Who would have thought an NHS pension scheme could be too generous? When transferring your 1995 NHS pension scheme to the 2008 NHS pension scheme, you’d like to think you were ending up with a better pension – right?
However, with the recent pension legislation, we are seeing serious unwanted tax side effects on it’s 2008 NHS pension members.
2008 scheme vs 1995 scheme
If you opted into the 2008 section of the NHS pension scheme, the retirement age is 65 years old. You retire later, but this is compensated by your pension being more generous. In short, if you drew the pension circa aged 62.5, you would suffer abatements, but would still end up in a not dissimilar position to those in the 1995 pension scheme. The closer to age 65 you retire, the better off you are in the 2008 scheme.
So, why is the 2008 scheme so generous?
This ‘generosity’ is all down to the rate at which benefits amass. This is called the accrual rate. These are typically expressed as a fraction, the lower the fraction the more generous the scheme is.
The 1995 pension scheme is a 1/80th, 2008 is a 1/60th. So, therefore the 2008 scheme is more generous. If we look at the 2015 section of the NHS pension scheme, this one is a 1/54th, so more generous still.
The other vital figure in the calculation is the income they base your retirement benefits on. The 1995 and 2008 schemes use your final salary. The 2015 scheme uses career average earnings. This is, therefore, a downward pressure on the final figure. The 2015 scheme definitely has its ‘swings and roundabouts’.
If we go back to the 2008 NHS pension scheme, with its generous system without having to use career average earnings it looks pretty good – so what’s not to like?
It turns out quite a lot actually!
The recent pension annual allowance legislation can penalise those who amass pension benefits at a faster rate. The new annual allowance legislation favors a low steady accrual rate, which is at odds with the 2008 pension scheme.
If you are in the 2008 pension scheme, we are seeing substantial annual allowance figures. This could be in the form of moving up a pay grade or receiving a superannuated pay rise.
As the 2008 pension scheme has a more generous accrual rate it just doesn’t sit well with annual allowance limits (£40,000 pa standard rate), however, this can be tapered to as little as £10,000 for higher earnings, so beware!
How lifetime allowance affects your retirement
The better accrual will lead to a larger pension, and therefore there’s an increased chance of breaching your lifetime allowance, and ultimately this will impact on your retirement!
As some of you may know I don’t tend to get overly concerned about the lifetime allowance, as ultimately you end up with a bigger pension. However, I am aware not everyone shares my opinion and will try to avoid penalties at all costs.
Due to the current pension regulations, I suggest you keep a close eye on your figures. Especially, if you are in the 2008 section of the NHS pension scheme and, you see a rise in your superannuable pay.
I would encourage you to speak to your financial adviser as with a little forward planning, it is possible we can help avoid some nasty shocks that may cause you annual allowance issues.
Are you experiencing these issues with your 2008 NHS Pension Scheme? Let us know by adding a comment below.