Valerie Martin is a partner and national director of medical
services at PKF, chartered accountants and business advisers
T 01483 564646
The main benefit of the new A-Day rules is that individuals will now get tax relief on contributions up to 100% of their annual earnings (up to an annual allowance set at £215,000 for 2006/07), allowing them the flexibility to pay in more. A-Day also introduced more flexible retirement, allowing people in occupational schemes to continue working while drawing their pension, where the scheme rules allow it.
One restriction introduced by the new rules is a lifetime limit on the value of an individual’s pension fund (currently set at £1.5m in the tax year 2006/07). However, while this restriction has been viewed as unfair by a few, it is unlikely to impact on the majority of individuals.
For practice staff, the main benefit of A-Day is a greater flexibility regarding the level of contribution they can make into independent pension arrangements, enabling them to build up greater income and tax-free cash in retirement, in addition to their NHS Pension Scheme. The latter scheme has not changed its rules in relation to allowing greater contributions, which therefore remain at up to 15% of pensionable pay for the employee’s contributions paid by practice staff, including added years or additional voluntary contributions (AVCs).
However, in the consultation document on NHS pensions published in August, it is proposed that the standard employee’s contribution, which is currently 6%, will be replaced by a variable rate dependent upon the level of earnings. This will give a 5% rate for practice staff earning up to £15,107 pa, but this will increase to 6.5% for those earning between £15,108 and £60,880. There is a top rate of 8.5% for those earning above £100,000 pa.
There are various schemes available to those practice staff who wish to build up additional income for retirement, but individuals should seek independent advice before they opt for a particular scheme, as it may not always be the right one for them. The main options are as below:
NHS added years
By purchasing added years, the member will increase their NHS scheme benefits, but the level of enhanced benefit will be dependent on how long they have been in the scheme. There are limits on how many years the member can buy, depending on their circumstances and the maximum contribution level of 15% that can be made. This scheme is an excellent way to secure additional benefits at normal retirement date, but is not an ideal option for anyone who is planning for early retirement, as it commits to paying contributions up until the age of 60.
It is proposed that the present added years will be replaced by a new system, allowing members to buy up to £5,000 of additional annual pension at any time while in pensionable employment. This will be available through a lump sum payment or by spreading the payment over a number of years, subject to the member not exceeding the annual allowance in the year. However, existing added years’ contracts will be honoured.
Money purchase benefits
Contributions can be invested on your behalf to build up a supplementary retirement fund. Subject to the new lifetime limit of £1.5m, up to 25% of the fund can be taken as tax-free cash; the rest is used to buy an annuity (ie, an additional pension for yourself or spouse) when you retire. These can now be done either through the main scheme as AVCs, or independently through banks, insurance companies and other financial institutions, such as personal pensions.
For some members, it may be more beneficial to use alternative investment vehicles for retirement planning purposes, such as Individual Savings Accounts (ISAs). Although no tax relief is given on the contributions made, any growth can be taken free of income tax under current legislation. This would be particularly relevant to individuals who are likely to have limited retirement income, and are nearing their age allowance limits.
For most practice staff, income in retirement will come from the NHS Pension Scheme. The NHS pension is an excellent final salary scheme, with a pension linked to members’ pay near retirement. Benefits are fully guaranteed, and will increase each year to keep pace with inflation. In addition to the pension, the scheme provides immediate life assurance of twice-annual pay from the first day of joining, which pays out to anyone nominated or to your estate on death.
So what does the NHS pension entitle the member to?
The scheme will provide either a pension at retirement, an ill-health pension (should a member become unable to work due to ill health), or a dependents’ pension (should the member die).
Pension at retirement
On retirement, your annual pension will be one-eightieth of your final year’s pay for each year of scheme membership. For example, if you worked fulltime for 14 years, and your final year’s pensionable pay was £18,000, the pension would be calculated as shown in Box 1:
Since practice staff were unable to join the scheme until 1 September 1997, a large number of members will be unable to achieve the maximum level of pension, which is currently 50% of final salary, based on 40 years’ service.
For members who work part-time, their membership and final year’s pay will be changed to the equivalent fulltime amounts. For example, if you worked fulltime for six years, then halftime for six years, and your final year’s pensionable pay was £10,000, the pension would be calculated using the fulltime equivalent figures, as shown in Box 2:
In addition to the pension income, scheme members are also entitled to a tax-free lump sum at retirement, currently set at three times the pension amount. It is proposed that this limit be increased to up to 25% of the value of the fund in return for taking a reduced annuity.
If someone is a current member of the scheme and becomes permanently incapable of doing their present NHS job because of ill health, then a pension may be payable.
Certain conditions apply, but in every case the NHS will ask their medical advisers to confirm that a member is incapable of carrying out their duties because of ill health. If they are satisfied the member meets the rules of ill-health retirement, they can pay the member a pension for life and a tax-free lump sum.
Ill-health retirement benefits are worked out in the same way as normal retirement benefits, but if the current scheme member has had at least five years’ membership when they have to retire, it may be increased to improve the pension they get. For example:
- Membership of between five and 10 years can be doubled.
- Membership of more than 10 years can be increased to 20 years, or membership can be increased by 6.667 years, whichever is the greater.
Both of the calculations above are subject to the maximum the member could have achieved by age 60. For example, if the member had completed 10 years’ service, but would have only attained 17 years’ service at age 60, the ill-health pension would be based on 17 years.
On the death of a member, a survivor’s pension is paid to the legal spouse or civil partner. However, this would cease if the spouse or civil partner were to live with someone else or remarry at a future date – a point few people realise.
In general terms, a spouse would receive 50% of the pension that the member would have received had they been retired on ill-health grounds. However, this is very much dependent on how many years the member was in service. If there is entitlement to a spouse’s pension, an allowance in respect of any children is also payable.
In addition to these benefits, a lump sum of two times the member’s pensionable income would also become payable.
Should I increase my pension benefits?
Although the NHS scheme provides many excellent benefits, it is important the member is aware of not only the benefits they are entitled to, but also whether those benefits are enough.
Many individuals don’t think about additional planning until either an event occurs or it is too late to do anything about the situation. As with any financial planning, it is important that individuals seek independent financial advice before acting, to ensure they are doing the best thing for themselves and their family.