Do I quit or is my pension still a . . .
Should I stay or should I go? Patrick Convey considers why opting out of your NHS pension is not a quick decision.
You would be forgiven for losing track of all of the pension changes that have occurred in the past ten years.
It seems we cannot go one Budget without HM Revenue and Customs and the Treasury adding yet further complication and additional taxation. The latest attack on pensions has been twofold.
Firstly, the lifetime allowance has now been reduced from £1.25m to £1m.
Any excess over the lifetime allowance is taxed at up to 55%. While there are some transitional protections available to protect a higher amount, there are various rules to follow.
In all likelihood, unless you are coming towards the end of your career, these protections may not be suitable and you may not even qualify for them.
The second assault has been on those who earn over £150,000 a year, as this group will gradually see their annual allowance reduced from the current £40,000 down to as low as £10,000 for those who earn more than £210,000 gross from all sources.
Any excess contributions are added to your income for the tax year and taxed at your marginal rate of income tax.
Those in the NHS and who also run their own private practice may be caught by both of the changes mentioned above.
You will undoubtedly have colleagues who are leaving the scheme and telling you that you are mad for not doing so.
But it is not that simple
The NHS Pension Scheme is a defined-benefit scheme, which provides benefits based upon your length of service and your pensionable salary. The pension is Government-backed and index-linked in retirement and also provides benefits for a surviving spouse.
Due to the rising costs, in recent years the private sector has been closing down such schemes almost as rapidly as the Government has been changing the rules.
The term gold-plated is banded around in the press and, in reality, it probably is not that far from the truth.
In or out
We have carried out some research to see what the impact would be of staying in the scheme versus opting out.
For an average doctor with 25 years’ service in the NHS and a pensionable salary of £100,000, by staying in the scheme and continuing to contribute for ten more years, he or she would be better off within 13 years of retirement versus a colleague who leaves the scheme.
The situation changes the closer you get to retirement and will be dependent upon possible pay rises, your position in relation to the lifetime allowance and whether there have been any annual allowance charges.
It should also be remembered that if you opt out, you will lose other benefits such as death-in-service life assurance and may also face reduced ill-health retirement options.
Each individual will require specific advice.
However, the message to take away is that the decision to opt out is not one that should be taken lightly, as it may cost in the long run.
Patrick Convey (right) is technical director of Cavendish Medical, specialist financial planners helping senior consultants in private practice and the NHS
The content of this article is for information only and must not be considered as financial advice. Cavendish Medical always recommends that you seek independent financial advice before making any financial decisions. Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor. The value of investments and the income from them can fluctuate and investors may get back less than the amount invested.
- See accountant Ian Tongue’s analysis of pension changes: ‘Pensions – they’re the limit’
