Given the recent increases to contributions and in particular the reduction to the Annual Allowance and Standard Lifetime Allowance limits, some doctors are questioning whether they should remain in the scheme or opt out.
Thinking about opting out?
It is possible to submit a written election to opt-out of the NHSPS for future service. If you have two or more years qualifying scheme membership this will result in you being treated as a deferred member of the scheme, in the same way as if you had left pensionable service with your employer. A deferred pension is usually paid from your normal pension age.
Opting out of the NHS Pension Scheme may involve some complex conditions
Should you choose to opt out, your deferred benefits will increase annually in line with inflation. These annual increases are applied in April and are determined by the CPI (Consumer Prices Index) rate applicable at the end of the immediately preceding September.
If you opt out of the scheme with deferred benefits and have reached minimum pension age then you can choose to claim your deferred benefits early, provided you are no longer in NHS employment. If you are still working in the NHS then you can draw your pension but you would need to take a break in service before returning to work.
If you choose to take your benefits early however they will be actuarially reduced. You cannot however take your deferred benefits on voluntary early retirement grounds if you left the scheme before 31 March 2000.
What are the tax implications?
The way that pension benefits are taxed changed significantly on 6th April 2006 when two allowances were introduced; the Annual Allowance and the Lifetime Allowance.
The Annual Allowance was reduced significantly on 6 April 2014 to its current level of £40,000. The Annual Allowance restricts the level of pension savings that can be made in any one tax year with the benefit of full tax relief.
As well as the reduction of the Annual Allowance, the Government also introduced changes to how annual pension benefits within the NHSPS (and other defined benefit schemes) are valued for testing against the Annual Allowance.
Whilst the government will allow the carry forward of any unused relief from up to three previous years, a number of members have been left with an unexpected tax bill which has led some to opt out of the NHS Pension scheme in order to avoid this charge.
- Standard Lifetime Allowance (SLA)
The SLA reduced to £1million on 6 April 2016. The SLA is the total amount of tax privileged pension savings that you are allowed to accumulate within registered pension schemes. Once benefits are taken that exceed the SLA then a tax charge is levied. This reduction has again led to members opting out of the NHSPS in order to negate or avoid this charge.
It was possible to apply for fixed protection in order to protect a higher level of Lifetime Allowance at either £1.8m or £1.5m. In order to facilitate this, members would normally have had to opt out of the NHSPS in order to observe the strict HMRC rules. It is no longer possible to make an application for fixed protection but individual protection is available, for further information on the Lifetime Allowance and the protections available please see our FAQs on the Lifetime Allowance.
What benefits will be lost?
When considering opting out of the NHSPS it is extremely important to think about the impact this will have on the valuable associated benefits provided, for example the loss of the death in service gratuity (two times actual annual pay).
Furthermore, these benefits change once you have been a deferred member for longer than 12 months.
The key differences can be summarised as follows:
|Death WITHIN 12 months of leaving/opting out of the NHSSS
||Death AFTER 12 months of leaving/opting out of the NHSSS
|Lump sum of three times annual pension, 2.25 times annual pension or 2.025 times annual pension for your 1995, 2008 section or 2015 Scheme membership respectively at date of death.
||Lump sum of three times deferred pension, 2.25 times deferred pension or 2.025 times deferred pension for your 1995, 2008 section or 2015 Scheme membership respectively at date of death.
|No six month short term pension payable
||No six month short term pension payable
|Widow's pension of 50%, 37.5% or 33.75% for your 1995, 2008 section or 2015 scheme membership respectively of tier two Ill Health Retirement Pension at date of death.
||Widow's pension of 50%, 37.5% or 33.75% of your 1995, 2008 section or 2015 scheme respectively deferred pension as at date of death.
|Widower's or partner's pension of 50%, 37.5% or 33.75% of your 1995, 2008 section or 2015 scheme membership respectively of tier two Ill Health Retirement Pension (post 6 April 1988 membership only) at date of death.
||Widower's or partner's pension of 50%, 37.5% or 33.75% of your 1995, 2008 section or 2015 scheme respectively deferred pension as at date of death (post 6 April 1988 membership only).
|Dependant's pension of 25%, 18.75% or 16.875% for your 1995, 2008 section or 2015 Scheme membership respectively of tier two Ill Health Retirement Pension at date of death. This is subject to a maximum of 50%, 37.5% or 33.75% for your 1995, 2008 section or 2015 Scheme respectively annual pension at date of death for two or more dependants.
||Dependant's pension of 25%, 18.75% or 16.875% for your 1995, 2008 section or 2015 Scheme respectively deferred pension as at date of death. This is subject to a maximum of 50%, 37.5% or 33.75% for your 1995, 2008 section or 2015 Scheme respectively deferred pension at date of death for two or more dependants.
It should also be understood that no enhancement is provided for a deferred member in any ill-health retirement. The rules on the payment of a serious ill-health lump sum are no different for deferred members.
Further information on survivors' benefits can be accessed in the NHS Pensions guide.
Think carefully - seek independent advice
Consequently, any decision to opt-out of future service should not be taken lightly. It is unlikely to be in the best interests of the vast majority of scheme members to make the decision to opt-out.
Doctors must therefore balance the possible tax implications against the loss of pension and life assurance benefits.
BMA members may wish to consider contacting BMA Services for independent financial advice.
Read the next update for August which focuses on the choice 2 exercise
If you have any questions or points to make then please contact the Pensions team