The Good, the Bad and the Ugly of the NHS Pension Scheme

‘You may run the risks, my friend, but I do the cutting. If we cut down my percentage… who knows? It might just interfere with my aim.’

Have you felt like Clint Eastwood recently? NHS Pensions changes can feel like your ‘percentage’ is being cut. James Gransby reports on the Good, the Bad and the Ugly of the NHS pension scheme

James Gransby in Clint Eastwood mode

The NHS Pension is still likely to be the best pension you can access. 

Despite the complexity and possibility of punitive tax charges, the scheme is Government-backed, index-linked in retirement, with a spouse entitlement on death and comes with ill health and death-in-service benefits for active members.

This makes it to top spot in what is good about the NHS pension.

The Budget in March 2020 favoured several people. The Chancellor raised the ‘threshold income’ for paying tax – the point at which point ‘annual allowance’ tapering is tested – from £110k to £200k, saving some people up to £13,500 in tax each year. 

The result of the judges’ and firefighters’ pensions age discrimination case – see the front page coverage in our August issue –  could mean that your pension will be larger at retirement. The worst-case scenario is that you will be in a neutral position compared to where you are now. If you are recently retired, then you may also be able to benefit from the changes if your circumstances fit.

The outcome of the discrimination consultation could also mean the prospect of clawing back some of the tax charges which you may have paid in recent years for breaching the annual allow­ance. 

The consultation also suggests that if making the decision to switch at retirement means that a large annual allowance growth figure occurs, then they will compensate you for the difference in your annual allowance charge liability.

At the end of last year, the Govern­ment introduced a mechanism by which any annual allowance tax charges for 2019-20 will be covered – by recompensing the difference in retirement as a routine payment made alongside your pension – as long as you submit a ‘scheme pays’ election by 31 July 2021 for the tax owed.

The ‘scheme pays’ election deadline date for the voluntary element of the 2018-19 tax year was extended from 31 July 2020 to 31 October 2020, so do not miss it. 

While NHS Pensions are being more flexible now than in the past over belated ‘scheme pays’ elections where there is a good excuse for having missed the deadline, this should not be relied upon.

The restriction on only being allowed to work 16 hours per week for the month following 24-hour retirement for those in the 1995 scheme has been lifted temporarily with the passing of the Coronavirus Act 2020 and so those wishing to retire and return during this period can now benefit from the lifting of this rule. 

Also, some members who would have otherwise been caught by pension abatement have also been given a reprieve at this time for the same reason.