NHS Pension Scheme

Is it still good value?

Ouch, it looks like everyone is taking a pay cut for the next few years!

Against a back drop of inflation of just under 4% and an NHS pay freeze, your pay is already losing its purchasing power. On top of that, NHS doctors and dentists now also have to pay 3 years of increased contributions into the NHS Pension Scheme. 

For what though? What do you get in return to make it worth contributing to?

The case for increasing contributions

The NHS currently contribute 14% towards the pension scheme which is ultimately tax payers money. The average NHS employee contributes 6.5%.

Public service pension expenditure has risen over the last decade by a third to £32 billion - longevity seeming to be a key factor with the average 60 year old living 10 years longer than they did in the 1970’s.

In 2010, the Government announced plans to save £2.8 billion per year by 2014/15. The how is by increasing member contributions to the NHS Pension Scheme.  The rationale is to ensure a fairer, more evenly based contribution between members and taxpayers. 

Factoring in these new contributions coming into force over the next few years, many NHS doctors and dentists will see their contributions rise by more than 50% in only a few years!

Does the NHS Pension Scheme Remain Good Value?Whilst it’s worth remembering that, prior to 2008, the NHS contributions had remained largely unchanged for well over a decade, the key question now is whether the NHS Pension Scheme remains good value?

I have a simplistic view on pensions. It’s good value if you get out more than you put in. There are, of course, many other factors to take into account but it’s a worthy starting point. 

Is the NHS Pension scheme ‘value for money’?

The answer sadly lies on your death bed as longevity is the determining factor

If you live to be 100, it proves to be excellent value. If you live to only age 61, the answer is maybe not.  The strong spousal pension should also not be forgotten. 

One story that has done the rounds suggests that if a doctor retires at age 60 then they have normal longevity.  If he retires at age 65 then this is reduced to only a few years. 

I have looked for the research that supports this story but have never found anything. If you know of it and where to find it, please contact me! 

I do, however, know who would hold such information. The Pensions Agency and they allude to it in the Department of Health’s July 2011 Consultation Paper*. 

They claim that the average NHS Pension Scheme member draws their pension for between 24-27 years.  They also claim that the Scheme still represents good value and I quote ”that for every £1 each member contributes to their pension, s/he will generally expect to get at least £3 in pension payments once they retire”.

But just a minute, are they basing this on the current normal retirement age of 60 or the 2008 section which is set at age 65.  If the latter, then this would put average longevity to between age late 80 and early 90. 

If the Hutton Report’s recommendations go through, the normal retirement age will be linked to the state retirement which is looking like to be 66 for some, but at least 67 for most

Time Frame In Which To Draw Your NHS Pension BenefitsAt this point you will not only have contributed more but you will have a shorter time frame in which to draw the benefits. 

If they also move the contract to career average earnings, I’m sure you can work out the consequences.

So good value or not?

It must be remembered that the NHS Pension Scheme offers many other valuable benefits such as if you are forced to retire on ill health grounds.

Whilst this cannot be taken as advice, it is potentially foreseeable that, at some point in the very latter stages of your career, you may wish to review if it’s worth continuing your contributions.  Watch this space!

 

Article by Max Spurgeon
IFA to Doctors and Dentists and Director at Legal & Medical Investments
February 2012

Source: Department of Health, NHS Pension Scheme Consultation Paper

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