Pension specialist Alec Collie explains why changes to the NHS pension were made and sets out the new contributions GPs on different pay levels will make, as well as the effect on take-home pay
On 1 October, changes came into force that affected the member contribution structure of the NHS Pension Scheme (NHSPS).
These changes mean a difference in both how GP pension contributions are calculated, and how much GPs will pay every month.
What has changed?
Four things have changed. First, NHS pension contributions will now be calculated based on the actual pensionable pay that members receive each month.
Previously, member contributions were based on the ‘Whole Time Equivalent’ model – which calculated how much a member would receive in pensionable pay, assuming they worked full time hours.
GPs with ‘practitioner’ status won’t need to worry about this, as practitioners already pay contributions based on their total annual practitioner pensionable pay.
Second, the number of contribution ‘tiers’ – which specify how much of a pension contribution GPs pay, depending on their salary levels – will be reduced from the previous seven to six.
This will be a two-step process. In the first stage, which just happened on October 1, the tiers will increase to 11, before being reduced to their final six sometime in 2023 (the exact date of which is still to be confirmed by the Government).
Third, the actual amount that GPs pay in contributions at each tier is also changing. This will also be a two-step process, in order to help members adjust to the changes. The figures have made their first change from 1 October, and it’s expected that they will change again when the contribution tiers change in 2023.
Finally, the pay boundaries associated with the contribution tiers will be linked to the annual Agenda for Change pay awards. This is intended to reduce the chances of GPs falling into a higher contribution band solely because of this pay rise.
Why are these changes being made?
Historically the NHSPS has been a final salary scheme. This has tended to benefit higher earners at retirement, and therefore it was structured so that they would contribute more to the NHSPS pot.
Following a review in 2011, it was found that all members’ contributions would need to increase to cover the costs of the scheme.
As part of this, it was agreed that higher earners would still contribute more. However, to ensure this was done fairly a tiering system – one of the things now changing – was introduced.
Fast forward to 2015 and, following the McCloud discrimination case brought against public sector schemes, all members of the NHSPS were moved to the reformed 2015 NHSPS, a career average (CARE) scheme.
After this, further changes to how contributions were calculated were needed so the costs of contributions among members were more fairly shared out, while maintaining that higher earners pay more.
The resulting arrangement ‘flattens’ the contribution structure by reducing the amount higher earners contribute and increasing the amount lower earners pay. Overall, however, higher earners still pay more.
There are still contribution tiers in this system, largely because of some legacy members who have service in pre-2015 sections of the NHSPS, and will benefit from final-salary linking on retirement. It’s been deemed fair by the Department of Health and Social Care that these individuals should continue to contribute more.
What does this mean for individual GPs?
The most important thing to remember is that these changes won’t affect the value of pension benefits at retirement. However, they may affect how much GPs pay into the scheme in contributions, and consequently, take-home pay each month.
The amount that GPs will now contribute will be based, as it was before, on how much they earn in pensionable pay.
What counts as pensionable pay will vary by GP. For partners, it is their share of the practice profits plus any ad hoc self-employed income (net of expenses), while for salaried GPs it will be their practice salary, including any overtime, plus any ad hoc income, net of expenses. Freelance GP locums can choose to pension individual periods of work – provided they aren’t trading as a limited company.
The contribution rates and pensionable pay bands now in place from 1 October (until the stage two changes are made in 2023) are listed below:
1 OCTOBER 2022 – 2023
| Tier | Pensionable pay per annum (e.g. share of practice profits, salary and ad hoc self-employed income net of expenses) | Member Contribution Rate | Member + Employer Contribution rate |
|---|---|---|---|
| 1 | Up to £13,246 | 5.1% | 19.48% |
| 2 | £13,247 to £16,831 | 5.7% | 20.08% |
| 3 | £16,832 to £22,878 | 6.1% | 20.48% |
| 4 | £22,879 to £23,948 | 6.8% | 21.18% |
| 5 | £23,949 to £28,223 | 7.7% | 22.08% |
| 6 | £28,224 to £29,179 | 8.8% | 23.18% |
| 7 | £29,180 to £43,805 | 9.8% | 24.18% |
| 8 | £43,806 to £49,245 | 10% | 24.38% |
| 9 | £49,246 to £56,163 | 11.6% | 25.98% |
| 10 | £56,164 to £72,030 | 12.5% | 26.88% |
| 11 | £72,031 and above | 13.5% | 27.88% |
In 2023, these will then move to the final structure, as below.
2023 ONWARDS (date to be confirmed)
| Pensionable Pay (per annum) | Employee Contribution Rate | Employee + Employer Contribution Rate |
|---|---|---|
| Up to £13,231 | 5.2% | 19.58% |
| £13,232 to £23,948 | 6.5% | 20.88% |
| £23,949 to £29,179 | 8.3% | 22.68% |
| £29,180 to £43,805 | 9.8% | 24.18% |
| £43,806 to £56,163 | 10.7% | 25.08% |
| £56,164 and above | 12.5% | 26.88% |
Because of the reduction in the number of tiers and the ultimate ‘flattening’ of the contribution structure, some lower earning GPs see their take home pay decrease, while some higher-earning GPs may see their take-home pay increase.
As an example, a GP earning £120,000 per annum would, pre-October, would have made £17,400 in annual pension contributions. Once the second stage of changes is complete in 2023, this will decrease to £15,000 – giving them £2,400 per annum more in take-home income.
On the other hand, a GP with low NHS earnings of £25,000 would have previously paid £1,775 per annum. They will then pay £2,075 per annum, after the changes are complete in 2023.
What should GPs do next?
These changes – and particularly the two-stage nature of it – may prompt some confusion in the short-term about how exactly it affects GPs.
The reduction in take-home pay for some GPs may also put additional strain on finances that are already under pressure due to the increased cost of living.
If GPs have any questions about what this will mean for their individual circumstances, or how they should be adapting their wider savings and investment strategy to accommodate, we recommend speaking to a professional financial adviser. They’ll be able to generate bespoke calculations, and explain the implications.
Amid a rising cost of living, and ongoing challenges with pension taxation, some members may be considering opting out of the NHSPS. We always urge caution around this decision.
The NHSPS is, in most cases, great value for money. Leaving the scheme could mean doctors end up with a diminished pension pot on retirement and lose valuable benefits that the NHS Pension Scheme brings – such as the death in service benefit, which pays a lump sum to their families and dependents if they pass away.
Again, taking professional advice before taking making any decisions in this regard will be key.
Alec Collie is head of Medical at Wesleyan Financial Services
