What the pension changes mean to you
Finally, after countless proposals and months of negotiation, we now know what changes are going to take place with the NHS pension scheme. These changes will take place from April 2008 and will have differing impacts depending on whether you are a current member, a former member or are likely to join after April 2008.
For existing members there is both good and bad news, with the most immediate impact being negative with increased contributions levels. All dentists within the NHS currently pay 6% of their superannuable pay for basic scheme benefits. From April 2008 the amount payable will be dependant upon income.
Contribution levels commence at 5% if earnings are below £19,165. Anyone earning more than this will see their contribution levels rising.
Dentists earning £100,000 plus from April will pay 8.5% of earnings. This would be a rise of £208 per month. All calculations are based upon previous years’ income. The second significant change that may be negative is the abolition of added years. From April the current added years scheme is being replaced with a new arrangement that limits the sum of extra income you can purchase to £5,000 per annum. Existing added years are unaffected.
Other changes are generally positive. There is good news for higher earners as the dental earning cap is removed on all future income from April 2008. Anyone who is a member by April 2008 will retain a normal retirement age of 60 with the ability to take early retirement from 50.
Most general dental practitioners will also welcome the introduction of a fixed calculation for dynamising previous years’ earnings. In future, previous years’ income will be increased in line with the retail prices index, plus 1.5%. This removes the annual uncertainty of dynamisation.
Under the new scheme rules, there is increased flexibility in how benefits are taken. Currently at retirement the pension tax-free lump sum is automatically set at three times the pension. From April this can be increased significantly if the retiree is prepared to forego part of their pension income. The commutation process is based as follows; for every £1 of pension given up there is an additional tax-free lump sum of £12 available.
To give an example, if a dentist were retiring today on a pension of £40,000 per annum the tax free lump sum is set at £120,000. If the same dentist were to retire after April they can still choose to take this lump sum, or a lump sum anywhere between £120,000 and £214,286. If the highest figure were chosen this would reduce the pension received annually by £7,857. As the pension received is taxable and the lump sum is not, this may be an attractive proposition to many at retirement.
Death in service benefits remain unchanged, however spouse and dependants pensions on death are altered. A dependants pension will now be paid not only to those who are married or have civil partnerships, but to anyone who can be proven financially dependant and have a long-term exclusive relationship with. On death, dependant children will now receive a pension until age 23 irrespective of circumstances.
Ill health retirement will still be available, however the terms on offer are likely to be significantly less generous and are still in consultation.
Former members of the scheme are unaffected by these proposals unless they choose to rejoin. Perhaps the most important consequence of this is that when pension benefits are taken there will not be access to the increased tax-free lump sum.
All members joining after April 2008 will be subject to the new pension scheme and will have a normal retirement age of 65. Most other aspects of the scheme are the same.
Impact on planning
There are a number of areas where these changes impact, and any dentist considering additional pension planning should seek advice as soon as possible because the existing added years scheme is removed from April, and all applications must be in by this date.
Dentists with high NHS earnings should consider their situation. The removal of the earnings cap, coupled with the increased contribution levels, may lead to a very significant increase in contribution levels. This not only impacts cash flow but may also lead to a danger of exceeding the lifetime allowances.
Dentists near retirement, especially those due to retire between now and April 2008, may wish to defer their retirement in light of access to greater tax-free cash.
All dentists with long-term partners now have greater protection from the pension scheme, potentially reducing the need to pay for costly private insurances.