What is final pensionable pay?
Whilst all accrual since 1 April 2022 has been in the 2015 Career Average Revalued Earnings (CARE) scheme the calculation of 1995 section benefits remains linked to ongoing pensionable pay where a final salary link is maintained. Where this has been lost as a result of a break in pensionable service of 5 years or more the pensionable pay leading up to the break will be used to calculate 1995 section benefits. All references to the best of the last 3 years below will refer to either the years leading up to a break of 5 years or more where the final salary link is lost or the years up to retirement where the link has been retained.
Your final pensionable pay is the pensionable income paid during the best year of the last three years of pensionable service. If you are working part-time or beyond whole-time hours it is your whole-time equivalent pensionable salary that is used. Whole time is usually 10 PAs or your contracted full time hours.
How the best of the last three years is determined
- At the end of each scheme year (1 April to 31 March) your employer is responsible for notifying the pensions agency of your annual pensionable earnings. Errors can occur where pay is over inflated as a result of time worked being reported as part-time when full time or undervalued as a result of the opposite. Errors may also occur if you have non pensionable breaks during the year or are in receipt of reduced pay due to sickness or maternity. Figures should be checked with your employer where you have concerns.
- When you retire or leave the NHS, your pensions agency will use the pensionable pay figures during the three years leading up to your retirement/departure from the NHS. If you have had breaks of less than 5 years during this time the scheme will step back to have 3 years’ worth of pensionable pay. This figure needs to be checked to ensure that any late paid awards or arrears have been accounted for correctly.
- The best year will be used to calculate your pension.
- Those in the 2015 scheme account will need to be had of any break of five years or more as the referencing period will lead up to that.
- The last 12 months of service usually produces the highest income of the final three years.
- If you previously earned a higher income (for example from a medical or clinical director post), which finished a year or two before retirement then an earlier year may be better.
- If your pay changed during three years your final pensionable pay will be a composite figure.
- It is possible to protect your pay, for the purposes of calculating 1995 section benefits, where your pay has dropped (voluntarily or otherwise). This is not relevant where your whole time pay remains the same but your hours worked have reduced but where you may have compulsorily or voluntary moved to a lower whole time equivalent paying role. See Stepping down section below.
If you receive a backdated increment
For the purposes of assessing your final pensionable pay any backdated pay will be apportioned to the years to which they relate and not in which they were paid.
For example, if you receive a lump sum of £30,000 during your final year before retirement but the payment relates to arrears of pay spread over the three years leading up to retirement, then £10,000 will be apportioned to each year of pensionable pay during the referencing period.
When testing your pension growth for the purposes of the annual allowance, HMRC advises that backdated pay is credited in full in the year it is paid. However, if the arrears partially or wholly relate to earnings in earlier years we suggest that you assess your position to see if it would be beneficial to ask your employer to inform NHS pensions of your earnings in each year. This should ensure that the back payment does not get treated solely as relating to the year it was received. This may not be necessary to do in Scotland or Northern Ireland where any backdated award is stripped out of the AA calculation.
If you have more than one job
Your pensionable pay is calculated with reference to each employment separately. In the calculation of your benefits, the number of hours worked in each employment is taken into consideration.
An example of this is as follows:
|Employment one||Employment two|
|Whole time equivalent pensionable pay||£79,000||£95,000|
Total number of PAs per week: 8
Salary employment 1: £ 79,000 X 6/8 = £ 59,250
Salary employment 2: £ 95,000 X 2/8 = £ 23,750
Final pensionable pay = £83,000
Sick leave and other breaks
- If you are out of NHS employment for any reason during the last three years immediately preceding your retirement, the referencing period will be extended to include three full years of 365 days of pensionable pay. This will include strike days which are not pensionable. This also happens if you are on nil pay due to sickness.
- If you are on reduced pay on account of paid sickness this will not affect your final pensionable pay which is always based on notional whole-time equivalent pensionable earnings.
- If you are on nil pay on account of sickness the referencing period will be extended to ignore periods where you were in receipt of nil pay. NHS pensions sometimes refer to these days as disallowed days.
Stepping down into a lower paid job
This will affect your final pensionable pay if you are to retire more than two years after the date you stepped down. However, if you are over age 50 (for those with a protected minimum pension age as a result of scheme membership on 5 April 2006) or age 55, and have reduced your pensionable pay and responsibilities by at least 10% you can apply for voluntary protection of pay. This means that the pension accrued up to the point of the step down will be based on the higher pay.
If you have transitioned to the 2015 scheme you are still able to apply for voluntary protection of pay (in relation to your accrued 1995 section benefits) so long as the facilities criteria are met.
