You’d be forgiven for wondering if your NHS pension scheme is still good value for money. With tiered contributions as high as 14.5% of pay, annualisation of these tiers meaning part-time doctors pay a far higher real percentage, penalties of up to 5% per year if you want to take benefits ‘early’ at 60, and possible tax charges if your NHS pension causes you to breach your annual or lifetime allowances.
Coupled with stories of ‘lost’ contributions and the ongoing inaccuracy of the information held by the scheme abound you may start to question if you should consider opting out of the NHSPS.
Are personal pensions a good alternative?
The onset of pension freedoms made personal pensions increasingly attractive but then the threat of lifetime allowance charges and annual allowance breaches took personal pensions off the table as a retirement tool for most.
With the NHS pension scheme using up all of these two allowances a few clients have suggested they would rather leave the NHSPS and rely on personal pensions alone for their on-going pension provision.
So how would that work?
If you did this, you could keep your annual allowance from breaching by ensuring your personal pension contributions remained under £40,000 (capped at your taxable earnings sum if less). However under the new tapering allowance rules the vast majority of doctors and dentists won’t have their annual allowance reduced as ‘normal’ career progression is within the annual allowance a majority of the time – so no advantage there.
If you switched to personal pensions you would still be highly likely to fall foul of the lifetime allowance as it would be calculated using the sum total of the deemed value of your NHS pension scheme, and the value of your personal pension.
Also, if you invested in the markets within your personal pension, you may, if your risk tolerance allows, experience volatility that could see your fund value either reduce scarily or zoom past the lifetime allowance in swings in value outside your control. This is, unless you are invested very cautiously, in turn attracting potentially low returns. To gain the security of the NHSPS you would be taking so little risk your fund values would struggle to keep up with inflation.
The NHS pension scheme offers risk-free returns
Why wouldn’t you stick with the NHS pension scheme that provides an income in retirement that doesn’t rely on investment returns and other benefits that are hard to replicate elsewhere? Benefits such as the Ill Health Retirement Pension, Life Cover (death in service), and uplifts for your spouse’s pension. Replicating these alone would cost a large % of your earnings, adding weight to any argument regarding the benefit of remaining in the NHS pension scheme.
What would it cost you to replicate these benefits outside the NHSPS?
We have run these calculations many times over the years and the outcomes don’t change. The percentage of your income you could need to invest in personal pensions to achieve the same level of income in retirement as the NHS pension scheme provides is often 3-4 times the amount you actually currently contribute. This of course varies by the individual, but the theme remains – the older you get the more you would need to contribute.
Quite apart from the physical levels of money you would need to invest you would require some pretty unrealistic investment scenarios to play out; low risk and high, consistent returns, to come close even with these much higher contribution levels.
Alternative ways to fund your retirement
Don’t forget, pensions aren’t the only way to invest for your post work life. ISAs, general investment accounts, structured products or even venture capital trusts could all form part of your retirement planning.
So, is the NHS pension scheme still good value for money?
We truly believe it would take either some extreme investment choices or high contributions to match the equivalent NHS pension. Not only is the NHS pension scheme still good value for money, importantly, a major part of your retirement planning is taken care of for you.
What’s right for you will depend on your overall situation and attitude, plus your understanding of risk so you should seek financial advice. This is also true if you think your pensions will fall foul of either the annual or lifetime allowances.
Remember the NHS pension scheme never stands still so keep informed and keep revisiting your plans!
Do you think the NHS pension scheme is still good value for money? Let us know by adding a comment below
Editor’s note: This post was originally published in August 2018 and has been completely revamped and updated for accuracy and comprehensiveness.