Unless the government makes a U-turn, this pension top-up facility is likely to be closed to new contributors from 1 April 2008.
GPs without added years are advised to consider the implications and, if possible, buy them while you still can. The last date to start an added years contract is the scheme member’s birthday before 1 April 2008. Beware of applying at the last minute because obtaining an added years quotation and processing your application could take at least three months.
Why buy added years?
Additional years in the NHS Pension Scheme (NHSPS) increase the period over which your pension benefits are calculated. Each added year bought should provide increased, index-linked pension, a tax-free lump sum related to the increased pension and improved spouse and dependants’ pension benefits. Depending on your circumstances it is possible to buy enough years to bring your NHS service to 40 years by age 60. The contribution is a set percentage of earnings and is eligible for full tax relief.
Instead of added years, GPs in the NHSPS can invest in an additional voluntary contribution facility. Your payments accumulate in an insurance company fund independent of the NHSPS and are subject to market pressures. The final pension depends on the fund’s value at retirement.
Another option is a personal pension. Recent changes to pension legislation mean you can make substantial contributions. A self-invested personal pension can hold more creative investments including commercial property – the practice premises, for example.
In contrast, the cost of added years is based on actuarial projections of the inflation rate and increases in average GP earnings. If these assumptions prove inaccurate, added years could be an expensive way to increase benefits.
Proposals for changing the NHS pension include a substitute for added years. With this, each member will be permitted to purchase additional pension of up to £5,000 a year. Buying the additional pension is not expected to be cheaper than added years, but capping the benefit reduces the cost to the state.
GP superannuation is currently based on ‘uprated pensionable practitioner earnings’: the pension is 1.4 per cent of total career earnings adjusted to reflect earnings inflation.
The proposed new rate is 1.87 per cent but to produce £5,000 of pension it requires GP earnings of £267,379.67, perhaps two or more years of pay. Whether the proposed new method is worthwhile will be evident when priced. However, GPs with short service can now potentially purchase up to a maximum of 20 added years.
Buying added years
Scheme members must write to the relevant Pensions Agency (see box) to get a quotation. Include your name, address, SD or SB number and National Insurance number. Confirm to which age, 60 or 65, you intend to contribute. You will receive a calculation with the maximum number of additional years you can buy and the cost as a percentage of earnings. Written guidance is included and you tell your primary care organisation if you want to proceed. It will produce the added years contract for you to sign.
First contribution date
Within 12 months of commencing NHS employment, scheme members can make a lump sum payment for added years. This is designed to permit those joining or returning to the NHS to make up lost service. For longer-standing members the only option is to contribute regularly. Crucially the first contribution date must be the new member’s next or subsequent birthday. Assuming added years are withdrawn at the end of March 2008 GPs with a birthday soon after the beginning of April 2007 may have already missed the boat.
Morley Rowe is director of financial services at Tenon Medical Services, part of accountants and business advisers Tenon Group, firstname.lastname@example.org or (01324) 475708
- Existing added years scheme closes to new entrants at the end of 2007 (calendar year).
- Existing scheme will change for existing members from the end of March 2008.
- Substitute scheme opens for new entrants from December 2007.
- The last date to buy added years is the scheme member’s birthday before 1 April 2008. Apply at least three months before your birthday.