Is it Time to Review your NHS Pension Benefits?
19.12.2018 , BY Kevin Quinn
19.12.2018 , BY Kevin Quinn
If I were to pose the question to a GP or Consultant, “What is your most valuable asset?”, I suspect that the thoughts of many would pretty quickly turn to their home, particularly if they happen to live in London or the South East of England where it is not uncommon for what would often be considered to be relatively modest properties to be worth £1m plus.
However, an asset which many GPs and Consultants may not have fully considered is their NHS Pension Scheme (NHSPS) benefits, which is probably not too surprising, as most members tend not to think about the “capital” value of their NHSPS benefits.
However, the cost of purchasing NHSPS benefits is significant.
By way of example, if a GP or Consultant in the NHSPS 1995 Section were retiring at their normal pension age (NPA) of 60 with a pension income of circa £50,000 gross (taxable) per annum and a lump sum payment of circa £150,000, I roughly estimate that, if a personal pension plan (PPP) was used to provide similar benefits to those offered by the NHSPS, the PPP fund value would need to be circa £2.4m in today’s market.
This estimate is based on current pension annuity rates to provide similar benefits to those offered by the NHSPS, i.e. an initial tax free lump sum and an inflation-linked pension payable for the rest of the member’s lifetime, including survivor/dependants’ benefits should the member pre-decease their partner/dependent children.
Consequently, for many GPs and Consultants, the capital value of their NHSPS benefits could be greater than the value of their home, even if they live in or around London!
It would, therefore, seem prudent for GPs and Consultants to monitor and review their NHSPS benefits regularly to ensure that they keep abreast of any significant changes and issues that could impact upon the value of those benefits.
In particular, it is likely that a number of key events will take place between now and a member’s planned retirement age which will “trigger” a need to review their NHSPS benefits.
Some of these “trigger” events include:
Event: When NHSPS Rules and Benefits Change
Why review? Changes can have a major impact on both the timing and the level of NHSPS benefits received by members at retirement which, in turn, could have a major influence over their future work and lifestyle plans.
For example, the NHSPS 2015 Scheme, which was introduced in April 2015, has an NPA linked to the member’s State pension age (SPA) which, for many members, will now be age 66 or 67, whereas the NPA for the NHSPS 1995 section is 60 and for the 2008 Section, it is 65. However, benefits taken before NPA will be subject to actuarial reductions.
NHSPS rule changes can also bring about valuable options but ones which will require a proactive action by the member to avail of them. For example, non-married or non-civil partner members can now (subject to certain conditions) nominate that their financially interdependent partner receives NHSPS dependants’ benefits. However, the nomination must be made by the member before their death, otherwise no dependants’ pension benefits will be paid to the partner.
Event: When You Receive Annual Allowance (AA) Statements
Why review? In case there is an AA tax charge to pay, as there will then be an option to ask NHS Pensions (NHSP) to pay the charge on your behalf, known as “scheme pays”. However, “scheme pays” applications must be made within a prescribed timescale otherwise this option will not be available.
In this regard, NHSP have also recently announced that any members who have an AA tax charge to pay in respect of their NHSPS benefits, including those who are subject to a “tapered” (reduced) AA limit and/or have an AA tax charge of less than £2,000, can now do so using the “scheme pays” facility.
To also consider the value of continuing with any NHSPS Added Years and/or regular Additional Pension contracts and private pension contributions, as making extra pension contributions will increase the AA value each year.
Event: When HMRC Tax Rules/Limits Change
Why review? For example, the pension’s Lifetime Allowance (LTA) limit was reduced from £1.25m to £1m on 6th April 2016 and the reduced LTA limit of £1m is then due to increase in line with inflation each year from April 2016. As such, the standard LTA limit is currently £1.03m and is due to increase again to £1.055m on 6th April 2019.
Pension benefits which exceed the LTA limit are subject to an LTA tax charge (LTAC) on the “excess”. The LTAC will be either 25% where the excess amount is taken as an income (which would then be subject to income tax at the individual’s marginal rate in the usual way), or 55% where the excess is taken as a one off lump sum payment.
As such, the reduction in the LTA limit will have an impact on the eventual value of pension benefits received by many GPs and Consultants which, in turn, could influence their decisions about continuing to contribute to the NHSPS, when to retire, etc.
However, subject to certain criteria, individuals who had pension benefits with a capital value of £1m or more as at 5th April 2016 and who have not already done so, will have the option to apply for HMRC Individual Protection 2016 (IP2016).
There is no deadline for IP2016 applications, although it would be prudent to have IP2016 in place before applying to take NHSPS benefits, otherwise an unnecessary LTAC may be applied.
IP2016 will provide eligible individuals with a personal LTA limit of up to £1.25m (depending on individual circumstances), even where the standard LTA limit is lower.
Event: When Taking Your Pension Benefits
Why review? When members come to take their NHSPS benefits, they will need to consider a number of issues and options, including their LTA position, the option to commute (“give up”) some of their NHSPS income to take a lump sum in the 2015 Scheme and/or an increased lump sum payment in the 1995/2008 Section, the LTA tax implications of the order in which their pension benefits are taken (if they also have pensions outside of the NHSPS), completion of their NHSPS AW8 retirement application form, etc.
Once made, these decisions cannot be reversed!
Event: Whenever You Feel it May be Necessary!
Why review? Notwithstanding the above, it is always worth periodically reviewing your accumulated NHSPS benefits to ensure, for example, that you continue to remain “on track” to achieve your retirement/financial independence objectives and that your pensionable pay and service records are up to date, etc.
No Going Back!
The above events and examples of reasons why benefits should then be reviewed are by no means exhaustive. However, given that NHSPS benefits will arguably be the one of the most (if not the most) valuable asset for many GPs and Consultants, it would seem prudent to review NHSPS benefits regularly to ensure that key issues are addressed as and when they arise. This is to ensure that that potentially valuable opportunities are not missed as, in many cases, there will be limited (if, indeed, any) scope to correct matters after the event!