Our wealth director Amanda Cowie talks about the NHS pension and what it really will cost you.
Most of my working life is spent helping medical professionals plan for the future. As you would expect, the bulk of their retirement planning is underpinned by the NHS Pension.
Over the last few years, due to the changes in government legislation, a growing number of my clients are questioning the growing cost vs the benefit.
This is a complex area because it’s not just about your NHS Pension, it’s about the whole picture.
So, what is the actual cost?
Your contributions less tax relief. So for a consultant earning over £111,377 it’s £16,149 per annum less £6,459 tax relief – about £10,000 per annum. For this you would ‘bank’ £2,062 pension in that year, which would be revalued by inflation plus 1.5% each year until taking the benefits.
Tax on any growth if the figure on your Annual Pension Saving Statement exceeds £40,000 the excess is taxed at your highest marginal rate of tax. Typically NHS Pensions will only send you a statement if they think you might exceed £40,000.
Important Note No 1. This is not linked to your contributions.
Important Note No 2. You can get the Scheme to pay the tax if it exceeds £2,000 but please read the FAQs on NHS Pensions website to be aware of the terms as you get charged a rate of interest above the rate of inflation. This can be quite expensive if you have a number of years to retirement and it’s a deduction against your pension.
But, what if you start to earn over say £150,000? You have to bear in mind the new Tapered Annual Allowance. Thank George Osborne for this one.
For a consultant earning £150,000 with pension growth of £40,000 the employer’s share of the growth, (£40,000 less your contributions of 14.5% of pensionable earnings say £21,750) £18,250 is added to your taxable income, which brings your adjusted income to £168,250. For every £2 your adjusted income exceeds £150,000 your Annual Allowance is reduced by £1. For the consultant in my example, this would mean a reduced “Tapered” Annual Allowance of £30,875 and they would pay tax on the growth above this at 40% so an additional £3,650.
Tax if you exceed the Lifetime Allowance when you come to take your benefits. The Lifetime Allowance is £1,030,000 from 2018 so anyone with an accrued pension of over £44,783 per annum in the 1995 Scheme will pay tax on the excess at 25%. The good news? There is an arrangement for the amount to be divided by 20 and taken each year by HMRC from your pension benefit.
Early Retirement Factor if you are a member of the 1995 Scheme the normal retirement Age is 60. For those in the 2015 Scheme it is state pension age. This means that, a 47 year old doctor will have benefits in both schemes. The benefits built up in the 1995 Scheme can be taken at 60 without reduction but those built up in the 2015 Scheme would suffer an Early Retirement Factor and their accrued pension would be reduced by around 31%.
So what can I do about this?
Not that much. Stay in, continue with contributions and pay any tax liability if affected. Become a deferred member if you feel that the cost is outweighing the potential benefit although it is important to take some advice before doing this.
What’s the benefit of staying in?
A risk free inflation linked income for the rest of your life and also a survivors pension (a spouse or someone accepted as being in a relationship of financial interdependence, please check the scheme rules) of between 33.75% and 50% of your pension for the rest of their life. There is also the matter of Death in Service benefits, an important consideration and if you defer, you may need to look at topping up your life cover.
What’s the alternative?
Look seriously at the cost vs benefit. Consider when you want to retire, look at the Early Retirement Factors, consider how much pension you need for retirement and look at other assets to assist (what about other savings, could they provide you with an income?). Remember any other investments other than cash (covered by the Financial Services Compensation Scheme) will have a risk attaching to them and to generate the potential for a return, which exceeds inflation you will likely have to take some investment risk.
Whatever you do though, it’s important to consider your options, not bury your head in the sand. Take some time out to plan. Or talk to us – it’s what we do every day.
Call Amanda Cowie on 0191 281 8191 or email her: firstname.lastname@example.org for more information or to discuss any of the above.