GP pensions: What do changes to annualising rules mean in practice?

Parminder Gill explains what changes to the rules around annualisation in the NHS pension scheme mean and the impact it could have on GP locums.

(Photo: Nipitphon Na Chiangmai/EyeEm/Getty Images)
(Photo: Nipitphon Na Chiangmai/EyeEm/Getty Images)

As of April this year the DHSC has changed how the annualising rules apply to GPs in the 2015 section of the NHS pension scheme.

The rules relating to annualisation were first introduced in April 2015. Annualisation is used when an NHS pension scheme member's employment does not last a full year to calculate what their annual income would have been if they worked for a whole year - and the level of pension contribution they are expected to make is set on this basis.

What is the change?

Under the old rules salaried GPs were able to take up to a month off without penalty, while a locum GP was eligible for a three-month break.

For example:

A GP locum with pensionable service on the 1 April 2018 works until 30 June (91 days) and earns £21,000. They take a break (82 days) and return to work on the 21 September 2018 and work to 31 March 2019 (192 days) earning £42,000. The total income and days is £63,000 (274 days). As the break did not exceed three months annualising does not apply and the pension contributions are £63,000 x 12.5% = £7,875.

However, from 1 April 2019 the DHSC has decided that all NHS pension scheme members will have their tiered contribution rate calculated 'using the same rules'. This means that any type of break regardless of length could result in the annualising rules being applied to pensionable pay.

What does this mean for GPs?

This change will have a greater impact on GP locums who, as part of their working pattern, may choose to take breaks between assignments. With most GPs now under the same rules, a locum may find themselves moving into a higher pension contribution tier.

Let’s assume the working pattern in the previous example was followed in 2019. The break of 82 days would no longer be ignored. Therefore, the annualising rules would apply and the whole-time equivalent income would be calculated as:

£63,000 ÷ 274 x 365 = £83,923. The pension contribution rate has moved into a higher tier and is now: £63,000 x 13.5% = £8505. An increase of £630 (£8505 - £7875).

The rules only apply to GPs who are members of the 2015 scheme. Fully protected members, such as members of the 1995 or 2008 section, are not affected.

The annualising rules can be quite complex (the NHS Pension Scheme in England and Wales guide on GP tiered employee contributions can be read here). It is not just determined by breaks in service, but whether or not you were a member of the 2015 scheme at the start and end of the scheme year, and the number of and type of GP posts held.

The contribution rate is calculated as following:

Total actual or annualised GP pensionable income in the NHS Scheme year

Tiered employee contribution rate

Up to £15,431.99

5%

£15,432 to £21,477.99

5.6%

£21,478 to £26,823.99

7.1%

£26,824 to £47,845.99

9.3%

£47,846 to £70,630.99

12.5%

£70,631 to £111,376.99

13.5%

£111,377 and over

14.5%

A move from an employee contribution rate of 12.5% to 14.5% for a GP locum earning £65,000 in pensionable pay would result in an increased employee contribution of £1,300 per year.

The NHS pension scheme

While the cost may increase for some GPs, it is important to remember that the NHS pension scheme provides valuable benefits. It will provide you with a secure income for life that will increase with inflation, along with a secure income for your partner in the event of your death.

While the 2015 scheme may not be as generous as the 1995 or 2008 section, which is now closed to new members, it still represents good value for money when compared to the alternative option of a personal pension plan.

GP locums may feel aggrieved at being made to pay higher pension contributions and some may consider leaving the scheme, but this may not be in the best interest of your retirement needs. Putting money into a personal pension plan may give you greater flexibility on how to access benefits but it is unlikely to produce anywhere near the same amount of secure income on a like-for-like basis.

Issues around annual allowance charges and lifetime allowance charges can also complicate the issue but will rarely swing the pendulum in the opposite direction.

What should be your next steps?

You should obtain the latest copy of your total rewards statement to understand your current pension benefits along with any private pension arrangements.

You should give some thought to how you want your retirement to unfold. If you have a better understanding of your retirement plans you will in a better position to make decisions about your working arrangements and pension plans.

The changes are complicated and if you’re unsure, you should speak to a specialist financial adviser. 

  • Parminder Gill is advice policy consultant at financial services mutual Wesleyan. For more information, visit www.wesleyan.co.uk    

This information is based on current understanding of legislation. The information contained in this article does not constitute financial advice.

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