Changes to NHS Pension cost dentists more
After nearly ten years of reviewing and fine-tuning, changes to the NHS Pension Scheme are finally arriving. Most NHS dentists will know by now that the new Scheme is to be launched on April 1 this year and the cost of being a member is going to increase.
It’s been successfully argued that these changes had to be introduced to match the demands of modern day life where the standard 40 year career is no longer the norm, flexible working and retirement is increasingly in demand and life expectancy continues to increase.
For existing members the good news is that you will be able to keep the majority of your existing NHS pension rights. Your selected retirement age will remain at 60 and the accrual rate (factor used to calculate your annual pension) will also remain the same.
It is however going to cost you more. The average NHS dentist earns approximately £80,000 a year which means they’ll be paying an extra 1.5% per year or £1,200 a year. Pension contributions are tax deductible so the net extra cost would be £720 a year, or over the course of a 35 year career an extra £25,200. Those with NHS earnings over £100,000 will pay a new rate of 8.5% compared with the current 6%.
There’s a limited window of time when you might be able to switch into the new scheme so for those in the existing scheme I’ve had my calculator out to see if you might want to make the switch. However for most people it’s likely they’ll be better off under their existing scheme.
Under the new scheme the retirement age is 65, so assuming you were happy to wait until then for your benefits, you would actually receive a higher pension every year under the new scheme than the current one. The only problem is you would also miss out on five years of pension income (from age 60-65). So even though the new scheme offers a higher pension the five year delay means that it would take nearly 20 years for your total pension earnings under the new scheme to match what you’d have had on the old scheme.
In addition if you remained in the old scheme and invested your pension income from 60 to 65, the breakeven between the two schemes increases to age 100.
I guess the summary of all this is that if you do not expect to live longer than 100, you do not want to wait until 65 for your NHS pension, and you don’t need the flexibility at retirement age then you should consider remaining in your existing scheme.
For those who want a little more detail, I’ve outlined some brief details on each of the changes below.
Retirement age
As stated above, for any entrants to the NHS Pension scheme after 1 April 2008 the retirement age is being increased to age 65 from 60. The earliest age these new entrants will be able to take a pension is also increasing from 50 to age 55.
The normal retirement date for existing members will still be aged 60 and you’ll be able to take your pension from age 50 (provided you joined before 6 April 2006.)
Contribution rate
To be a member of either the new or the existing NHS Pension Scheme, it’s now going to cost more, and how much more will depends on your NHS earnings:
- Up to and including £19,165 – 5%
- £19,166 to £63,416 – 6.5%
- £63,417 to £99,999 – 7.5%
- £100,000 plus 8.5%
These percentages work a bit like stamp duty where if you buy a property for £250,000 you pay 1% or £2,500 but if you purchase for £250,001 you would have to pay 3% stamp duty on the whole amount (£7,500) even though you only went over the threshold by £1.
So, if you’re tracking your earnings closely and you’ve earned £99,999 in a tax year, earning £1 more might cost you £1,000 as the cost goes from 6.5% to 7.5% - so watch out if you’re on the threshold.
Earnings Cap
Previously high earners were subject to the Dental Earnings Cap – from 1 April 2007 this was £112,800. However from 1 April 2008 there will be no earnings limit for future service.
Contributions Limits
Maximum employee contributions are currently 15% of income whereas in the future this will be increased to 100% of pensionable pay. This is subject to an upper limit of £225,000 (07/08) and an overall limit (also called lifetime allowance) of £1.6m (07/08). To check you’re under this lifetime allowance, simply multiply your expected pension by 20.
Accrual rate – the way you earn your pension
For those in employment the calculation is changing from 1/80th to 1/60th which looks good but with the 80ths scheme you get your lump sum in addition to your pension but with the 60th scheme you have to reduce your income to get the lump sum. Even worse you would also have to wait until your 65 to get the money. For those dentists in hospital or community I’ve worked out that, provided you didn’t want to take a job on reduced income prior to retirement, if you switched to the new scheme you’d have to live until you’re 124 before you’d be better off by switching.
At the moment dental practitioners total career earnings are added up at age 60 (increased to take into account inflation and the increase in cost of living) and multiplied by 1.4. Under the new scheme this multiple is being increased to 1.87, with the proviso being you have to wait until age 65.
Ill health benefits
The proposal is to replace the current arrangements with a two-tier arrangement providing different levels of benefits for members, dependent on the severity of their condition and the likelihood of them being able to work again.
It appears that for those with less than 10 years service who have to retire early because they are unable to do any ‘regular employment’ due to permanent ill health (Tier 2) might stand to gain from the new proposals whilst those with 10 years or more service may not receive as good as benefits as previously. However these changes are still subject to consultation and Parliamentary approval.
Added years
For any members who have not already purchased ‘added years’, in future you will only be able to buy additional annual pension of up to £5,000 a year. Existing added years contracts will be honoured, so if you need to purchase significant extra pension benefits, you may want to act before 1 April 2008.
Retirement Lump Sum
Under the existing scheme you receive your retirement lump sum in addition to your pension. However with the new scheme you will be given a higher pension but then will need to sacrifice some of that to get the lump sum. The exchange rate is £12 of lump sum for each £1 pa of pension given up.
Flexible Retirement
The new scheme will allow for more flexible retirement as you will be allowed to re-join the Scheme following re-employment on return to work after retirement even if you’re taking your pension income. This is particularly useful for those on a final salary scheme such as hospital dentists (rather than dental practitioners), as it provides the option to take a less demanding role near to retirement without it affecting your pension.
Survivor Benefits
Partner is now defined as someone you are married to, have entered in a civil partnership with, or a partner you have nominated who you have an exclusive and long-term committed relationship with of at least two years in which you are financially dependent or inter-dependent.
Surviving partners will now keep survivor pension even if they marry or co-habit
whereas in the past these benefits were normally lost on re-marriage.
For more details about your NHS pension please visit www.nhspa.gov.uk or contact Essential Money on 0121 685 5060.