Dental specialist financial adviser Karen Watson-Brown highlights what dentists should be thinking about in terms of their pension and employment benefits when moving to private practice.
The NHS pension scheme (NHSPS) is sometimes described as a ‘golden pension’, and there is good reason behind this. Both the legacy scheme, made up of the 1995 and 2008 sections, and the 2015 reformed scheme offer a wide range of benefits.
Any dentists considering making the switch from NHS to private practice will be leaving both their NHSPS benefits and NHS employment benefits behind. They need to carefully consider how they will be replaced which can be somewhat daunting. Paying into something private to build up the equivalent level of benefits offered by the NHS needs planning and consideration. This is where the help of a specialist can be extremely useful.
Why is the NHS pension different to a private pension?
There are two types of pensions. Firstly, a defined contribution (DC) pension. Here, the amount of pension you get in retirement is defined by the contributions paid into it. Secondly, a defined benefits pension. This is defined by the benefits that the scheme will pay you when you retire, not necessarily what you put into it. The NHSPS is a defined benefits pension, its structure is based on pensionable earnings and is banded. Essentially the more you earn, the more you contribute.
How to replace the basket of NHS benefits?
Going private undoubtedly offers its own set of benefits in terms of salary, lifestyle and patient care. There is no longer the treadmill of NHS appointments. Appointment times are longer allowing you to get to know your patients better and offer a greater level of care. The flip side of it is you’ve now got to provide everything the NHSPS had to offer. You must also contribute other NHS employment benefits, such as sick pay, yourself. In order to consider how to do that, we need to define exactly which benefits need to be replaced.
The first and most obvious benefit for NHS members is the pension in retirement. This can be replaced with a private pension. But what about the other employment benefits which are built into the NHS contract?
NHS employment benefits
Sick pay
NHS sick pay is an employment benefit payable from week four to week 26. This means there is a period of 22 weeks of sick pay which will be lost when switching to private. Many dentists have an income protection policy and may feel assured that they are covered for sick pay.
While the income protection cover exists for this purpose, it is important to be aware of the finer details. For example, if your income protection is deferred for 26 weeks and you are leaving the NHS, this would now need to be pulled forward as you haven’t got that sick pay anymore. A question I often ask my clients here is, if you suffered an accident or injury that meant that you couldn’t work, how long could you cover your monthly bills before your savings ran out?
Parental leave
If you are employed by the NHS and pregnant, you are entitled to one year of maternity leave. Dentists can claim parental leave payments if they meet the qualifying conditions. Dentists can claim for a period of 26 weeks. This must start between the week they are due to give birth and 11 weeks prior. Maternity leave payments are taxable and fully pensionable.
A private dentist is typically self-employed and will need to consider how they will cover their maternity leave. Also, how soon they will want to return to work. How much maternity allowance you’re entitled to depends on how many Class 2 National Insurance contributions you’ve paid while being self-employed. The full amount you could be entitled to is £172.48 per week for up to 39 weeks.
NHSPS Benefits
Death in service
Death in service is an often-overlooked NHS pension benefit. If an active NHS member were to die, they would receive a tax-free lump sum. This is usually based on two times their earnings. It is payable to whoever their nominated beneficiaries may be – a spouse or children. This benefit changes and there is a significant reduction as soon as a dentist has been out of the NHSPS for longer than one year.
To plug the gap, a dentist may consider taking out a life insurance policy for example. This will replace the lost death in service benefits. There may be even more tax efficient options to replace the loss of death benefits for dentists operating as a limited company.
Dependant’s pension
Members of the NHS pension scheme also benefit from a spouse’s pension. In the event of your death, your family or other nominated person may be eligible to receive a dependant’s pension. An adult dependant pension would be paid every month to your surviving spouse. If you leave behind child dependants, a pension may also be payable to them until they are 23 if they are still financially dependent at this stage.
Ill health retirement pension
There is also the ill health retirement pension which is payable by the NHS if a dentist becomes ill and is never able to work again. The ill health retirement pension has two tiers.
Tier one is where a dentist can no longer do their own job but can take another position within the NHS. In this case, the member is paid the pension they have built up to date. Tier two is applicable to a member who will never be able to work again. They will be paid what they have built up to date as well as a proportion of the earnings they would have accumulated had they carried on working up to retirement age.
Seeking specialist guidance
As we have noted, there are clearly a number of benefits that need to be considered. Some of these, including death in service and the ill health retirement pension, may not be so well known.
A dental specialist financial adviser can provide useful guidance here by evaluating your individual circumstances, highlighting what needs to be done and how to set about doing it. The sooner you get to work at plugging the gap, the easier it will be to ensure that everything that you originally had in place has been sufficiently replaced. This will provide you with peace of mind of knowing that you have a solid retirement plan and that your loved ones would be looked after if the unexpected were to happen.
For information and guidance on NHS benefits and advice on general retirement planning, you can book a no-obligation financial review with a dental specialist financial adviser at Wesleyan Financial Services by visiting wesleyan.co.uk/lifes-journey or calling 0800 316 3784.
