NHS Pension Benefits - Should You Increase Them?

Copyright 2006 Ray Prince

One of the recurring themes we deal with as financial planners is the subject of buying more NHS Pension benefits.

This is now worth a revisit as the situation is probably changing again! For the punch drunk amongst you, we will try to keep this as painless as possible.

To be serious for a moment though, these decisions are often fundamental to your future standard of living and comfort in retirement, as well as the options to semi retire or retire earlier, so it’s worth taking the time to ensure you are making the right decisions.

Traditionally it has always been agreed that the basic NHS Pension Scheme is unbeatable, and that is still the case. However, what about 'making up' for lost benefits or attaining the 'magic 40 years service'?

What is the best way in which you can do this?

Well, the choices to date have been:

Added Years

Here, for a percentage of your pay, you can buy extra years service. For many, this is a good route as:

•They are guaranteed defined benefits and so risk free •For married people they enhance your protection for life and illness cover as well

But some would argue:

•They are inflexible as once started you are committed to them •Seen as “expensive” by some (typically 4-9% of your pay)

Additional Voluntary Contributions

These are “in house” with the NHS (Standard Life, Equitable Life and Prudential) or you can buy them as “Free Standing” policies with an insurance company of your choice.

Advocates of such schemes would say:

•They are flexible as to what you contribute •Have the potential for growth over added years if the stock markets perform

But equally:

•Since they are investment based there are no guarantees

Do Nothing

This may be due to confusion, “I can’t afford it” or sheer apathy.

However, it may be the “best” option for you, especially if you are in your 50’s.

The new proposed NHS Pension changes (if approved) will come into effect in 2008, and will have a huge impact on a scheme largely unchanged since 1948.

You can read more at:

http://www.nhsemployers.org/pay-conditions/pay-conditions-1272.cfm

For brevity these changes include:

- Ability to take more tax free cash from your pension - Abatement of pension on returning to work and part time work whilst taking pension benefits - Higher earners paying more towards their pension – so 6% now could go to 8.5% for example, although likely to be tiered - Earnings cap to disappear for high earners so more of your pay is pensionable - A new facility to be able to “buy” up to £5,000 per annum unrelated to service history - The scrapping of the 40 years maximum service rule!

As if this is not enough, we must remember the new Pension A Day rules that came into force in April. These give new rules on contributions and benefits, and introduced a new Lifetime Allowance of £1.5 million in today’s terms. If you build up a larger pot there may be a tax penalty chargeable.

Let’s take a deep breath and see where this takes us.

Summary

Aren’t we all pleased that the 'pension simplification' rules and proposed NHS Pension changes have made it so much easier for you doctors and dentists to make an informed decision?

No? You cynical lot!

As we can see it is even more complex than ever, and echoing the do nothing of above, we would share two things for now:

1. If after discussing your circumstances with yourself, a planner or significant other, you do decide to buy more pension, the added years route or similar looks more attractive.

Why?

Well, the ability to take more tax free cash will be looked upon favourably by most, and therefore boosting benefits here would “add to your basic pot” and mean more tax free cash.

2. Do nothing - for many of our clients in their 50’s this is the case. Once we have analysed their cash flow projection based on their wealth built up over the years and measured against their goals, time after time if they have 35 years service plus, their model shows they will be fine presuming they have some investments and debt has been handled well. So there is a real danger that money could be ‘wasted’ by investing in more pension.

There are many alternatives available, including investing in ISAs, giving to the children or simply spending more themselves.

The Financial Tips Bottom Line

Choosing the right options for your pension planning is about to become (in 2008) even more complex. Take your time with any decisions you make and don’t be afraid to ask for expert advice as getting this wrong could cost you dearly.

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