Common queries about lump sum payments including examples for those in the 1995 and 2008 NHS pension scheme. This FAQ should be read in conjunction with our FAQs on GP pension flexibilites.
How is my pension calculated?
Your benefits are based on your total career pensionable earnings. These earnings are increased every year by the dynamising factor. At retirement the total of your dynamised earnings are multiplied by the accrual rate to provide your annual pension. If you are contributing to the 1995 section you will receive a pension based on the accrual rate of 1.4% of your dynamised earnings plus a lump sum equal to three times the annual pension. If you are contributing to the 2008 section you will receive a pension based on the accrual rate of 1.87% of your dynamised earnings. There is no automatic lump sum payable from the 2008 section.
What if I have worked in both Primary and Secondary Care?
Your pension will be calculated using all your pensionable NHS service regardless of whether you are working in primary or secondary care.
However depending on the number of years worked in secondary care, and when this work took place; there are three options as to how this service can be included in the pension calculation.
Please refer to our FAQ on Primary Care Doctors flexibilities.
What is dynamising?
In a career average revalued earnings (CARE) scheme, where benefits are based on actual earnings throughout your career, it is necessary to ensure that earnings prior to the year of retirement are kept up to date.
Dynamising is the mechanism which revalues previous earnings so they reflect their current value.
The latest dynamising factors, which apply in all the nations, are available on the NHS website.
How does dynamising work?
Dynamising involves your pensionable earnings being uprated by a revaluation factor. The factor is set for each financial year and is compounded with each previous year’s factors.
With effect from 1 April 2008 the factor is the annual increase due under the Pensions (Increase) Act 1971, currently linked to the Consumer Prices Index (CPI), plus 1.5%.
How is my pension calculated?
Each year’s pensionable earnings are dynamised. At retirement all your revalued earnings are added together to give your total NHS pensionable earnings. The total is referred to as uprated earnings. You will then receive a percentage of your total revalued earnings as an annual pension.
The percentage payable is determined by the section of the NHS pension scheme which you are contributing to:
- The accrual rate in the 1995 section of the pension scheme is 1.4 % of total revalued earnings.
- The accrual rate in the 2008 section of the pension scheme is 1.87 %of total revalued earnings.
If you have, for example, worked as a GP for 37 years and have accumulated total revalued earnings in the 1995 section of the pension scheme of £1,800,000 you will have accrued a pension of £25,200 per annum:
£1,800,000 x 1.4% = £25,200 per annum
Plus lump sum of £75,600 (£25,200 x 3)
If you have, for example, worked as a GP for 37 years and have accumulated total revalued earnings in the 2008 section of the pension scheme of £1,800,000 you will have accrued a pension of £33,660 per annum:
£1,800,000 x 1.87% = £33,660 per annum
The pensionable earnings received throughout your career are summarised in a document known as a ‘dynamising sheet’ which is available from the relevant pensions agency.
Are all my earnings from NHS primary care work pensionable in the NHS pension scheme?
Generally speaking income received directly from an NHS employing authority is pensionable in the NHS pension scheme.
Details of the elements of pay which are currently pensionable can be found in annex A of the Frequently Asked Questions, accompanying the annual certificate of pensionable profits which GP partners are required to complete each year. Please ensure that you refer to the current documents as details may change.
If you are working exclusively as a GP locum you should note that you will be unable to pension some elements of pay. This too is detailed in the annex.
The same elements of pay are pensionable in England & Wales, Scotland and Northern Ireland
Is there a lump sum payment at retirement?
In the 1995 section, there is a standard lump sum payment paid at retirement. The standard lump sum is generally three time the standard pension. This lump sum can be increased to 25 % of the capital value of the benefits by way of commutation.
In the 2008 section there is no standard lump sum at retirement but you can give up some of your annual pension in favour of lump sum by way of commutation. You can take a maximum of 25% of the capital value of the benefits by way of commutation.
I have moved to the 2008 section under the NHS Choice exercise. Do I still get a standard lump sum?
If you transferred to the 2008 section from the 1995 section as part of the choice exercise, there will be a minimum amount of lump sum that must be taken at retirement. This is known as the Mandatory Lump Sum. This will be the amount of lump sum accrued based on service up to 31 March 2008. You can also elect to increase this amount if desired through commutation.
How is the standard lump sum calculated?
