In the light of recent changes to the NHS Pension Scheme (NHSPS) and major reform to public sector pensions in the pipeline, GPs are wondering whether to leave the NHSPS and pay into private pensions instead.
To avoid making the wrong decision, GPs need an overview of NHSPS and private pension benefits. However, the final changes to the NHSPS are not yet known, so I have assumed they will be in line with the 'heads of terms' agreed with the DH last December (see www.nhsbsa.nhs.uk/pensions).
The main issues causing concern are that NHSPS contributions have increased and will increase further, while benefits are being reduced and GPs will need to work longer to receive an unreduced pension.
Also, the maximum sums individuals can contribute tax free annually to pensions have fallen, leading to potential tax charges, especially for some high-earning GPs. The maximum total pension pot that can be accumulated in tax-free contributions has also fallen, leaving GPs uncertain about their final pension benefits.
Public or private sector
Ultimately, the question is whether the overall benefit of remaining in the NHSPS is likely to produce a better result than opting out and investing in private pensions.
Also, will the cost of building up more NHSPS benefits represent a valuable investment, despite changes to the scheme's rules and potential tax charges?
GPs need to look at the main features of the NHSPS and compare them with the private sector alternative of personal pension plans (PPPs), including self-invested personal schemes (SIPPs) - see box, below.
|NHSPS versus PERSONAL PENSION PLANS|
Main NHSPS features
Main PPP features
The NHSPS offers a predetermined set of guaranteed benefits, where the scheme bears the investment and mortality risks.
A PPP has much greater flexibility over when and how benefits are taken, but eventual benefits are much less certain and you bear all the risks.
GPs with a 'cautious' attitude to risk are likely to find the NHSPS more in keeping with their philosophy.
Even adventurous GPs, prepared to take a significant risk, need to consider the level of investment return required on any PPP contributions to match benefits given up by leaving the NHSPS.
Potential returns needed
A GP in the NHSPS 1995 Section with annual superannuable pay of £100,000, based on the current accrual rate, would receive a pension of £1,400 (1.4% of superannuable pay) and a lump sum of £4,200 (4.2% of it), for a year's contribution.
This £1,400 pension would be revalued in line with the Consumer Price Index (CPI) plus 1.5% between the time the pension was earned and the date of retirement.
On the open market in mid-April 2012, the cost of an inflation-proofed pension with a 50% spouse's pension was approximately £50,000. However, the GP's total annual NHSPS contribution (at 2012/13 rates) for these benefits would be about £24,000, including a self-employed GP's 14% employer's contribution.
Investing this in a PPP would mean the funds need to more than double in value to enable you to purchase a comparable pension.
Such a rise is improbable, especially for GPs relatively close to retirement, and even those with many years to invest will need plenty of optimism.
For GPs some time from retirement, the cost of replacing death in service, spouse's and dependant's and ill-health benefits may deter even the most adventurous.
If investing instead in non-pension arrangements, these will need to produce even greater returns once the loss of tax relief (up to 50%) on pension contributions is factored in.
While you can invest in tax-efficient non-pension investments like venture capital trusts and enterprise investment schemes, these tend to be much higher risk.
Other factors to consider include annual allowance tax charges on NHS 'deemed'
contributions in excess of £50,000 a year, and tax charges on any excess pension over the £1.5m lifetime allowance. Their importance depends on individual GPs' circumstances.
The NHSPS remains an attractive defined benefits scheme, the benefits of which would be extremely difficult to match in any private arrangement.
GPs should seek professional advice if considering leaving the NHSPS.
- Stephen Caps is a chartered financial planner at Ramsay Brown Financial Services, www.ramsaybrown.co.uk