Paul Ham
Over the last few years there have been numerous changes to the NHS pension scheme that have steered a number of members to leave and many more to give it serious consideration. Some who have left have deferred their pension benefits and some have taken early retirement but before making any decision it is important to fully understand the consequences.
Some of the changes leading to this decision have been internal such as the increase in contributions or the change of retirement age and some have been external including the annual and life time allowances. Individually these changes are bad enough but when combined they do make members of the scheme question its overall value. The next imminent change affecting pensions is a further reduction to the lifetime allowance. If you have read previous blogs you should hopefully understand what this means but in short it is a reduction in the amount of pension you can receive before it attracts a lifetime allowance charge. There are measures that can be taken to protect existing pension pots exceeding certain limits at the date of change but there will a number of members for whom such protection will not help and it is those who are likely to be considering the benefits of remaining in the scheme over the benefits of leaving. There are a number of pros and cons that need to be considered when contemplating what to do:
- The employers contribution will cease to be payable which is good news for practitioners but perhaps not so good for consultants.
- The risk of an annual allowance charge is all but eliminated.
- Your pension obviously will not accrue at the same rate as if you continued to contribute.
- You will pay tax on the contributions that you save which for practitioners includes employers contributions.
- If you are currently protected in the 1995 or 2008 scheme you may not be able to re-join that scheme if at a later date you change your mind.
- If you do not take early retirement your deferred benefits will grow with inflation.
- You may be able to claim your deferred benefits early.
- If you should become permanently incapable of work after deferring your pension you may still be able to claim tier 1 incapacity benefits but not tier 2.
- There are different death benefits payable depending on how long you have been out of the scheme at the time of death.
Even if your pension pot doesn’t exceed the lifetime allowance at the moment it will still grow therefore you may which to investigate the long term consequences. You could have a pension below the £1m allowance and even after being deferred, your pension benefits could grow to exceed it. What might that mean to you?
Perhaps the most important consideration is the financial consequences. There are a number of ways that this can be assessed depending upon your view. Even after factoring in the cost of lifetime allowance charges the accrual rate of the NHS pension scheme continues to be extremely favourable over any other type of investment however if you are in a position to have to factor in annual allowance charges that picture can swiftly change. There are potentially two options to consider. Either take early retirement or defer your pension. If taking early retirement you may be funding a reduction in working commitment and therefore the calculations might look much different. If deferring your pension you will want to look at the pension you might expect at normal retirement age verses what it might be if you remained in the scheme. You may also want to consider what it might cost in contributions to buy the additional pension at your normal pension age and to consider not only whether in monetary terms its worth it but what those contributions could do for you now if put to an alternative use. Could they help pay off your mortgage early or could they simply improve your standard of live, What value would you place on improving your lifestyle?
The decision really isn’t an easy one so don’t rush in to making it however be mindful that the lifetime allowance reduction is from next April so you may need to make a decision before then.
The views expressed on the NHS Pension Scheme, changes to the NHS Pension Scheme, wider UK pensions legislation by Paul Ham are his own.
They are not intended as advice, they intended purely as guidance only.
Med-Ex Financial Advisory Services Limited does not seek to offer advice on the above subjects only guidance not least because future legislation might reverse interpreatation and practice.
Med-Ex Financial Advisory Services Limited can provide individuals (NHS Pension Scheme members or otherwise) with calculations concerning their proximity to the prevailing Annual Allowance and proximity to the prevailing Lifetime Allowance. The outcome of these calculations does not mean that the firm is giving advice to an individual to remain contributing to a scheme or to opting out of a scheme.
Any queries on this need to be addressed to nickmiles@med-ex.co.uk.
