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Your pensions questions answered

Financial advisor Ric Belcher addresses some of the questions he is most often asked by GPs

Financial advisor Ric Belcher addresses some of the questions he is most often asked by GPs

Q. I used to pay 6% of my income to the NHS pension scheme but now pay 22.5%. Is the scheme really that good?

A. Yes, the NHS pension scheme really is that good. Since April 2008, personal contributions to the scheme have been increased. Previously, the standard payment was 6% of profits. Now the personal contribution levels depend on income, varying from 6.5% up to 8.5% on incomes of more than £100,000.

Then there are the employer's contributions, which before the 2004 GP contract were paid at 14% of income behind the scenes and not directly accountable to the practice.

The employer's contribution is now part of the global sum received by the practice, and in a time of rising profits, these were easily payable without affecting a GP's bottom line. Now, with pressure on profits and the global sum not increasing in line with expenses, payment of the employer's contributions is contributing towards a lower personal income for GPs.

But if you consider that for these contributions you get a guaranteed index-linked pension and tax-free lump sum at retirement, widow's benefits and potential ill-health retirement benefits, it is still excellent value for money.

Q. How much of your income would you have to contribute to a private pension to do as well as with the NHS scheme?

A. A couple of years ago, I asked pension and investment company Clerical Medical to calculate how much you would have to contribute to a private pension to replicate the benefits of the NHS's scheme.

The company came up with a figure of 26%. Even this would not produce the guaranteed benefits of the NHS scheme, for which you would need to buy additional income protection and life assurance benefits as well.

Q. Should I have a private pension as well as the NHS pension?

A. ‘Should' is a loaded word. Whether you should depends on individual circumstances. But the fact is that you certainly can pay into a private pension, whether stakeholder, personal pension or self-invested personal pension (SIPP).

These modern pensions should have low charges (particularly the stakeholder one). They are also very tax-efficient and flexible.

They allow you to invest regularly or by lump sum. You should be able to increase, decrease or suspend payments at will, and make ad-hoc payments as and when you choose. Seek independent financial advice to get an understanding of the features and benefits of each.

Q. I am confused about the standard retirement age for GPs. What exactly is it? We don't have to work until we're 65, do we?

A. Not necessarily. For members of the NHS pension scheme prior to 1 April 2008, the standard retirement age remains 60. The standard age of 65 only applies to members of the new NHS pension – those joining after 1 April 2008 – and for existing members who transferred to the new scheme after that date.

Right now the earliest a GP can retire is at 50, although this earliest retirement age will be increasing to 55 for everyone (irrespective of which NHS pension scheme you are a member) in April 2010.

For those seeking early retirement, significant early retirement penalties apply, and you should seek independent financial advice to discuss the implications.

Q. I've missed out on added years. What can I do to boost my NHS pension?

A. The added years scheme was suspended at the end of March. But a new additional voluntary contributions (AVC) scheme was launched to replace it. The AVC scheme, amusingly referred to as son of added years, is designed to boost your NHS pension by up to £5,000 (indexed) a year and is available to all scheme members under age 65.

You can buy additional units of £250 of extra pension, to a maximum of 20 units. This can be enhanced to allow for 50% to be payable as widow's benefits – that is up to a maximum of £5,000 main pension plus £2,500 widow's pension.

The AVC can be funded as either a one-off lump sum, or spread over a maximum term of 20 years. To give an idea of costs, for a 35-year-old male GP wanting to buy the maximum pension benefits to retire at age 60, a cost of £346 per month (over 20 years) or a lump sum of £48,600 would be charged.

In addition to the AVC, you could also consider the NHS money purchase AVC scheme, a stakeholder pension, personal pension or self-invested personal pension.

Other non-pension investments might also be considered, such as ISAs and unit trusts. Each of these has different features, positive and negative, and you should seek independent financial advice from someone who is well versed in all the options, NHS or otherwise.

Q. Could you tell me something about ill-health retirement benefits? Have they really been scrapped?

A. They have been amended rather than scrapped. The amount you now might qualify for depends on the severity of your condition, average income to date and service to date.

If you are a current member of the NHS pension scheme, with at least two years' membership, and become permanently incapable of doing your present job because of ill health, you may be entitled to pension benefits.

Q. How does qualification for heath retirement benefits work?

A. Termination of your contract because of sickness or injury will not automatically lead to the early payment of a pension.

There are two tiers of ill-health benefits. Tier one is entitlement to the retirement benefits you have earned to date, paid without any actuarial reduction for early payment. This is payable if you are:

• a scheme member accepted by the agency's medical advisers as permanently incapable of doing your current NHS job, or
• a former scheme member accepted by the agency's medical advisers as permanently incapable of earning an income by doing regular work.

Tier two is entitlement to the retirement benefits you have earned to date enhanced by two-thirds of your prospective membership up to your normal retirement age. This is payable to you only if you are:

• a scheme member
• accepted by the scheme's medical advisers as being permanently incapable of doing your current NHS job, and
• permanently incapable of regular employment of like duration to your NHS job.

The assessment will take into account your mental and physical capacity, previous training, and practical professional and vocational experience. This would be irrespective of whether or not such employment was actually available to you.

Therefore, if someone with a normal pension age of 60 retires on ill-health grounds at the age of 45 after contributing to the NHS pension scheme for 20 years, their benefit will be based on 20 years' service for tier one and 30 years for tier two (10 plus two-thirds of 15 – the number of years left until normal pensionable age).

The number of years is then used to calculate the pension. Payment of these benefits would probably affect the payment of benefits from an income protection policy.

Ric Belcher is a partner at Medical Money Management, which provides independent financial advice to the medical profession.

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