NHS pension discrimination and the April changes: what to know before going private
Gareth Stainsby shares what’s next for the ‘McCloud’ case and what it means for those with an NHS pension.
One of the biggest financial considerations from a personal perspective ahead of moving to private provision is the impact it may have on your retirement plans.
Most dentists who have worked in the NHS at some point in their career will usually have some form of NHS pension accruing in the background. When you leave the service, replacing your NHS pension needs to be high up on your list of priorities. And with complexities such as the pension discrimination case added to the mix, it’s not an easy financial planning area.
For some, the pension discrimination case will impact retirement plans. The decision you make at retirement therefore needs careful consideration to ensure you retain as much value as possible.
From 1 April 2022, all active members of the NHS Pension Scheme (NHSPS) moved over to the ‘new’ reformed pension schemes introduced in 2015.
This was the first step in the government’s multi-stage process to remedy age discrimination in public sector pension schemes. Affected scheme members will need to be aware of what it means for their pensions. As well as what future changes could still be to come.
You can find a recap on the pension discrimination case here.
What happened on 1 April, and what does it mean for you?
The first stage is what’s happening now. From 1 April, the 1995 and 2008 sections of the NHSPS both closed. All staff who contributed to those schemes were then automatically transferred to the 2015 career average scheme.
Crucially, any pension a member built up in the 1995 and 2008 schemes is not lost.
The potential shift is not – in practice – likely to feel hugely unfamiliar to dentists.
While the 1995 and 2008 sections operated on a ‘final salary’ basis for other roles in the NHSPS, for dental practitioners, they were ‘career average’ schemes. They operate in a similar way to how the 2015 scheme does now.
However, there are differences between the three parts of the NHS Pension Scheme; the 1995 section, the 2008 section and the 2015 scheme. It is helpful for dentists to keep in mind this for understanding and assessing the growth of their pension pot. And when it comes to their retirement plans.
One area is in how you accrue pension pots.
For 1995 scheme members, each year that a dentist belongs to the NHSPS, their earnings go into a pot. The total of which revalues annually to factor in inflation.
The resulting figure is their ‘uprated earnings’. They will receive an annual pension based on 1.4% of their total uprated earnings.
In the 2008 section, the pension is based on 1.87% of a dentist’s uprated earnings. Meanwhile, those in the 2015 scheme will receive an annual pension calculated at 1/54th of each year’s pensionable pay.
Like the previous schemes, this amount revalues each year in line with inflation.
The schemes also have different mechanisms for lump sums. These may form part of a dentist’s retirement income plans.
With the 1995 scheme, a tax-free lump sum is automatically paid on retirement. This is normally three times a dentist’s pension.
If individuals have membership on or after 1 April 2008, then they will also have the option of receiving a larger retirement lump sum in exchange for a smaller annual pension. If they choose to do this, then they will receive £12 of additional lump sum for every £1 of pension exchanged.
A lump sum is not automatically available in the 2008 and 2015 sections. However, dentists do have the option of receiving a lump sum by exchanging part of their pension; again receiving £12 of lump sum in retirement for every £1 exchanged.
It may be possible to take a lump sum up to a maximum of 25% of the ‘capital value’ of benefits paid.
The capital value is the value on an individual’s NHSPS benefits by HMRC. We can therefore calculate it by multiplying the pension payable by 20 and adding any lump sum.
Perhaps the biggest difference between the 1998 and 2008 sections and the 2015 scheme is that the latter pushes back a dentist’s ‘normal pension age’ (NPA) – the age at which they can take their full pension benefits, with no reductions – to the State Pension age.
That’s currently 66 years old and it will start to increase from 2026. By comparison, the NPA for the 1995 section is 60, and 65 for the 2008 section.
From a practical perspective, this increases the potential income ‘gap’ for any dentist planning to retire before their NPA.
Dentists can claim benefits from different schemes at different times. If they accrue benefits in the 2015 scheme, they will need to wait for longer to access these, penalty-free, than they would for benefits accrued in the 1995 or 2008 section.
This could be an important factor for dentists to consider. Bridging the ‘gap’ will need accounting for within their retirement plans.
Ultimately, the benefits that dentists accrue in different pension schemes or sections will all contribute to the pension that they have when they retire.
Factors such as different lump sum mechanisms and NPAs from section to section will need considering when thinking about what funds you can, or should, access, and when.
Here, speaking to a financial adviser who understands the complexity of the NHSPS is hugely valuable.
What do you need to do now?
For the change that took place on 1 April, the key point to remember is that everyone will have now been moved automatically to the 2015 pension scheme. However, you do not lose pensions built up in the 1995 and 2008 sections of the NHSPS.
For members affected by the McCloud case, there is a future choice to make regarding the Deferred Choice Underpin.
That choice doesn’t need making now. Although for any member it pays to prepare yourself.
When you consider moving to private provision, now could be the best time to review your retirement plans and the impact of this case.
The start of the McCloud remediation process is an opportune moment for dentists to review their full savings and retirement plan. Ensure that it still aligns with your ambitions, and is on track to help deliver the retirement that you want.
Taking the time to review and plan will help give practitioners the confidence that their retirement – and the decision they make with regards to the McCloud remedy – will therefore deliver the best possible outcome for them.
If you’d like further advice on how the pension discrimination case might affect you or your conversion to private practice, you can speak to a specialist dentist financial adviser at Wesleyan Financial Services, who the NHS recognises as advisers able to give advice on this subject.
Advice is provided by Wesleyan Financial Services Ltd.
‘Wesleyan’ is a trading name of the Wesleyan Group of companies.
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