New options for your NHS pension

In the final part of our series, Kevin Quinn points out the choices GPs can make from 1 April 2008.

On 1 April the current NHS Pension Scheme (NHSPS) will be replaced by a revised scheme for existing GP members.

New joiners will not be able to go into the revised scheme, but must join a new version of NHSPS which has some different rules.

Features of the revised scheme that GPs need to consider are death benefit nominations, the new additional pension facility and whether to join the new NHSPS when this option is made available to you.

The time window for transferring to the new scheme is expected to be between 1 July 2009 and 30 June 2010.

You should weigh up whether under the revised NHSPS you would benefit from giving up some pension income for an increased tax-free lump sum.

Additional pension
When we went to press, full details about buying additional pension, transferring to the new scheme and the new scheme's early retirement reduction factors were not available so definitive advice is not yet possible.

Currently, GPs can only nominate one beneficiary to receive the death in service lump sum benefit.

From 1 April you can opt to split it between two (or more) beneficiaries.

Also, if you are not married or in a civil partnership but have had a partner for at least two years, you can nominate this person for the survivor's pension.

You will be able to buy an additional pension at retirement of up to £5,000 a year (in today's money) regardless of whether you are also buying added years.

If the NHS additional pension is costed in the same way as the teachers' additional pension, estimates suggest it will be competitive when compared to private sector top-up alternatives.

Under the revised scheme, GPs will still build up (accrue) pension rights at 1.4 per cent of dynamised earnings under the career revalued earnings scheme (CARE) and automatically get a tax-free lump sum of three times annual pension.

GPs who opt to join the new scheme will also have CARE but an increased build-up rate of 1.87 per cent will apply. However normal retirement age will be 65 and an actuarial reduction will be applied if you take your benefits early (from 55).

You will not automatically qualify for a tax-free lump sum. Instead, you can forego part of your annual pension to provide a lump sum, at the rate of £1 of pension for every £12 of lump sum.

Tax-free lump sum
If you stay in the revised NHSPS, you will be able to increase your tax-free lump sum by giving up pension to increase the lump sum.

The maximum increase is 25 per cent of your deemed lifetime allowance value which is broadly 23 times your annual NHS pension.

The same 'commutation' rate of £1 pension income for each £12 of tax-free cash applies.

I estimate that based on conservative assumptions, GPs will need to survive for around 20 years after retiring to be financially better off by not opting to increase your tax-free lump sum to the maximum.

Factors such as your state of health when you retire will therefore have a bearing on your decision.

My 20-year estimate assumes that the extra lump sum would be deposited in a bank/building society account earning 3 per cent net of tax a year; you will be a higher rate tax payer in retirement and the inflation rate stays constant at 3 per cent annually.

Whether or not to transfer to the new NHSPS will be a tricky decision, so seek expert advice.

Kevin Quinn is a certified financial planner at specialist medical accountants Ramsay Brown & Partners, www.ramsaybrown.co.uk

Food for thought

From 1 April 2008, GPs in the existing NHS Pension Scheme (NHSPS) should check:

  • Whether it makes sense to change the person(s) nominated to receive death benefits. Do this as soon as possible.
  • The pros and cons of the new additional pension option for buying an extra £5,000 annual pension at retirement.
  • If you can increase your retirement benefits by joining the new NHSPS when the opportunity becomes available. From 1 July 2009 to 30 June 2010 is the likely period for this.
  • At retirement, whether it will be to your advantage to give up some pension income to secure a larger tax-free lump sum.

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