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Pension Changes (2015)
A REVIEW OF CHANGES TO NHS PENSIONS
This review is NOT presented as specific financial advice
In these changing times it is essential that professional advice is sought when considering pension options
The scope of this article is to highlight some of the changes, the groups affected and to advise those with any doubts to seek independent financial advice from a pensions expert
Rising cost of Pensions
The NHS pension scheme has always been a significant benefit for NHS dentists.
Most practitioners will have noticed the step rise in contributions especially for those declaring high Net Pensionable Earnings.
These increases started in 2008 as prior to April 2008 there was a flat rate contribution of 6%
In April 2008 those declaring NPE of over £105,319 paid 8.5%
In April 2014 the comparative rate for those earning over £111,377 is 14.5%
Put into figures a dentist declaring earnings of £115,000 in 2007-8 paid £6900, they will now be paying nearly £10,000 more at £16675
A dentist declaring more “average” earnings of £70,000 would have paid £4200 in 2007-8 but will now be paying more than double that at £8750
Despite these increases there are very few advisors who would suggest anything other than the NHS pension scheme representing excellent value for money
It should not be forgotten that the NHS adds 14% to the pension pot in addition to these contributions. NHS practitioners are in a CARE scheme – Career Average Revalued Earnings as oppose to a final salary scheme.
A private pension with equivalent benefits would probably be prohibitory expensive. It needs to be remembered that the scheme offers
A guaranteed index linked lifetime pension
The option to transfer pension to lump sum ( within certain limits)
Death in service benefits
Guaranteed index linked lifetime spouse pension
Guaranteed ill heath retirement pension
What other changes are happening?
The changes do not end with merely paying more.
Most practitioners will find themselves moved to a new scheme in April 2015
The only group not affected are those who had 10 years or less until normal retirement age of 60 on April 1st 2012
In other words those who had remained on the 1995 scheme and were born before April 1st 1962 will not join the 2015 scheme
It is worth reviewing the background to this in terms of the 3 groups
Group 1 – 1995 Scheme
Pension is 1.4% of the pension pot paid annually
Lump sum is 3x the annual pension
Normal retirement age is 60
So a dentist with 35 years service to the NHS could have built up a pension pot of £4,000,000 depending on their career earnings.
This would give a pension of £56,000 per annum and a tax free lump sum of £168,000
Group 2 – 2008 scheme
Pension is 1.87% of the pot but with no lump sum
However pension can be “swapped” for lump sum at a ratio of £12:£1
Normal retirement age is 65
So a £4,000,000 pot would give a pension of £74800 per annum with no lump sum
To take an equivalent lump sum to the 1995 scheme would cost £14,000 per annum in pension therefore reducing the pension to £60800 per annum
On one analysis this seems better than the 1995 scheme BUT of course full pension cannot be taken until 65
With both schemes a pension can be taken earlier but with a penalty
A dentist in the ’95 scheme taking their pension at 57 would loose 14% of their pension and 9% of their lump sum – reducing the pension in the example above to £48160 and the lump sum to £153,000
Presumably a dentist in the 2008 scheme wanting to retire at 57 would face quite significant cuts in annual pension in order to achieve this.
However it needs to be remembered that the reduced pension is drawn for longer. In the example above allowing for paying approx. 30% tax in total the dentist retiring at 57 has received more pension in total up until the age of 76 – after that age he will be about £5500 per annum worse off after tax .
It needs to be remembered that those in the 1995 scheme cannot retire and continue to contribute to a scheme – those in the 2008 and 2015 schemes will be able to take retirement income and still work and contribute to their scheme.
Group 3 2015 scheme
Everyone now moves to a CARE scheme – including salaried practitioners who were previously part of a final salary scheme
HOWEVER all years in the previous schemes ( 1995 and 2008) are protected and it is only years after 2015 which are dealt with under this scheme
Normal retirement age will be linked to the State pension age ( which could be 67, 68 even 70 as this gets raised over time)
As with 2008 there is no lump sum but a lump sum can be “bought” from pension in the same way as the 2008 scheme
So what happens to the 3 groups on April 1st 2015?
