Trouble in store for GP's new surgery
NHS pensions are the gold standard but soaring deficits make reform inevitable Dr John Couch looks at how tough the review might prove
With the demise of most final salary company pension schemes, public sector pensions are now the gold standard, envied by most others in the UK. The big problem is that they are very expensive and, as life expectancy increases, they will become prohibitively so.
The Government and Department of Health would like to change this but are walking a political tightrope between action and electoral votes.
Our personal NHS pension contributions are not salted away, awaiting our retirement. They fund existing NHS pensioners, with the Treasury underwriting any deficit. It is this deficit that is rising rapidly and will continue to do so. Reform of the scheme is inevitable the only question is how tough this will be.
Over the last year or two discussions have been taking place between the department and NHS staff representatives, including the BMA. A review has been published with a variety of proposals. Although many of these have been trumpeted as improvements, retirement on full pension at 65 rather than the current 60 is very far from this.
Retirement at 65 is an aim declared in other public sector pension reviews and has caused widespread fury. So much so that for now the Government appears to have backed off. None of the proposals is yet firm and while a new NHS scheme is supposed to start from April 2006, recent news has been sparse, suggesting a delay is more likely.
Your pension and lump sum
Your pension is currently payable from retirement at age 50 upwards and is index linked from age 55, that is, it rises with inflation. The pension is actuarially reduced on retirement before the age of 60 and is further reduced as you will have paid fewer superannuation contributions.
All NHS staff pay personal superannuation contributions of 6 per cent of NHS earnings. This is allowable against tax. Employers pay an extra 14 per cent, and in the case of GP partners most of this is included in GMS/PMS budgets.
Annual contributions are recorded in your name by the NHS pensions agency (NHSPA) and a statement is sent a few months after the year-end. All employed NHS staff, including salaried GPs, receive a pension based on the best out of their last three years of earnings, multiplied by the number of full-time equivalent years (FTE) of NHS service. The final figure is further multiplied by 1.2 per cent (the accrual rate) to give the annual pension. A tax-free lump sum equivalent to three years' pension is also paid.
For GP partners, on retirement, each year's contributions are dynamised (uprated to represent the increases in GP pay) and added together. An average GP pay annual figure (calculated from your GP career earnings) is multiplied by FTE years of NHS hospital service.
This is added to the GP total. This final figure is multiplied by a 1.4 per cent accrual rate to produce the annual pension. Once again a tax-free lump sum of three times the annual pension is also paid.
The dynamising factors are also important as they keep previous years' pay in line with current GP earnings. Partner contributions are now based on NHS profits and this, along with nGMS, has given future pensions a big boost. Your future pension has already increased by well over 20 per cent in the past two years and will rise further once the effects of nGMS have fully filtered through.
As an example, a full-time GP with 32 years' GP service and four years' hospital service, retiring now at age 60 and with an average £85,000 pa superannuable income, would receive an index-linked pension of £42,840 a year and a tax-free lump sum of £128,520.
All NHS staff can ask the NHSPA for a pension forecast annually and eventually this should be possible online. The contact details are shown on the left. Remember to quote your national insurance number and/or scheme number.
As well as the proposals for the reform of the NHS pension scheme, Chancellor Gordon Brown is bringing in universal reforms from April 2006. These will include increasing the earliest retirement age to 55.
The proposals for the new NHS pension scheme therefore include earliest retirement at 55 as well as increasing normal retirement age to 65. Pensions will be actuarially reduced if retirement is taken earlier.
However, it is pledged that contributions paid under the old scheme will not be reduced and will also be applied under current rather than new rules.
For current GPs the new scheme will be optional until 2013 at the earliest, and those retiring before this date will therefore be unaffected. GPs retiring in the first few years after this date will also see little change as the bulk of their pension will also be paid under old rules.
The accrual rate will also change to around 1.5 per cent for employed staff and possibly around 1.87 per cent for GP partners. But this will include the lump sum which will be a more flexible option. Up to 25 per cent of the pension value may be taken as a lump sum with corresponding reduction in pension (of £1 for
every £12 lump sum taken).
The net effect is that a GP entering under the new scheme but still wishing to retire at age 60 rather than 65 will face a lower pension/lump sum package. Until firmer figures are available it is not possible to accurately quantify this.
One worrying proposal is that all NHS staff should have the same dynamising factor. As GP incomes on average rise faster, this would have a negative effect on final pensions. The BMA is already fighting this proposal with vigour.
Returning after retirement
Under the current scheme, if you retire before age 60, start drawing your NHS pension, and subsequently return to work, you face losing some pension. This process is known as abatement. This applies if your combined pension/earnings are higher than your earnings before retirement.
The pension is abated by £1 for every £1 that your earnings exceed this level. A return to work must therefore be planned very carefully, and inevitably this means part-time. However, if you start drawing pension at age 60, provided there is at least one month between returning to work, no abatement applies. Any return to work does not accrue further pension.
Under the new proposals, flexible retirement is recommended. This would mean a GP could start drawing their pension or part-pension from age 55 and continue to work with no break in service. It would also allow a wind-down to retirement with part-time working and little or no loss of income. Re-employment would also continue to be superannuable.
Death in service
The present scheme offers protection to your spouse or named partner of either sex. With death in service, an index-linked and enhanced spouse/ partner pension and tax-free lump sum of twice your average annual superannuable earnings is paid. For the first three months after death (six months if there are dependants) a monthly payment is made equal to your equivalent monthly superannuable pay.
If you die after retirement your spouse/partner will receive a lifetime index-linked pension of half your pension. This may be increased if you still have dependants. There may also be a lump sum if you die soon after retirement, although the lump sum already paid is taken into account.
Under the new proposals, the tax-free lump sum payable for death before retirement will increase to three times the average of your pensionable annual earnings. Also, again for death before retirement, the initial payment made immediately after death will be for six months even if there are no dependants.
The review has noted the Government wishes to limit the amount of guaranteed pension via added years. It also noted that members would like the scheme to be more flexible, with increased or reduced payments according to members' finances.
No recommendations were made but further views invited. It is clear the days of the old added years scheme are numbered and, given the desire to reduce costs, any new scheme is unlikely to be as good as the current one.
Anyone thinking of pension enhancement should seriously consider the present scheme with some urgency as it may not be around much longer. As always, take expert pensions advice first.
Your pension and lump sum are enhanced if you retire through ill-health before retirement. The amount of increase depends on how long you have already served
and can only be increased to give a maximum 40 years' service. You can also have
an even larger lump sum if you are not expected to live longer than a year.
Your dependants' pension entitlement will be unaffected by this.
The review did not discuss any improvements to these benefits. Ominously it did note that there is currently little or no integration between employers and the NHS pensions agency. They suggested this should change so that active management can occur to prevent the onset of ill-health and manage existing ill-health.
The review talks about alternative posts for staff that are not totally incapable of working. The implication is that it may become more difficult to get full ill-health retirement. At present it is difficult to see how this could apply to GPs. Also, for GPs and their staff, this also implies an effective primary care occupational health service. This is poorly provided at present.
NHS Pensions Agency
Fleetwood, Lancs FY7 8LG
Tel: 01253 774774
0845 974 7737
John Couch is a GP in Ashford, Middlesex