NHS Pension Changes
Dental Tribune - June 2007
The main area I’d like to cover in this article is personal pensions but as there are significant changes being proposed to the NHS Pension Scheme I’ve included a short section below.
NHS Pensions
The changes are likely to come into effect no later than April 2008 for existing members and by the end of 2007 for new entrants. Some of the key changes are that new members joining the NHS after 2007 will have a retirement age of 65, and the 6% contribution rate that members of the NHS pension scheme pay now is likely to increase and will depend on earnings.
One of the key areas of change is that in future members will only be able to buy additional annual pension of up to £5,000 a year. So although existing added years contracts will be honoured no new contracts will be offered. This year is likely to be the last opportunity to take advantage and as it’s only possible to start these contracts on a birthday, it might be worth requesting an illustration.
The proposals are still at draft stage but if you would like to see what the changes are likely to be you can download the information from www.nhsemployers.org.
The Basics of Personal Pensions
Assuming your NHS pension is not going to be able to provide you with all your retirement income needs, you’ll need to make further pension provision. One of the most tax efficient options available is through a personal pension. With these you get up to 40% tax relief on your contributions, tax free growth during the term and at retirement you can take 25% of the fund tax free with the balance providing a taxable income.
So if you pay £78 into a pension the provider will collect a further £22 (22%) from HM Revenue & Customs and if you’re a higher rate tax payer you can claim a further £18 (18%) on your self assessment. So it basically costs £60 to get £100 into a pension, which is a pretty decent offer.
Contribution Limits
You are now able to contribute up to 100% of your earnings into a personal pension every year up to an overall annual limit which is £225,000 in 2007/08. Even if you have no earnings, you will still be able to invest £3,600 a year before tax relief.
Maximum fund/benefits
Everyone now has a maximum permitted tax-exempt fund (or its equivalent in retirement benefits). This is called the lifetime allowance (LTA). In 2007/08, it is £1.6 million rising to £1.8m in 2010/2011. If you have NHS pension benefits your equivalent fund is simply the annual pension multiplied by 20 plus the lump sum, plus the total fund value of any personal pensions.
There are penalties for exceeding the lifetime or annual allowances, so if you’ve got significant pension benefits you should check to make sure you’re not unnecessarily overpaying pension contributions.
When you can retire
The earliest age at which most people will be able to take money from their pensions will rise from 50 to 55 on 6 April 2010.
Incorporation
If you’ve been advised to incorporate and become an employee and employer it’s important to make sure any pension contributions are paid by the company rather than from your personal bank account. The reason for this is because if the contribution is paid direct by the company you will make employer and employee National Insurance savings.
What you should know
The key areas to investigate when choosing a personal pension or reviewing your existing ones are as follows:-
Charges or Reduction in Yield
The higher the charges on your pension the less money will be available for your retirement. In the last few years pension charges have reduced dramatically and we are still meeting people who’ve got ‘old style’ pension schemes with high annual charges. Typical pension fees now are less than 1% of the fund value per year, so if you’re paying more than that transfer now.
It is relatively simple to transfer to a low cost alternative but watch out for any transfer fees before you do it.
Investment Funds
One of the most important aspects of personal pensions is how the funds are invested. There is no ideal investment scenario as how you invest will largely depend on your attitude to investment risk and your financial experience. Younger investors tend to take more risk whilst those nearing retirement tend to reduce their exposure to equities and select more cautious funds.
Based on UK All Companies pension funds over the last year if you picked the best fund a year ago £1,000 would have grown to £1,265 and if you’d picked the worst fund you’d only have £939. Of course we don’t have the benefit of hindsight but with such a large difference of 34.7% between funds in the same sector it makes sense to choose more than just one fund.
Had you decided to diversify your investments even further and chosen a commercial property fund, the best fund would have increased your investment to £2,327 over the same year.
Flexibility & Transfer values
As nobody knows what the future holds we normally recommend pensions that provide flexibility in terms of paying contributions and transferring the benefits to other schemes.
Financial strength of the provider
If you've seen the press in recent years about the failure of some high-profile financial services companies, you should be concerned about the financial strength of the pensions company you select.
There are several agencies that measure financial strength and provide ratings which you can use to compare the different pension providers.
Understandably you want to make sure you are dealing with a company that will remain safe and secure. You need to choose a provider who will be around for many years to come.
There are several agencies that measure financial strength and provide ratings which you can use to compare the different pension providers.
Understandably you want to make sure you are dealing with a company that will remain safe and secure. You need to choose a provider who will be around for many years to come.