In the 1995 section, the standard lump sum is usually three times the pension. Another way of expressing this for primary care doctors is that it is 4.2 per cent of the total uprated earnings. For example, using the previous calculation above:
£25,200 (pension) x 3 = £75,600
£1,800,000 x 4.2% = £75,600
Is the standard lump sum always three times the annual pension?
The lump sum will be less than three times the pension for married men with service prior to 25 March 1972, for women who opted for a bigger widower’s pension, and for individuals who opted for increased dependants benefits in the 1995 section, unless an unreduced lump sum has been purchased.
Is the lump sum tax free?
The lump sum is not subject to income tax but may be subject to a lifetime allowance charge if it exceeds 25% of the capital value of your benefits.
Please refer to our FAQ on ‘Lifetime Allowance’ for further information.
What is the capital value of my benefits?
The capital value of your benefits is determined by HM Revenue and Customs (HMRC) rules. In the NHS pension scheme the capital value is calculated by multiplying the pension you will receive by 20 and then adding any retirement lump sum.
What is commutation?
With effect from 1 April 2008 it is possible to increase your standard lump sum (1995 Section), or access a lump sum (2008 section), of up to 25% of the capital value of your benefits by giving up part of your scheme pension.
If you chose to commute pension to lump sum, each £1 of pension you give up will provide £12 of lump sum. The maximum lump sum cannot be established by simply calculating 25% of your standard benefits. The calculation takes account of the different conversion rates which apply when you commute pension to lump sum (£1:£12), and for valuation purposes to test benefits against the lifetime allowance (£1:£20).
How do I work out the maximum lump sum available to me?
If you are a member of the 1995 section the maximum lump sum available is 5.36 times your standard pension.
For example, if you are a member of the 1995 section with a pension of £25,200 and a standard lump sum of £75,600, the lump sum could be maximised as follows:
£25,200 x 5.36 (commutation factor for 1995 section) = £135,072 approximate maximum lump sum
£135,072 - £75,600 (basic lump sum) = £59,472 maximum additional lump sum
£59,472/12 = £4,956 reduction in annual pension required to fund this.
If the maximum lump sum of £135,072 was taken the annual pension would be reduced to £20,244 (£25,200 less £4,956). It is not necessary to take the maximum lump sum, it is possible to access any lump sum amount between the standard lump sum and the maximum of 25% of the capital value, by giving up a part of the annual pension as detailed above.
Pension commutation calculator for those contributing to the 1995 section
If you are a member of the 2008 section the maximum lump sum available is 4.28 times your standard pension.
For example, if you are a member of the 2008 section with a pension of £33,660 the lump sum could be maximised as follows:
£33,660 x 4.28 (commutation factor for 2008 section) = £144,060 approximate maximum lump sum (rounded down to the nearest number divisible by 12)
£144,060/12 = £12,005 reduction in annual pension required to fund this.
If the maximum lump sum of £144,060 was taken the annual pension would be reduced to £21,655 (£33,660 less £12,005). It is not necessary to take the maximum lump sum; it is possible to access any lump sum up to the maximum of 25% of the total pension value, by giving up a part of the annual pension as detailed above.
Are sub-awards commuted in the same way as was chosen at retirement?
If your benefits are recalculated for any reason resulting in additional monies due to you this is known as a sub-award.
If you choose to take the maximum permitted lump sum then any sub-award made will be commuted in the same way.
If you choose to take anything less than the maximum lump sum any sub-award will simply provide the standard benefits.
Can I increase my pension and lump sum?
Yes, the options available to you are as follows:
- buying the unreduced lump sum (for members of the 1995 section specifically for male members with service before 25 March 1972, for female members who elected to increase widower’s benefits, and for individual who elected to increase civil partner or nominated partner benefits)
- buying half-cost added years of NHS pension scheme membership (if you are a member of the 1995 section and have accepted a refund of contributions in respect of any period of service as a primary care doctor or in relation to a period of NHS service prior to 6 April 1978).
- buying additional pension. This facility was introduced on 1 April 2008 and is available to all, including members already purchasing the maximum number of added years. It enables additional pension benefits of up to £5,000 pa to be bought in blocks of £250 pa.
- additional voluntary contributions (AVCs)/free standing additional voluntary contributions (FSAVCs)
- personal pension plans (PPPs)
- stakeholder pensions.