NHS staff are leaving the NHS Pension Scheme at almost 5 times the rate of other public sector workers¹. Are you thinking of joining them?
Or maybe, like thousands² of other members, you’re thinking of stopping your contributions and taking a break from the scheme. Is that wise?
Like everything in life, there are good and not-so-good points about the NHS Pension Scheme. Even with the vast number of recent changes to both the Scheme itself and pension legislation as a whole, we at Legal & Medical continue to wholeheartedly espouse its value.
So why then are so many medics making a mass exodus from it?
Not knowing all the facts
When you’re thinking about doing something, sometimes it’s just easier to ask a colleague their opinion than go through a lengthy fact-finding exercise yourself. I get that. The thing is, I strongly suggest you no more take financial advice from each other than I would ask for a complex diagnosis of a serious medical condition from one of my esteemed colleagues here at Legal & Medical!
Second hand, possibly flawed information from colleagues is not a recommended way to make an informed decision, let alone one that is individual to you and your circumstances.
If you don’t have a clear and accurate understanding of the long-term benefits of your NHS Pension, you’re not going to fully appreciate its value.
You need to make sure that the information you have is up-to-date before you make any decisions. There have been more changes in the last 5 years to both the NHS Pension Scheme and all manner of financial legislation and regulation than I can recall. If you’re not confident or able to commit the time to get up-to-date information, it is well worth delegating the job to a specialist financial adviser who spends their working life doing just that.
Thinking you’ve paid in all you can
Many medics believe that as soon as their pension reaches the lifetime allowance, it’s no longer worth paying into the scheme and it’s best to leave.
To refresh your memory, the lifetime allowance (LTA) is the maximum that you can hold in a pension environment without penalty. As counter-intuitive as this may sound, even if you breach the LTA, you will still end up with a higher pension after paying tax penalties on the excess.
It’s definitely worth taking the time to look underneath the bonnet to see how the penalties are applied and can be paid.
Not wanting to pay any more tax – you’ve paid enough already!
You’re already paying a lot of tax. You then get hit with a further tax liability for going over your annual pension allowance! This could very well cause you financial problems and, in a panic to avoid having to pay even more tax, some medics choose to remove themselves from the NHS Pension Scheme altogether.
Your annual pension allowance is a very complicated area. There are numerous variables at work, not least inflation which for once can actually help you not breach your allowance. I strongly recommend you take advice if you have concerns regarding your annual allowance position.
Thinking buying a property is a better investment
Understanding the benefits of your NHS Pension is certainly complex and often confusing. Wouldn’t it just be easier – and just as beneficial – to invest your money somewhere else? In something like property.
As a nation, we are a bit obsessed with owning property. It’s a familiar environment and because of this familiarity, it’s perceived as being less risky than it actually is. Owning property has its own tax complications and one thing is certain, no adviser at Legal & Medical would trade the NHS Pension in for an investment in property!
The NHS Pension Scheme offers a tax-relieved contribution, employers contribution, and an index-linked pension in retirement that crucially is not linked to the markets. Not to mention all the other benefits such as life insurance, ill health pensions, and dependents benefits. Need I go on…?
You can no longer afford to pay into the NHS Pension Scheme
We’ve all been there: “The cost of living is too high, and we need every penny!” Often these times of worry force you to review your options at a time when the family costs are running away with you. School fees that rise by more than inflation each year, the ever-increasing university fees, mortgage, and utility costs. You are getting it from all sides!
If this is the case and you genuinely cannot cover all your costs, then any decision to leave the NHS Pension Scheme should be based on a thorough understanding of the advantages and disadvantages of this course of action. Including the availability, or not, of re-joining the Scheme at a later date.
Don’t just focus on the short-term gains if you left the Scheme. It’s important that you recognise the long-term benefits that you’d lose by leaving.
Most medics want to stop work at some point. To do this, you must have something in place that replaces your income. You’ll struggle to find better than the NHS Pension.
So should you leave the NHS Pension Scheme?
The NHS Pension Scheme is, of course, not for everybody, but those it isn’t right for are the exception to the rule.
I would strongly recommend that if you are considering leaving or taking a break from the scheme, that you gather all the necessary information. Speak to a financial specialist, such as a Legal & Medical adviser before taking such a massive step. The wrong decision will have a far-reaching effect on your future wealth.
Are you thinking of leaving the NHS Pension Scheme? Let us know why by leaving a comment below.
I am a 53 year old consultant with a reasonable private practice. I have an FSAVC with 67,000 and a current NHS pot of approximately 940,000. I am probably going to leave the NHS pension because of the combined effect of LTA and Pension taper tax relief with only 10,000 allowance. Between them these seem to make continuation in the scheme very disadvantageous. I have taken local pensions advice which was to leave the scheme and concentrate on accumulating through ISAs This to me seems like a sensible piece of advice but I would value your thoughts.
Hi there,
Leaving the NHS scheme is a big decision! You are giving up significant benefits. I do understand that the annual allowance is a major negative issue, and being so close to the lifetime allowance already is certainly another concern. However, there are ways to mitigate for the lifetime allowance charge – by taking non-standard benefits ie. max lump sum, and reduced income for instance. Non-standard benefits, when measured against the lifetime allowance are worth less than standard benefits.
I would consider setting up a company (if not done so already) and paying private income to the company. Depending on what your family situation is, you may then be able to employ a partner/spouse, children and have them as a shareholder(s), which means they are eligible for dividends and also income. If they are non-/basic rate taxpayers this could be highly tax-efficient. “The company” can also provide a pension for them!
ISA is certainly one approach. However, the use of VCT’s and other investment products are all worth considering. I would obviously encourage you to get in touch with Legal and Medical to review things, including your NHS pension!
Best wishes
Owen
I have checked with NHS pensions.
The figures on the Total Reward Statement do not take account of the reductions relating to the Scheme Pays Elections made over the years.
NHS Pensions state that the reductions to the final pension cannot be assessed or estimated until the pension is ultimately taken.
My accountant says that the Scheme Pays Elections would have quite a significant effect upon my final pension payable but would also not be able to estimate what this amount would be.
This obviously makes decisions about opting out of the scheme or starting to take the pension more difficult and I am seeking advice.
Hi Dr Mittal
I have attached a link to the NHS scheme pays pdf that covers the “Recovery Factor” – essentially the way of measuring what impact a scheme pays election has on your future pension. Remember that elections in the 2019-2020 year (in isolation) will have no negative impact on your future pension because the government agreed to meet the cost of elections made in this year. I would recommend that you talk to an adviser before making an election.
NHS Pensions – Annual Allowance – Scheme Pays recovery
factors
Best wishes, Owen