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.
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.
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.
Under the 1995 Section, the GP would receive:
Under the current proposals, the GP would get:
Reduction of benefits under proposed position
|In the NHSPS 2008 Section and retiring at age 65 on
1 April 2021.
Under the 2008 Section, the GP would receive:
Under the current proposals, the GP would get:
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
|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