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How changes to the NHS Pension Scheme will affect GPs

Stephen Caps on the implications for your NHS pension benefits and the timing of your retirement.

A 50-year-old GP who is planning to retire at the age of 60 on 1 April 2021 could lose up to £2,100 a year under proposed changes (Photograph: Istock)
A 50-year-old GP who is planning to retire at the age of 60 on 1 April 2021 could lose up to £2,100 a year under proposed changes (Photograph: Istock)

You will almost certainly be aware of the well-publicised actual and proposed changes to pensions. This feature went to press as an announcement on a revised offer was expected.

These changes include the NHS Pension Scheme's (NHSPS) new 2008 Section and a reduction to the annual allowance restricting your combined annual contributions (ignoring any carry forward allowance), to a total of £50,000 for all registered pension schemes of which you are a member.

Also the lifetime allowance, that limits the capital value of tax-advantaged pension benefits, including NHSPS benefits, will fall from its current level of £1.8 million to £1.5 million from 6 April 2012.

In addition, the Independent Public Service Pensions Commission, chaired by Lord Hutton, has made several recommendations that have been accepted by the government, and which will have a significant impact on the future pensions of the majority of public sector workers.

There were 27 recommendations in Lord Hutton's report and the main ones that will impact on public sector pension costs and benefits are:

  • Changing from a final salary basis for calculating pensions to career average revalued earnings (CARE) scheme. (GPs' NHSPS benefits are already calculated on a CARE basis).
  • Linking the normal retirement age for NHSPS members to the retirement age for state pensions. This is currently 65 but will increase to 66 from 2020 and is expected to increase further.
  • Increases to NHSPS member contribution rates to be phased in over three years, with the first increase taking effect from April 2012.
  • Altering the rate of increase to pensions in payment from the previous Retail Price Index (RPI) measure to the generally lower measure of the Consumer Price Index (CPI). The CPI basis replaced the RPI basis in April 2011.

However, Lord Hutton's report also recommended existing pension rights should be honoured in full and that members should continue to receive defined benefits. This means that NHSPS members' eventual pensions are guaranteed and determined by their lifetime earnings and their length of service.

Assuming the recommendations are implemented, the above changes mean that at some point around or before 2015, all members will be moved to a new NHSPS.

ADDED YEARS

GPs in the 1995 Section with an added years (AYs) contract are concerned about what will happen to AYs when a new NHSPS is introduced.

  • Currently, there is no firm indication about what will happen to AYs.
  • When the 2008 Section was introduced, members moving to the new scheme had to stop paying AYs contributions. The 2008 Scheme was optional; the '2015 scheme' will not be.
  • When agreeing to purchase AYs, GPs entered into a contract with the NHSPS and therefore any changes that are introduced or imposed may be a breach of contract.
  • As with changes to pension dynamisation after the 2004 GMS contract was introduced, and the current legal challenge to moving public sector pension increases from the RPI to the CPI, this might prove sufficient grounds for another legal challenge.

How will this affect you?
The main factors determining the outcome for GPs will be first, whether you are in the 1995 Section or the 2008 Section of the NHSPS, and second, your current age and consequently how far away you are from retirement.

GPs closest to retirement will be least affected by the changes. This was one of the intentions of the Hutton recommendations, given that people soon to retire will have the least time to adjust their retirement plans.

At one extreme, GPs retiring before the new scheme is introduced will be completely unaffected by the changes, while younger GPs will find most of their benefits will change.

Those GPs retiring within a few years of the changes should experience limited impact on their retirement benefits.

To try to put this into some context, the examples (below) are for a GP aged 50 who is currently in the 1995 Section and wishes to retire at 60, and a GP aged 55 in the 2008 Section who wishes to retire at 65.

Example: GP aged 50 Example: GP aged 55
In the NHSPS 1995 Section and retiring at age 60 on
1 April 2021.

