Could not contributing potentially be better for your pension?

Once more we find ourselves in unusual times, and this time we are not talking covid – I refer to inflation. In most cases inflation is considered harmful, and if you read our article last month, you’ll know our GPs are currently experiencing just how damaging it is! However, inflation could be advantageous to certain people close to retirement.

Could your retirement benefit from high inflation?

There is a position whereby those close to retirement could actually benefit from higher inflation, and it is not the first time this has happened. Plus, inflation was considerably lower than it is now. It seems inconceivable that someone can benefit from receiving a higher pension by coming out of the pension scheme, but this could be the case.  

This article will mainly affect hospital doctors approaching retirement who are primarily in the 95 scheme.

As mentioned in our previous blog, the treasury will uplift a pension by the previous Septembers CPI. Many forecast inflation will be 10% in September and could go further. For deferred members (not contributing and not drawing the pension) their pension in the 2023/24 tax year will be uplifted by inflation. 

Why does this look so attractive?

The issue arises when there is a gulf between inflation and the pay award. It is unlikely that you will see a salary increase of the same magnitude as inflation. The government is likely to want to control salaries to prevent further inflationary pressures. 

You could find yourself facing a choice you were unaware of:

1. Become a deferred member and benefit from an uplift in line with inflation (possibly 10%) or,
2. Remain an active member of the scheme and receive a sub-inflationary pay lift. 

The deferred member will potentially have a larger pension and will make savings as they are not contributing. If you are in one of the trusts that rebate all or part of the employer’s contributions then the savings are greater than just your own contribution.

A top-level consultant’s grade is £114,003 (England), so assuming 36 years of service, this would equate to a pension of £51,301 and a tax-free element of £153,904. An inflationary increase of 10% would give a pension of £56,431 and a tax-free lump sum of £169,293.

A deferred member would not have an annual allowance liability if they remain out of the scheme for the whole tax year. It is worth highlighting we are expecting low annual allowance figures for many in the 2023/24 tax year due to the high inflation, so this may not be an issue for all.

The member who remains in the scheme will benefit from another year of service. This service will be in the 2015 scheme, so slightly different rates are used. I have assumed a 2% pay rise which would take the base pay to £116,283. This would equate to an increase in pension of £2,153 per annum (no automatic tax-free lump sum in the 2015 scheme). You would suffer penalties if you wish to draw it earlier than the state pension age. 

It’s all looking quite rosy… 

Sadly, it is never that straightforward as there are several factors you need to take into account. 

1. If you are due a pay increase (i.e. moving up a rung on the pay grade), this may be greater than the inflationary lift.
2. Ideally, you need to be within 24 months of retirement, as should you decide to rejoin the pension scheme benefits of the higher inflation could be lost.
3. You should also factor in that you could lose some benefits from opting out of the NHS pension scheme.

 The BMA has constructed a calculator that allows you to personalise it. The calculator doesn’t work for GPs in the care scheme or those in the 2008 pension. 

Peri-retirement modeller for those aged 59+ on the 1995 NHS pension >

So, should you leave the pension scheme?

We are often asked whether we recommend an individual come out of the NHS pension scheme. Coming out of the pension scheme is an important decision and should never be taken lightly. We do not advise members on coming out of the pension scheme, but we can provide information, allowing our clients to make an informed decision.  

This article should not be interpreted as specific advice, as always we would urge you to contact one of our specialist advisers who will look at your own circumstances before advising.

Are you close to retirement and considering reaping the rewards of high inflation? Let us know by leaving a comment below.