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Do you – or someone you know – work for the NHS? When you start working for the NHS, you should be automatically enrolled onto the NHS Pension Scheme. Yet what is it, exactly, and how does it work? Does it offer good value for retirement planning and are there better alternatives (such as a personal pension)? In this guide, our team at Elmfield Financial Planning in Padiham, Burnley, Lancashire offers some answers. We hope this is useful and please get in touch if you’d like to discuss your own financial plan with us over a free, no-commitment consultation.
How does the NHS Pension Scheme work?
The NHS Pension is the workplace pension scheme offered to NHS employees. As a voluntary scheme, you can opt out. However, this likely will not be a wise idea if you want a comfortable retirement in the future – especially if you intend to build a long career in the NHS.
Since the 1st April 2015, a new NHS Pension Scheme has been in place. This brought about changes agreed between the government and NHS trade unions in 2011, and includes the following provisions for members:
- Employers contribute 20.68%.
- The contribution from the employee (taking tax relief into account) is 4% to 8.7%.
- The scheme is a “defined benefit” scheme rather than a “defined contribution” one. This means that you get a guaranteed lifetime income when you retire.
- This income is not determined on a “final salary” basis. Rather, the scheme uses a forumale based on a Career Average Revalued Earnings (CARE) model.
How does the Career Average Revalued Earnings (CARE) model work?
Prior to the 1st April 2015, the NHS Pension Scheme followed the 1995 and 2008 sections. These offered a final salary pension which based retirement income on your earnings just before you retired.
Now, however, the Career Average Revalued Earnings (CARE) model is used. Under this system, you earn 1/54th of your pensionable pay each year (for your future pension). For instance, if you earn £75,000 in pensionable income, then your pension would be 1/54 x £75,000 = £1,389.
Each year, this £1,389 would be revalued using a formula. Specifically, this is based on the Consumer Prices Index (CPI) plus 1.5%. So, in the above example, the £1,389 earned in the first year would be increased to £1,458.45 in Year 2 (assuming the CPI was 3.5% that year).
This process continues for each year that you are a member of the NHS Pension Scheme until you retire. In effect, therefore, you receive a new retirement “pot” each year like in the above example. At the end of the process, you add up the pension you earned each year to find out your total pension.
Is the NHS Pension Scheme a good deal?
Compared to other workplace pensions in the UK, the NHS Pension Scheme offers a very attractive employer contribution of 20.68%. By law, employers are only required to contribute 3% under auto enrolment rules. This is “free money” towards your retirement which is not affected by investment performance.
Many UK workplace pensions operate on a “defined contribution” model, where both you and your employer build up a “pot” of money over time which is invested in different assets (e.g. shares). Here, your investments will rise and fall over time and there is a chance that your pension may fall in value as you near your planned retirement date. Yet the NHS Pension offers members a guaranteed lifetime retirement income which rise each year over the rate of inflation. This, combined with your State Pension, offers many people a very stable and comfortable retirement income that is difficult to achieve elsewhere.
How do I get the best from an NHS pension?
One of the biggest pension planning challenges for many NHS employees is navigating the lifetime allowance, which sets a limit on how much you can save into your pension(s) without incurring a tax charge. In 2022-23, this is set at £1,073,100.
If the value of your pension benefits exceeds the lifetime allowance (LTA) when you retire, then anything taken as income over this threshold is taxed at 25% (for lump sums, it is 55%). As such, it is vital to ensure that your NHS Pension is integrated into a wise retirement plan which accounts for all of your pension savings – so you do not incur needless tax charges.
High-earning NHS workers with a long membership to the NHS Pension Scheme are mostly at risk of exceeding the lifetime allowance. However, other members can be affected too. Speak to a financial planner if you are concerned. There are ways to mitigate a needless tax liability – e.g. making use of ISAs and/or retiring early.
Invitation
If you are interested in starting a conversation about your own financial plan or investments, then we’d love to hear from you. Please contact us to arrange a free, no-commitment consultation with a member of our team here at Elmfield Financial Planning in Padiham, Burnley, Lancashire.
Reach us via:
T: 01282 772938