Existing position
  • Revalued lifetime NHS earnings to 31 March 2015 of £3 million.
  • Revalued earnings from 1 April 2015 to 31 March 2021 of £600,000.

Under the 1995 Section, the GP would receive:
  •     Pension £50,400 pa (£3,600,000 x 1.4 per cent).
  •     Lump sum £151,200 (£50,400 x 4.2 per cent).

Proposed position
Under the current proposals, the GP would get:
  • Pension £42,000 (£3 million x 1.4 per cent).
  • Lump sum £126,000.
    
Plus  
  • Pension £8,400 from the 2015 Section (£600,000 x 1.4 per cent less 25 per cent early retirement factor [ERF] = £6,300).
  • Lump sum £25,200 less ERF of 18 per cent = £20,664.
  • Total pension £48,300 pa.
  • Lump sum £146,664.

Reduction of benefits under proposed position
  • Pension would be £2,100 pa less.
  • Lump sum would be £4,536 less.
In the NHSPS 2008 Section and retiring at age 65 on
1 April 2021.

Existing position
  • Revalued lifetime NHS earnings to 31 March 2015 of £3 million.
  • Revalued earnings from 1 April 2015 to 31 March 2021 of £600,000.

Under the 2008 Section, the GP would receive:
  • Pension £67,320 pa (£3,600,000 x 1.87 per cent) part of which could be commuted to a lump sum with smaller pension.

Proposed position
Under the current proposals, the GP would get:
  • Pension £56,100 (£3 million x 1.87 per cent).

Plus  
  • Pension £10,546 from the 2015 Section (£600,000 x 1.87 per cent = £11,220 less 6 per cent early retirement factor).
  • Total pension £66,646 pa.

  • Reduction in benefits under proposed position
    Pension would be £674 pa less.

The examples assume that the new '2015 scheme' is introduced on 1 April 2015, and that the current accrual rates for each scheme remain the same.

I have also assumed that the existing early retirement factors (ERFs) are applied for early retirement when taking benefits from the new scheme before the state pension age.

If the accrual (benefits build-up) rate for the new scheme is less than the current accrual rates for the 1995 and 2008 Sections, then the pension reduction will be greater than in the theoretical examples.

The pension loss is not much for the example GP in the 2008 Section, as the state retirement age (SRA) in 2021 will be 66 and therefore, the ERF will only be based on a GP taking benefits one year early.

The GP's position will become progressively worse as the SRA increases to age 67, 68 or even 70 years.

Other issues include that GPs will also have paid significantly more in NHSPS contributions over that period, as contributions are due to increase by 2.4% gross (before tax relief) from April for GPs with NHS pensionable earnings over £110,273 a year, with further increases proposed for April 2013 and April 2014.

The government has said that it will cap additional member contributions for high earners at a maximum of 6 per cent.

This means that a high-earning GP could be contributing 14.5% by the time the new NHSPS scheme is introduced.

While much of the detail of the new NHSPS will emerge after 'consultations' have taken place, the effect of the changes, if implemented, will be to reduce benefits and increase costs for GPs.

However, GPs should remember that the NHSPS is still recognised as one of the best pension schemes in the UK - and one that many in the private sector would envy.

As such, GPs should think very carefully before making any decision to opt out of the scheme without first obtaining detailed advice as to how the changes might affect them personally.

GPs’ NHS PENSION CONTRIBUTIONS
Earnings 2011/12 2012/13 proposed
Up to £15,000 5% 5%
Up to £21,175 5% 5.6%
£21,176 to £26,557 6.5% 7.1%
£26,558 to £48,982 6.5% 7.7%
£48,983 to £69,931 7.5% 8.5%
£69,932 to £110,273 7.5% 9.8%
£110,273 or over 8.5% 10.9%
  • Stephen Caps is a chartered financial planner and director of Ramsay Brown Financial Services Limited, www.ramsaybrown.co.uk

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