Inflationary increases to your NHS pension

This guidance covers how much inflation might increase your pension, how it’s applied and by who and information on guaranteed minimum pension and second bit pensions.

Location: UK
Audience: All doctors
Updated: Monday 7 September 2020
Piggybank illustration

If you are an active member of the NHS pension scheme

If you are contributing to the 1995 or 2008 section, benefits keep up with inflation by being based on current rates of pay/recently dynamised income. Dynamised income is increased in line with pensions increases plus 1.5%. This means that if CPI (consumer price inflation) growth is nil or negative the dynamising factor applied to increase GP income will be 1.5%.

If you are actively contributing to the 2015 scheme, benefits keep up with inflation by being revalued each year in line with treasury orders. Active revalued income is increased in line with treasury orders plus 1.5%. This means that if CPI growth is nil or negative the revaluation factor may be less than 1.5%.

If you are buying additional pension these benefits are increased annually in line with pensions increase.

 

If you left NHS employment

If you opt out of the pension scheme or leave pensionable NHS employment before the scheme normal pension age (1995 or 2008 section) or state pension age (2015 scheme) then your pension is deferred.

These benefits are no longer linked to current pay and service but are protected against inflation by being increased each year in line with the Pensions (Increase) Act 1971.

When you draw your pension you will receive your deferred pension, plus the inflationary increases between the date that you left the scheme and the date that you retire.

 

Once I have retired how will my pension be increased?

The increase for all NHS pensions in payment (1995,2008,2015) is calculated in line with the Pensions (Increase) Act 1971.

From 1 April 2011 the increases have been linked to changes in the CPI (consumer prices index) from September to September with the increase being applied on the first Monday in April (which falls on or after 6 April) of the following year.

 

When an increase will be applied

Your pensions increase date, known as your deemed date, is based on your last day of service.

If you are a secondary care doctor in the final salary section of the scheme the date is the end of the relevant pay period which forms your total pensionable pay in the 1995 section, or reckonable pay in the 2008 section. Your pensions increase date will be the day after the end of the relevant pay period.

If you are a GP the pensions increase date is the day after your last day of service.

If you have transitioned to the 2015 scheme from the 1995 or 2008 sections and have lost your ‘final salary linking’, then there will be one date applying to your deferred benefits (ending on the last day before the break in service of five years or more). There will also be one date relating to when you last accrued 2015 benefits.

If you have had a break in 2015 scheme service of five years or more, your earlier 2015 scheme service will cease to receive active revaluation but will instead be subject to deferred benefit revaluation. This means that on retirement your service before the break of five years or more will be subject to revaluation on a different date to that of your later benefits.

 

Are you entitled to the full increase next April?

  • If your deferred benefits were bought into payment and you left the scheme before the middle of the previous April then you will receive the full increase.
  • If you retired from NHS service after the previous pensions increase date and your total pensionable pay in the 1995 section was calculated using a year other than the final year before retirement, you will receive the full increase.
  • If you retired from NHS service after the previous pensions increase date and your total reckonable pay in the 2008 section was calculated using a year other than the final year before retirement, you will receive the full increase.
  • If you retired after the previous pensions increase date with immediate benefits and your pay was calculated up to your last day of service then you would receive a partial increase during the first year and the full increase after that. 

 

Retiring before age 55

If you have retired before age 55 on the grounds of redundancy, or voluntary early retirement (1995 section only) you will not receive any increases until you reach age 55. At that point your pension will be increased to the level it would have been if increases had been applied from retirement.

 

Additional pension purchase

Your additional pension increases from the date of purchase. It is increased while you are contributing to the scheme, if your benefits are deferred and when your pension comes into payment.

 

Who pays the increases on my NHS pension?

If your pension includes an element of GMP (guaranteed minimum pension) then the cost will be shared between the NHS pension scheme and DWP (Department for Work and Pensions).

NHS pensions will meet the full cost of increasing your NHS pension accrued before 6 April 1978.

The cost of increasing your NHS pension accrued between 6 April 1978 to 5 April 1988 is shared. NHS pensions will meet the cost of increasing the non-GMP element of your NHS pension. The DWP will meet the cost of the increases to the GMP element of your pension which is paid as part of your state pension.

The cost of increasing your NHS pension accrued between 6 April 1988 to 5 April 1997 is shared. NHS pensions will meet the cost of increasing the non-GMP element of your NHS pension plus the first 3% of any increase to be applied to the GMP element of your pension. The DWP will meet the cost of any pensions increase to be applied to the GMP element of your pension, where the annual increase exceeds 3%, and this part of the increase will be paid as part of your state pension.

GMP ceased to accrue from 5 April 1997 and NHS pensions will meet the full cost of increasing your NHS pension accrued from this date.

 

Second bite pensions increase

This is an additional amount of pensions increase that may be paid to you in the April following your retirement. It represents the additional pensions increase due between the date of the last pensions increase award and your date of retirement.

A second bite increase will only apply to you if you have retired in the following circumstances:

  • having been a deferred member, you are now drawing your pension
  • you were a member of the 1995 section and your total pensionable pay period was either the previous or earliest year, ie, where total pensionable pay is not your last years’ pensionable pay
  • you were a member of the 2008 section and your reckonable pay period was not the best three year average ending on your last day of service. 

An example of a second bite pensions increase would be where a member left the NHS pension scheme on 30 September 2018 and retired on 30 September 2019. The lump sum would have been paid on 1 October 2019 and it will have received the proportionate PI increase applicable between 1 October 2018 and April 2019.

However, the lump sum would still be due an increase in respect of the period between the pensions increase day in April 2019 and the retirement date in September 2012. This second bite would be payable in April 2020.

 

Second bite and lifetime allowance

  • Where a deferred member receives the full increase in the first year following retirement that part of the increase which is for the period from the last pensions increase date up to the retirement date will be tested against the lifetime allowance.
  • The same will apply to an 1995 or 2008 member whose total pensionable pay or reckonable pay was in respect of an earlier year, not the final year.
  • If you have already taken the maximum tax free lump sum you may incur a lifetime allowance tax charge on any second bite lump sum paid.
  • Where a GP member is subject to second bite, the benefits are treated as additional benefit crystallisation events and a tax charge is likely to be applied to any lump sum benefits regardless of whether or not the standard/personal lifetime allowance is used.