If you have reduced your hours, providing that you have remained in the same role, this will not affect your final pensionable pay, which is always based on notional whole-time equivalent earnings.
If you are made to move into a lower paid role (for example as a result of redundancy, reorganisation or following ill health) you should look into Protection of Pay – non voluntary- to ensure benefits are calculated on higher pay. This is available irrespective of age or the level of the reduction in pay. If you are suffering from ill health you should consider ill health retirement before taking up another role.
Which elements of my pay are pensionable?
Generally speaking, income is treated as pensionable if it is regular, likely to continue and relates to normal duties.
Pensionable income currently includes:
- basic salary (up to 10 PAs or whole time)
- distinction awards
- discretionary points
- intensity payments or on call supplements
- clinical excellence awards stated to be pensionable.(New National Clinical Impact Awards are not pensionable and if you lose an old pensionable award pay protection may be applied for)
- availability supplements
- high-cost living area allowance
- additional income from clinical or medical director posts (if included within a whole-time contract)
- chief officer supplements for doctors in public health medicine
- domiciliary visit fees. Pension resulting from this is calculated separately using unscaled (calendar) service as pensionable service.
Final pay control
Final pay control is applicable to the calculation of 1995 section officer benefits. It continues to apply
to those who have retained final salary linking to the 1995 section (by not having a break in pensionable service of five years or more) and have transitioned to the 2015 scheme. All active accrual since 1 April 2022 is in the 2015 CARE scheme.
Benefits in the 1995 section are based on the best of the last 3 years final pensionable pay. Final salary linking means that transitional members who retain the final salary link will see an increase to their 1995 accrual if they receive prospective pensionable pay increases.
The Final Pay Control charge can have a significant impact on GP practices if pay increases for practice staff or non-GP partners exceeds the allowable amount in the last 3 years leading to retirement or leaving the scheme. Practice staff and non-GP partners are Officer members of the scheme have benefits based on final pensionable pay.
From 1 April 2014 in England and Wales, 1 April 2015 in Northern Ireland and from 1 July 2014 in Scotland, a penalty may be applied to an NHS employing authority, including GP practices where a scheme member is awarded an increase to pensionable pay which exceeds an ‘allowable amount’.
To avoid a Final Pay Control charge pensionable pay (looking at the last 3 years plus a previous base year) cannot increase by more than the allowable amount which in England, Wales and Scotland is the lesser of:
- pensionable pay in the relevant year
- pensionable pay in the year before the relevant year increased by CPI increases (from the February before the relevant year) plus 7%
- the percentage difference between pensionable pay in the current year and the previous.
The ‘allowable amount’ in Northern Ireland is the lesser of the pay itself or the pay in the previous year increased by CPI (from February) plus 4.5% or the percentage increase in the current years pay compared with the previous years’.
From 1 July 2021 the rules were amended in England and Wales and from 1 April 2023 in Scotland increasing the ‘allowable amount’ from CPI plus 4.5% to CPI plus 7%. Additionally exemptions to the Final Pay Control charge were introduced.
Exemptions (applicable in England and Wales from 1 July 2021 and in Scotland from 1 April 2023) to being subject to paying a charge include increases resulting from:
- a nationally agreed contract, or framework agreement where this is authorised under particular NHS terms and conditions
- a promotion following fair and open competition, with supporting evidence
- a National Clinical Excellence Award (CEA)
- the ending of a salary sacrifice arrangement
- an increase in practice profits impacting non-GP providers in certain circumstances such as:
- a change in their practice share allocation in the last three years which is as a direct result of another provider’s share allocation decreasing
- a change in their practice share allocation in the last three years which is as a direct result of another provider leaving
- an increase in the partnership profits within the three year period immediately prior to the date on which they cease to be in pensionable employment
- an increase in the partnership profits and an increase in the actual share allocation during the same three-year period
If the allowable amount is exceeded in any of the three years leading up to retirement (or any three years when final pensionable pay is calculated for the purposes of ascertaining benefits) then the employer may be liable for a charge. The individual’s pay will not be capped. The charge does not apply where benefits are payable as a result of death in service or in deferment.
This means that additional costs may be incurred by the employer/practice if scheme members retire or leave the NHS pension scheme within three years of receiving a significant increase in pensionable pay.
Where a member receives a pay increase above the allowable amount the pension produced by the excess pay is still payable to the member but the employer who paid the increase is liable to a charge which must be paid within one month or incur additional statutory charges.
Where the exemptions do not apply and a charge is incurred NHSBSA have no ability to exercise discretion and a charge will be levied based on the increased pension produced by pay exceeding the allowable amount.
Phasing in pay increases (which are not covered by the exemptions) over several years may assist in avoiding the charge.