Group 1 – Had more than 13.5 years to normal pension age on 1/4/12 – so those expecting to retire at 60 and were aged 46.5 or younger on 1/4/12 – so born after 1/10/65
Group 2 – Had between 10 and 13.5 years to normal pension age on 1/4/12 – so for those expecting to retire at 60 and aged between 46.5 and 50 on 1/4/12 – so born between 1/4/62 and 1/10/65
Group 3 Born before 1/4/62 and had less than 10 years to normal retirement age on 1/4/12
Group 1 will retain all benefits built up in their previous schemes until 31/3/15
They will take their pensions forwards with 2 pots – pre 1/4/15 and post 1/4/15
Group 2 will join the 2015 scheme BUT will be given an individual switch date depending on their age Someone age 49 on 1/4/12 ( so born 1/4/63) will not switch until 1/4/20 – there is a sliding scale of switch dates
Group 3 – Do not go into the 2015 scheme
Up to 500,000 NHS practitioners will be receiving “choice 2” letters inviting them to move from the 1995 scheme to the 2008 scheme
Previously this “option” was available but very few practitioners moved – the 1995 scheme was far more beneficial
Choice 2 letters might need more consideration – the main issue being that if a dentist stays in the 1995 scheme they will not be able to draw that pension pot at 60 and continue to accrue pension in their 2015 pot. If they intend to retire at 60 there would seem to be little point moving schemes BUT if they move their pension from the 1995 scheme to the 2008 scheme they will be able to draw their pension from the 2008 scheme when they are ready to do so and still accrue pension – so if intend to retire later than 60 moving to the 2008 scheme MIGHT be advantageous
These are very complex decisions and it is imperative that individual advice is sought so a full understanding of the implications can be given and the best decision taken for each set of individuals circumstances
A choice needs to be made by 16/3/15
What about Lifetime Allowance ( LTA) ?
The value of LTA has fallen over recent years from £1.8M in 2012 to £1.25M in 2014
There is often confusion about how LTA is calculated – it is NOT the same as the pension pot
LTA is the annual pension multiplied by 20 plus the lump sum
So in the worked example a £4,000.000 pension pot gives a pension of £56,000
LTA is £1,120,000 plus £168,000 = £1,288,000 – exceeding the LTA
Many dentists with sizeable pension pots will have already discussed taking life time allowance protection – this is another area to seek specialist advice
Exceeding the LTA can result in significant tax charges
The final pension planning hurdle relates to annual allowance
This has just fallen from £40,000 to £50,000
Again there is often confusion as to how this is calculated
It is NOT the amount you put into a pension in contributions
It is possible to exceed the annual allowance and incur a tax charge at your highest marginal rate for doing so merely by the increase in value of your pension
This is unlikely for a NHS pension alone but is a consideration for those with additional private pension pots ( which also contribute to the LTA calculation)
Annual allowance is calculated by taking the opening and closing value of the pension pot and assessing the growth in value
In our example
Opening value £4,000,000
This would give a pension of £56,000 and is then multiplied by 19= £1,064,000
– this is then uplifted by the annual rate of inflation plus 1.5% - so if inflation was 1.5% in the previous year it will be increased by 3.0%
This gives a closing value of £4,120,000
This is multiplied by 1.4% (£57680) and then multiplied by 19 £1,095,920
From an annual allowance perspective then there has been an increase of £31920 – just from growth in value of the fund
This means that there could only be an additional net pension contribution of approx. £30,000 to avoid a tax charge
It is clear that these are complex areas
For many younger practitioners they will need to come to terms with these increased contributions but will also perhaps feel better about them when they consider the benefits
Certainly the tax implications are complicated and anyone with substantive NHS life time earnings needs to take individual advice as a matter of urgency
I would like to reinforce that this is my personal interpretation of the situation
It is vital to seek expert advice
I am very grateful to Natham Smith and David Barber from Wesleyan for the advice given at a seminar arranged by Tees LDC. This article is based on the information given at this meeting. Whilst other advisers are available I would not hesitate to recommend their expertise in this field.