Wesleyan Financial Services’ team of Specialist Financial Advisers share what you need to consider in order to replace this gold-standard scheme when making the move to private provision.
About the NHS pension scheme (NHSPS)
The way in which your NHS pension works depends on when you joined the scheme. This is because there are three parts to the NHS pension – the old scheme, which has a 1995 section and a 2008 section, and the 2015 scheme. If you have been an active member of the scheme since before 2015, then it’s very likely that you belong to more than one scheme.
For general dental practitioners, both the 1995 and 2008 sections and the 2015 Scheme are CARE (career average revalued earnings) schemes. This is a type of defined benefit pension scheme in which the member’s pension at retirement is calculated using their average salary over the entire period of their service.
As part of the NHSPS, you also have NHS pension survivor benefits for your family depending on your length of service and circumstances.
What happens to your pension when you decrease or cease NHS provision?
Your NHS pension contributions are likely to decrease or stop completely, depending on whether you choose to reduce your NHS commitments or convert to private practice on a full-time basis.
It’s important that you still understand your NHSPS because, unless you choose to opt-out, you will remain a member of the scheme even when you transition to private dentistry.
Any pension entitlement you have accrued up until the point you leave the NHS will be available to you when you are ready to retire – you just won’t be able to contribute further if you leave fully (which is when you will be referred to as a deferred member of the scheme).
Also, for deferred members, when it comes to the annual revaluation of the scheme the additional 1.5% will be removed from the calculation, so benefits will not grow as fast over time.
Your family’s entitlement to the survivor benefits will also be reduced or withdrawn depending on the steps you have put in place before leaving.
If you remain in the scheme but reduce your NHS commitment, contributions will continue but would be reduced to reflect the lower earnings. Also, the revaluation of benefits would remain at 1.5% plus CPI.
What can be done to replace these benefits?
Often, the first port of call for those reducing their commitments but still practising under the NHS is to explore options with buying Additional Pension and Money Purchase AVCs (an arrangement for making additional contributions to build up a separate retirement fund) through the NHS.
For those leaving completely, making sure you have an alternative retirement-saving vehicle in place means that a proportion of your hard-earned cash can be used as a separate retirement nest egg.
The NHSPS is an excellent benefit that isn’t easily replaced, and it often takes a multi-pronged approach to reach the same retirement income level, such as a mix of a personal pension with an investment portfolio plus other appropriate policies.
When it comes to accumulating your retirement income, Wesleyan Financial Services has broken down the most tax-efficient order:
Individuals have a limit on the amount they can save into pensions each year. This is the annual allowance and is set at £60,000 for the 2023/24 tax year. However, it is worth noting that if you are an incorporated dentist, you can pay your pension through the business. By doing that, you can save corporation tax and dividend tax (depending on your tax rate).
Similarly, individuals can contribute up to £20,000 tax-free per annum to ISAs. Making use of these savings vehicles first for retirement is a strong starting point.
Also, as you may face changes to your NHS pension survivor benefit, it will be worth reviewing your estate planning to ensure that your family continues to be fully protected should the worst happen. Often, a life assurance policy can support replacing this benefit.
The cost of delay
Finally, it’s important to remember that some of these decisions, while falling under long-term financial planning, will result in increased costs to yourself if delayed.
The longer you delay saving into a pension fund, the higher the premium required to achieve a particular retirement income goal. This is in part due to the effect of compound interest, where the interest you generate on your personal pension begins to generate further interest. Compound interest means you don’t have to dip your hand into your pocket as much to reach the same goal.
You also don’t want to miss your tax-free allowance opportunities or go a long period without benefiting from pension tax relief (the latter of which is still subject to the limitations of the annual allowance).
Speak to a specialist
As always, what the right plan of action is for you may be different to a colleague who has gone through the same process. You may need a tailored financial plan to help you maintain your retirement plans when making the move from NHS to private.
*Correct as of 6 April 2023.
Please note: The value of investments can go down as well as up and you may get back less than you invest.
Tax treatment depends on individual circumstances and may be subject to change in future and advice in relation to inheritance tax planning is not regulated by the Financial Conduct Authority.