Why the NHS pension scheme is so good
Shane Stack of Medical Money Management explains why GPs enjoy a very good pension scheme indeed, and one most certainly to be cherished
First let us explore how much the NHS pension scheme costs you and what you get for your money.
You pay 6 per cent of your NHS earnings, the NHS pays 14 per cent, and the rest is subsidised by the Department of Health/Treasury. You receive tax relief at your marginal highest rate on the contributions, so for 40 per cent tax payers the net cost is 3.6 per cent. There is no 'fund', so there is no investment risk, and your payments are used to pay the pensions of retired NHS employees.
You will receive a tax-free lump sum and an index-linked pension when you retire, plus a spouse's pension if they survive you. Or if you don't make it to retirement a reduced index-linked pension and lump sum on ill-health retirement; or a death in service lump sum plus spouse and/or dependent's pension if you die before retirement.
For GPs the value of these benefits is dependent upon your 'total uprated earnings' (TUE) at ill-health/retirement/death. This
figure is simply your earnings for each year of your career, which is then 'dynamised' to bring it up to today's value. The total is then multiplied by 1.4 per cent to give a pension per annum and the lump sum is usually three times the pension (pre March 1972 membership may be different).
What is Ill-health retirement?
The definition is 'permanently incapable of discharging duties efficiently because of physical or mental infirmity'.
How much you get depends upon length of service, and the level of earnings during your career. Broadly speaking, during the first five years of service the amount is minimal. After, say, 10 years of service, the pension is about a quarter of your average income. For example, a GP with average career earnings of £75,000 and 13 years' service could expect an ill-health retirement pension (IHRP) of some £21,000 a year plus a lump sum of £63,000.
Remember this has got to last the rest of your life so those of you with families and/or mortgages should consider protecting your income/mortgage in the event of ill-health and not just death. Statistically speaking, you are up to 20 times more likely to stop work due to ill-health than you are to die
before the age of 65.
How much would my spouse get if I were to die in service?
Spouses receive the NHS member's income for three months (six months if one or more children) and a pension of 50 per cent of the value of member's pension at the date of death, payable throughout their lifetime, unless they remarry. They will also receive a lump sum of two times average dynamised income. If there are dependent children they will also receive a pension of 25 per cent of the member's pension up to a maximum of two children.
Take the example of a GP with a spouse and two children who dies at age 37 with the same service/earnings as above. The widow(er) would receive a lump-sum gratuity of £150,000 (£75,000 x 2) and a spouse's pension of £10,500 a year (50 per cent of £21,000). A further £10,500 a year would be payable while the children are dependent (reducing to £5,250 if only one dependent child).
Again, I am sure most would agree this is an insufficient amount to raise a family over the longer term, so check your life cover.
Assuming I reach retirement, how much pension will I get then?
Let's assume you qualified at age 24 and worked abroad for a couple of years. At age 60 you would have achieved roughly 34 years' service. Again, assuming the same average income of £75,000 a year over your career (bearing in mind earnings are considerably lower during your early years) then the approximate pension (in today's value) would be £35,700 pa plus a lump sum of £107,100.
If you then died, your spouse would receive £17,850 a year for the rest of their life.
Can I top up my NHS pension if it's insufficient?
In most cases, yes. You have to be careful, however, that you do not fall foul of the Government's new maximum tax qualifying pension pot, also known as the lifetime allowance. For the current tax year (2006/7) this is set at £1.5m and this will increase to £1.8m in the tax year 2010/11.
The equation for calculating the value of defined benefit pension schemes such as the NHSPS is 20 times the pension plus lump sum. Therefore, in broad terms, if you are likely to retire on a pension of £66,000 pa or more (in today's value) from the NHSP, then you could breach the limit.
You can use added years (AY), additional voluntary contributions (AVC) or personal pension (PP)/self invested personal pension (SIPP) to top up the NHS scheme. Be aware that added years is being withdrawn in just over 12 months' time, so act quickly.
You can obtain regular statements from the NHSPS to ascertain your benefits to date. Log on to www.nhspa-.gov.uk to find the
relevant address for your part of the UK.
In order to obtain the same benefits as the NHSPS in the private sector (personal pension/SIPP) then on average one would need to contribute 26 per cent of earnings each year. That's why it's so good!
Shane Stack is a partner in the Medical Money Management Group, which provides advice on financial matters and insurance for practitioners