Your time to add pension value is running out
Changes are afoot relating to GP pensions, and GPs need to act now.
Dr John Couch explains what to do
Almost 30 years ago the NHS, at very short notice, announced an end to the then added years pension top-up scheme. This had allowed GPs to purchase added pension years over a period of only 10 years. Suddenly GPs realised what an excellent deal this was and there was a last-minute stampede to get applications registered. The scheme that replaced it is still with us today – but not for too much longer.
In the current pension climate the current scheme is seen as over-generous, so the recent pension review has signalled its demise by the end of 2007. There is little detail about the new scheme, bar a maximum payout of £5,000 a year, but no prizes for guessing it will be more expensive and more limited in the extra pension value provided.
At the very least the majority of principals and associates not already purchasing added years should review this option urgently. Start by calculating your current pension forecast at age 60. The NHS pensions agency can do this if you make a written request; alternatively the BMA website has a pension calculator.
Next add any other expected income and deduct expected expenditure after retirement. Allow for the effects of inflation. The NHS pension and added years are inflation linked, which is not usually the case with other income. If your net income is not comfortably in the black, consider top-up options including added years, the NHS additional voluntary contributions (AVC) scheme and other personal pension plans. All these are tax deductible at your top rate.
Also consider other options such as ISAs, shares, property and buy to let. Take advice from an independent pensions and investment adviser.
Doctors qualify at about age 24 at the earliest. Some enter later, some take career breaks. The current NHS pension scheme allows up to 40 years' service by age 60 so most GPs can purchase four or so added years. These carry all the benefits of the main scheme including a higher lump sum on retirement. The only limiting factor is that no more than 9 per cent of your pensionable income can be contributed once the 6 per cent currently paid to the main NHS pension is taken into account.
The cost depends on age at entry. Consider three GPs aged 30, 40 and 50 all earning £100,000 pensionable income. The cost of buying four added years for retirement at 60 would be £2,800, £4,360 and £9,000 a year respectively. Forty per cent tax relief reduces this considerably. Payments are deducted monthly. This would provide guaranteed extra pension of around £5,500 a year at today's prices plus £16,500 extra lump sum.
Alternatively, if you have just won the lottery, a one-off lump-sum payment can be made, again with tax relief. This would be roughly £80,000 gross for the above examples. You do not have to buy the maximum possible and part-years are allowed. The main drawback is that once you have signed up you cannot pull out as the payments are automatically deducted until you retire. Apply via your PCA pension officer.
Although you have longer to sign up than GPs in 1976, a rush of applications is anticipated so do not wait too long in case of
delays or a more sudden closure.
Dr John Couch is a GP in Ashford, Middlesex