHS employees with any deficit underwritten by the Treasury.
This is one of the main reasons why all public sector pension schemes are currently being reviewed.
The current scheme for GP principals works as follows.
·GPs pay 6 per cent of their 'superannuable' NHS earnings into the NHSPS, usually monthly. This is topped up by the PCT which adds another 14 per cent (paid directly to GP practices).
·Each year of GP 'superannuable' NHS earnings is uprated by a dynamising factor; this is increased each year to take account of rises in average GP earnings.
·NHS hospital service prior to this is included using that individual GP's average annual superannuable earnings (or, if individually more advantageous, hospital service can be paid under NHS salaried rules).
·The total uprated 'career earnings' are multiplied by 1.4 per cent (the 'accrual rate') to give an annual pension.
·A tax-free lump sum of three times the annual pension is also paid (service prior to March 25, 1972, only counts as one times annual pension unless the GP has purchased an 'unreduced lump sum').
Up to 2004/5 'superannuable' NHS earnings were calculated during each financial year from the various old Red Book GMS fees and allowances. A few months after the end of the year an SD86C statement was issued to each GP showing their superannuable income.
From 2004 'superannuable' NHS earnings will be calculated from GP NHS profits and will also include items not previously superannuable. This is expected to improve pensions.
Salaried GP pensions are paid, as for all employed NHS staff, based on final salary and number of years of 'full-time equivalent' service. An accrual rate of 1.2 per cent (rather than 1.4 per cent) is applied. GP principals who have also worked for the NHS in another superannuable capacity, such as a clinical assistant, will receive an additional pension for this work, paid separately along similar, 'salaried', lines.
It should be remembered that all NHS pension contributions attract tax relief at that GP's top rate, 40 per cent for most GPs.
Checking your contributions
It is vital you check your NHSPS contributions every year to ensure they are accurate. You should also keep a careful record of payments. Keep all SD86C statements and any NHS payslips filed carefully.
For salaried work your payslip should state clearly your 6 per cent employee contribution on gross salary. For GP principals it helps considerably if your practice keeps a spreadsheet of monthly GP superannuation payments for checking against the SD86C statement. This statement will show your 'employee' contributions and the NHS superannuable income.
Statements prior to 1992 did not show the latter figure to calculate this divide the employee payments by six and then multiply by 100.
If you feel your SD86C is incorrect you must appeal via the PCT immediately, following this up with appropriate evidence. Your practice manager should be monitoring superannuation monthly.
Statements currently being issued will be the last under the old superannuation rules. From 2004/5 onwards practices calculate their monthly payments (most practices are using last year's figure and uprating for pay increases already received).
Once accounts for 2004/5 are drawn up, any balancing payments can be calculated and paid.
Future statements will therefore be delayed. Practices must budget carefully for balancing payments as they will have to make the full 20 per cent (6 per cent employee and 14 per cent employer) contribution.
How to calculate your pension
The easiest way to find out what your likely pension will be is to send your details, including NHS pension (SD) number, found on the SD86C statement, and/or national insurance number, to the NHS Pensions Agency.
Eventually you will be able to get your individual details online. They will send
you a prediction based on your contributions to date.
The snag with this is that their data may be incorrect; this often applies to previous hospital service. It therefore makes sense to be able to calculate the figure independently. A pension adviser with good knowledge of the NHS scheme, such as the BMA pension department, can help you.
It is, however, not too difficult to do this yourself using your chosen retirement age.
The steps to follow
1Use a spreadsheet.
2List your superannuable income (from SD86C) for each year and part year as a GP.
3Multiply each year by the current relevant dynamising factors (*available from the NHSPA
see table 1 at left).
4Add all of the resulting totals.
5Add the total number of years to retirement and multiply by the most recent superannuable income (this figure will be an estimate). Add this to step 4 total. Treat part years as a proportion of days served divided by 365 days. Skip this step if you want to know your pension as if you were retiring at your current age.
6The final figure is the estimated GP career superannuable income at chosen retirement age. Multiply this by 1.4 per cent to get the practitioner pension.
7To include hospital service, multiply the step 6 figure by the estimated number of total NHS service days (hospital + GP) divided by the total number of GP service days to the chosen retirement age. If hospital service is more than a few years, and a higher figure would be achieved by calculating this as for a hospital doctor, then this figure is used and a separate pension paid (see the booklet 'A Guide to the NHS Pension Scheme' available from your local pensions officer, the NHSPA, by post or online). Ignore this step if so. The result is the final estimated pension at today's values.
8The lump sum, which is tax free, is three times this for most GPs (except see above reference regarding service prior to March 25, 1972).
Note: If you chose a retirement age below 60, the above pension and lump-sum figures must be actuarially reduced using figures available as above (*) and in table 2 (opposite page, bottom).
Example 1: a GP aged 55
Dr Smith is currently 55 and qualified age 24.
He has been a full-time GP from age 28 and has no breaks in service.
His current average annual dynamised GP superannuable income is £75,000.
He hopes to retire on his 60th birthday. Using steps 4-8 on the left, his current prediction is as follows.
4. Total current dynamised GP career earnings
= £75,000 x 27 years = £2,025,000
5. Add estimated income over next 5 years = £375,000 + £2,025,000 = £2,400,000
6. Multiply by 1.4% = £33,600
7. 4 years (1,460 days) hospital service
GP service to age 60 will be
27 + 5 years (11,680 days)
Total NHS pension £33,600 x (1,460+11,680)/11,680 = £37,800 p.a.
8. Lump sum is three times pension £113,400
These figures are based on current rules and use today's prices, ie they will rise further, up to retirement, in line with national GP earnings. Always check for any increases in dynamising factors, which alter each year. This is particularly important over the next two years as the forecast GP principal pay increases for Q&O
and enhanced services kick in.
Dynamising factors have already increased by 10 per cent. Further significant increases of 20-30 per cent are predicted. Dr Smith's annual pension by the time he retires in 2010 could rise to around £50,000.
Example 2: salaried GP aged 40
Dr Jones is a salaried GP aged 40.
She works half-time and does not plan to increase her time commitment.
She has 16 years' NHS service to date. Of this the first six years were full-time, the subsequent half-time. She has had two maternity leaves but continued to pay superannuation contributions. There are no other career breaks.
Her current salary is £35,000 p.a. She wants to know her forecast pension at age 60 assuming she continues working half-time to that age.
1. Years of full-time reckonable service by age 60 are, 6 full-time + 30 at half-time
(= 15 full-time equivalent years) = 21 years
2. Estimated final salary at today's prices = £35,000
3. Estimated pension is 21 x 35,000 x 1.2% = £8,820
4. Lump sum is three times this = £26,460
This figure is at today's prices and will rise in line with pay increases. It will also rise if seniority becomes payable. Note that in the final three years of service, the salary from the highest of those three years can be used if applicable.
The above figures are based on the current NHS pension scheme. Changes to the scheme were proposed recently.
NHS Pensions Agency, Hesketh House, 200/220 Broadway,
Fleetwood, Lancs FY7 8LG. Tel: 01253 774774
BMA Services/Pensions advice. Tel: 0845 974 7737