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Now that the government has launched its consultation paper on increasing flexibility within the NHS Pension Scheme, some NHS trusts are taking action to shore up the workforce to try and stave off the worst of the winter crisis.
The proposals announced on 11 September 2019, would allow NHS staff, from 6 April 2020, to limit pension accrual in increments of 10% and enable employers to recycle their unused pension contributions back into the individual’s salary.
Should I opt out of my NHS pension scheme?
Some NHS trusts are offering staff the ability to opt out of the NHS Pension Scheme and receive some or all of the employer contribution as additional salary. Members would also benefit from not having to make the member contributions to the NHS Pension Scheme which can rise to 14.5% of salary for the highest paid staff. This, together with an employer pension contribution of up to 20.38% of salary, can look like a valuable alternative to pension savings in the NHS Pension Scheme, without many of the tax issues associated with the pensions Tapered Annual Allowance and the Lifetime Allowance.
There are however a number of issues with opting out of the NHS Pension Scheme, which doctors, senior consultants and all NHS staff should consider before making their decisions.
"The proposals announced on 11 September 2019, would allow NHS staff, from 6 April 2020, to limit pension accrual in increments of 10% and enable employers to recycle their unused pension contributions back into the individual’s salary."
An individual for example, needs to weigh up the difference in value to the member of an immediate salary supplement in comparison to the value of an additional pension throughout retirement. The value of NHS pension benefits could be significantly higher for an individual than the contributions received, particularly for a member close to their normal retirement age. More importantly, an individual opting out of the NHS Pension Scheme is no longer eligible for death in service benefits (lump sum of two times salary) or ill health benefits. For older, senior doctors, the cost for equivalent life cover could be considerable.
Additionally, opting out of the NHS Pension Scheme part way through the tax year may not stop an individual’s annual allowance being tapered, so, while an individual could reduce their pension accrual, taking additional shifts together with higher take home pay (due to opting out of the NHS Pension Scheme) may further reduce the amount of tax relief available for pensions savings. This could potentially leave an individual with a pensions tax bill despite opting out the NHS Pension Scheme for part of the year.
It is possible that some of these senior NHS consultants will be better off, in the long run, paying higher tax for higher future benefits, but what is missing is “educating” these doctors about the real “value” of the generous defined benefit (DB) pension they are accruing and the impact of tax on their benefits. This lack of understanding of the value of NHS pensions can be seen in the high proportion of members who opt out of the NHS Pension Scheme.
"The value of NHS pension benefits could be significantly higher for an individual than the contributions received, particularly for a member close to their normal retirement age."
Is the NHS Pension Scheme better in the long run?
The consultation proposes flexible pension accrual in the future, with both the scope to choose a personal accrual level before the start of each scheme year, and the opportunity to increase their chosen accrual level during the year when they are clearer on the level of their total earnings. Senior NHS staff would benefit from taking advice on the appropriate rate of benefit accrual for them. NHS staff should also value the associated benefits of remaining in the scheme such as death in service lump sum and incapacity benefits and should not opt out without taking advice.
The crisis faced by the NHS and the pensions issues is not going to be solved by allowing individuals to temporarily opt out of their NHS pension, or by adding complicated proposals to reduce pension accrual in the NHS Pension Scheme (which in any case will not take effect until at least April 2020). There needs to be radical changes to pensions tax policy, particularly the poorly thought-out, complex tapered annual allowance that is affecting senior staff in both the public and private sectors.
If you oversee an NHS Trust and require more information on this topic, please email me or view more of our material below.
Pension planning for senior NHS staff
Worried about the NHS pension 'tax trap'? Doctors and senior NHS staff can read our full briefing note to help make sense of the Tapered Annual Allowance and related pension taxation rules.Find out more