Is it time to opt back into the NHS pension scheme?

The March 2023 budget turned out to be quite a momentous one for doctors and dentists who are members of the NHS pension scheme.Could now be the time to opt back into the NHS pension scheme?

Some days before the budget Jeremy Hunt took to the House of Commons, it was leaked that significant changes would take place for Pensions Annual Allowance, and Pensions LifeTime Allowance, both rumoured to increase significantly. Therefore we were somewhat surprised when Jeremy Hunt announced the abolition of the LifeTime Allowance as of April 6th 2024, and effectively no LifeTime Allowance (LTA) recovery tax payable from April 6th 2023!

Budget summary: Changes that affect your pension

  • LTA is scrapped from April 6th, 2024. No LTA recovery charge levied on pension crystallisation events from April 2023. 
  • Maximum pension commencement lump sum (tax-free cash) will be limited to a maximum of 25% of the 2022/2023 LTA. In monetary terms, this is £268,275. 
  • If LTA protection is held, the maximum pension commencement lump sum will be 25% of the protected LTA, e.g., if you hold Individual Protection 2014 with a protected LTA of £1,400,000, the maximum tax-free cash would be £350,000. 
  • Take care if you are considering rejoining the NHS pension scheme as a result of the budget changes, or indeed the NHS Pension Scheme Flexible Retirement (hopefully being introduced in October 2023) and hold LTA. Protection. In some instances, you may lose the protection if contributions to new schemes take place.
  • Standard Annual Allowance is lifted from £40,000 to £60,000 from 6th April 2023.
  • Also, the Adjusted Income level, which determines if your standard annual allowance is tapered, is increasing to £260,000. Therefore, you would only see a tapering of the standard LTA if your total taxable income, plus growth in your NHSPS benefits over the year and any contributions to Personal Pension arrangements exceed £260,000.

    (Remember, if your total taxable income is under £200,000 you do not have to undertake additional calculations to determine your Adjusted Income).    

Flexible Retirement Rules

NHSPS Flexible Retirement has been introduced for the 1995 NHS pension scheme benefits from October 2023 (providing the date doesn’t change again). 

When this comes into play it will allow you to take up to 100% of your 1995 section NHSPS benefits without having to officially retire. You will need to reduce your pensionable NHS commitment by at least 10% for 12 months after receiving your NHSPS benefits. The benefits of the NHS Pension Scheme Flexible Retirement have been covered in previous articles.The main benefit is that you will not have to officially retire from your NHS post, effectively ending ‘retire and return’ with any resultant severing of existing NHS contracts and renegotiating new contracts eliminated.

Another benefit of the NHSPS Flexible Retirement is that you will be able to continue contributing to the main NHS pension scheme 2015 section. This may also be very appealing due to the removal of the LifeTime Allowance and increase in Annual Allowance.

Is it time to opt back into the scheme?

So, the questions regarding opting back into the scheme are… 

Will it be beneficial to rejoin the NHS pension scheme post flexible retirement, or for those who have already opted to retire and return?

The answer will come down to individual circumstances and when benefits from the 2015 section are likely to be taken. The 2015 section benefits are generous, especially for those at the far end of their careers, who are maybe at the top increment level of the Consultant’s contract, or Senior GPs and Dentists with NHS contracts. This is due to the accrual rates for the 2015 section. 

The accrual rate is 1/54, meaning for a Consultant with an NHS pensionable salary of £130,000. 1-year membership of the 2015 section will result in an indexed linked pension of £2,407 p.a. 

This pension would be reduced if the doctor decided to take these benefits before the scheme’s normal retirement age (the individual’s state retirement age), and they would also see a reduction if part was commuted for a lump sum. However, the guaranteed indexed linked pension may well be appealing and offer value for money based on the contribution required by the NHS pension scheme. Care should be taken for those with LifeTime Allowance protection as this can be lost on rejoining the NHS pension scheme 2015 section.

Independent Financial Advice is highly recommended for those looking at the rejoin option in these circumstances.  The contribution rate for the pension varies depending on earnings but could be as high as 13.5%.  The question arises; how long does it take for me to see a return on my contributions – which is difficult to answer.  Numerous factors will influence the result, including longevity and inflation rates.  

Would it be beneficial to rejoin the NHS pension scheme if I am currently “opted out” of the scheme – and not taking my NHS pension benefits?

For those who have decided, due to pension taxation issues to “opt-out” of the NHS pension scheme all of the above comments apply with the caveat that the individual may be further away from state retirement age. 

There is, nonetheless, a potential complication, and this is mainly due to the high inflation rates. For those who have opted-out, their NHS pension scheme benefits are known as retained NHSPS Benefits. These retained benefits will be based on the value of their pension at the point of opt-out. Therefore, final salary benefits will have been determined by their time in the scheme, and their NHS Pensionable Salary in the 12 months up to the opt-out date. The retained benefits are then increased each year in line with CPI inflation. 

Now, we all know the CPI rate for 2022 has been exceptionally high at 10.1% (September rate), therefore, retained benefits will increase by this amount. For anyone who rejoins the scheme within 5-years, then the link to final salary is reinstated. This would not normally cause an issue, but for an individual who is close to retirement age and at the top of the pay scale the reinstatement of the link to Final Pensionable Salary, theoretically, could result in a lower pension. 

These are strange times with high inflation having an impact on many walks of life, and unforeseen implications on areas which have previously been unaffected by inflation. Retained benefits in the NHS pension scheme are one of these areas. Digging deeper into the NHS pension scheme rules and regulations may have uncovered something interesting concerning inflation increases vs final salary reinstatement, which needs some investigation. More on this next month.         

There’s never a dull moment with the NHS pension scheme! Please contact your Legal and Medical Adviser to discuss how any of these items affect your future plans. 

Are you thinking of opting back into the NHS pension scheme? Let us know by adding a comment below.

This article is not specific advice. We would always suggest that you get specialist advice in this area.

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