When you joined the NHS, you automatically gained membership to the NHS Pension and were probably told the NHS Pension was a “great deal”. But why is it considered a great deal? What are the pitfalls and problems and what annual check do you need to make to ensure your NHS pension is up to date.
This article gives you a simple overview of the NHS Pension but if you want more detail then download the Medics Money guide to the NHS Pension here.
This guide contains further information on Annual allowance and the essential checks all doctors need to perform on their pension.
Join our community of 35,000 + doctors learning how to make better financial decisions and download our guide here.
A pension is a tax efficient way to provide an income for your retirement. Tax efficient because the employee contributions are deducted before tax, so a 20% taxpayer contributing £1 to their pension effectively only pays 80p to contribute £1 towards their pension and a 40% tax payer contributing £1 effectively only pays 60p. However, the tiering of employee contributions in the NHS effectively removes some of this tax relief for higher earners. More on that later.
The NHS scheme is known as a Defined Benefit (DB) pension which makes it different to most other pensions available today, which are usually Defined Contribution (DC) pensions.
Non NHS Pensions or Defined Contribution (DC) pensions, you and possibly your employer, pay contributions into a pension “pot”. This “pot” would usually be invested and when you retire the amount of money in the pot is your pension. The value of the pot depends on the performance of your investments and once you’ve spent the “pot“ there is no more money available. Over time, inflation also effectively decreases the size of your pot.
In Defined Benefit pensions, like the NHS pension and some other public sector schemes, you and your employer pay a contribution which can be thought of a membership fee. This membership fee buys you a pension at retirement and you will receive a defined amount of money each year until you die.
Unlike DC in DB there is no pot to run out.
Unlike DC in DB the pot is also has some protection from being decreased by inflation.
| Defined Contribution (DC) “normal pension” | Defined Benefit (NHS Pension) |
|---|---|
| Benefits defined by contributions and size of fund at retirement | Benefits defined by pre set formula of the pension scheme |
| Benefits depend on performance of investments | Benefits based on salary and length of service |
| Benefits vary depending on performance of stock market & other financial products | Benefits guaranteed and underwritten by HM Treasury. |
There are actually three sections of the NHS Pension and they all work slightly differently. The amount you get can be based on your Final salary, like the 1995 section of the NHS pension. Or it can be based on your Career Averaged Revalued Earnings (CARE), like the 2015 section of the NHS pension scheme. The NHS Pension works slightly differently for GPs and Dentists and our free guide covers this here
From April 2022 all active members are in the 2015 scheme, we will concentrate on that scheme in this article.
Each month, depending on how much you earn a set amount is deducted from your pensionable salary.
The table below shows how much of your pensionable pay you need to contribute. The rates are due to change in line with Agenda for Change uplifts in England as per the table below.
These employee contributions have no bearing on the value of your pension and are simple a membership fee to be in the scheme. We discuss below how the value of your pension is calculated.
| Tier | Pensionable earnings (rounded down to the nearest pound) | Contribution rate from 1 October 2022 |
|---|---|---|
| 1 | £0 to £13,246 | 5.1% |
| 2 | £13,247 to £16,831 | 5.7% |
| 3 | £16,832 to £22,878 | 6.1% |
| 4 | £22,879 to £23,948 | 6.8% |
| 5 | £23,949 to £28,223 | 7.7% |
| 6 | £28,224 to £29,179 | 8.8% |
| 7 | £29,180 to £43,805 | 9.8% |
| 8 | £43,806 to £49,245 | 10% |
| 9 | £49,246 to £56,163 | 11.6% |
| 10 | £56,164 to £72,030 | 12.5% |
| 11 | £72,031 and above | 13.5% |
The rates for Scotland are here – these are currently being consulted on with a view to changing them;
| Tier | Pensionable earnings band | Contribution percentage rate |
|---|---|---|
| 1 | Up to £21,614 | 5.2% |
| 2 | £21,615 to £25,981 | 5.8% |
| 3 | £25,982 to £32,914 | 7.3% |
| 4 | £32,915 to £66,017 | 9.5% |
| 5 | £66,018 to £92,423 | 12.7% |
| 6 | £92,424 to £123,147 | 13.7% |
| 7 | £123,148 and above | 14.7% |
As you can see from the table, the normal retirement age at which you can retire without early retirement factors applying varies depending on which section of the pension you are in. A key point to note for those in the 2015 section is that retirement age is linked to state retirement age. Listen to the podcast below to hear why that scares us and what we are doing to mitigate it here.
| Section | 1995 | 2008 | 2015 |
|---|---|---|---|
| Normal retirement age | 60 | 65 | State pension age |
This podcast covers how to retire early and also outlines our own early retirement plans.
You can find out more about the McCloud judgement here.
