Retirement could represent a third of your adult life, and without adequate pension plans you could see a significant drop in your standard of living. NHS employees have a good occupational pension scheme but you may still want to supplement this with other savings options, depending on the kind of lifestyle you want and the kind of income you will need in retirement.
What is available through the NHS?
There are two sections to the NHS Pension Scheme and the pension benefits you receive will depend on which section of the scheme you are in. If you joined the Pension Scheme after 1 April 2008 you will be a member of the 2008 Section. Members who joined before this could be in either section, as they were recently given a one-off option to transfer all of their pension benefits to the 2008 Section. If you aren't clear which section you are in visit the NHS website at http://www.nhsbsa.nhs.uk. Your pension benefits will also include a death in membership lump sum which is currently twice your average uprated earnings regardless of the scheme you are in.
What changes have there been recently to pension tax legislation?
This April the lifetime allowance - the total amount of benefits that can be drawn from pensions without tax penalties being applied - reduced from £1.8 million to £1.5 million. If you have a reasonably long period of service under the NHS Pension Scheme, a history of high pensionable earnings and/or large funds in private pension arrangements you may find the changes in the lifetime allowance will affect you. These could affect how you build your pension and you might need to consider alternative savings products such as ISAs.
It's worth remembering that last April the annual allowance, that is the total amount you can save into your pension each year with tax relief, fell from £255,000 to £50,000. The likelihood of exceeding the annual allowance will be determined primarily by the yearly increase in your NHS pension and also whether you contribute to a private pension plan or pay additional voluntary contributions. If you exceed the allowance you will have to pay income tax at your highest marginal rate of tax on the excess.
How will the NHS pension change in the future?
Earlier this year the government issued its final proposals on the new design for the NHS Pension Scheme in England and Wales following on from the Hutton Report. These proposals include:
- All members will be on a Career Average Revalued Earnings (CARE) Scheme.
- The normal retirement age will fall into line with the State Pension Age which could be as high as 68. Members will however retain the option to retire between 55 and 75 although early retirement is likely to result in reduced pension.
- There will be an accrual rate (that is the amount of pension you build up each year) of 1/54th (1.85%) of pensionable earnings.
- The revaluation factor (that is the amount by which your benefits are increased each year to protect them from inflation) remains unchanged at CPI +1.5%.
- Employee scheme contribution rates will increase by an average of 3.2%. These increases are being introduced over three years starting from April 2012 when higher earners will have seen a 2.4% increase in contributions.
It's worth noting that there will be no change to your retirement age or the amount of pension you will receive if you were within 10 years of retirement on 1 April 2012.
What will happen to my existing pension benefits?
The Government has stated that any benefits already built up by members in the existing NHS Pension Scheme will be protected. Members will still be able to choose the age at which they retire and won't have to work until the state pension age. They can draw full pension benefits earned under the existing scheme at their current normal pension age. They will then have the option to defer the pension earned under the proposed new scheme until the state pension age but won't be able to earn more pension under this scheme.
Phil Mileham is the national sales manager at Wesleyan Medical Sickness