Scott Wilson weighs up the benefits of the NHS pension and whether your pension contributions would be better invested elsewhere.
Before we dive in, let’s address a common misconception – one that many people understandably struggle with, given the complexity of the NHS pension scheme.
As strange as it may seem, when you pay into the NHS pension, you don’t have a physical pension pot. There isn’t a vault with your name on it, nor a shiny pot marked ‘do not touch’. Unlike most modern workplace pensions, the NHS scheme operates differently. Instead of a tangible pot, you have a record of your entitlements, tracked by a system.
And because of that structure, there are quite a few restrictions to contend with when considering transferring it elsewhere.
Think of your NHS pension contributions like a membership fee. In return, the NHS promises to provide you with a guaranteed income for life when you retire, along with other valuable benefits. These include a tax-free lump sum – automatically available in the 1995 section, or available by commuting part of your annual pension income in the 2008 and 2015 sections – and financial support for your spouse or dependents if you pass away.
What you’re really building up is a growing entitlement the NHS is obligated to honour. Your pension is calculated based on your earnings and how long you’ve worked within the system. And yes – while that might sound intangible, it’s backed by the government, which offers a level of security.
A bundle of benefits
It’s easy to overlook the broader value of the NHS pension. If you were to pass away before your spouse, they can receive up to 50% of your pension for the rest of their life, depending on which part of the scheme you are a member of. And depending on the circumstances, your children could receive between a quarter to a third of it too (with a few caveats).
It’s a built-in safety net – and one that’s challenging to replace or top up. You don’t lose the spouse’s pension if you invest elsewhere. The pension, however, would be lower as a deferred member than as an active member of the scheme.
Your NHS pension isn’t tied to the stock market
Choosing to invest elsewhere might mean exposing yourself to more risk than you realise.
The NHS pension guarantees you a steady income for life, no matter how the stock market is performing. If you’re still contributing to the scheme, your pension grows each year by the rate of inflation, measured by the Consumer Price Index (CPI), plus an extra 1.5%. If you’ve left the scheme, it still increases annually in line with CPI – just without the extra boost.
For those of you with a bit more experience in dentistry, you may remember when your pension increases were linked to the Retail Prices Index (RPI) instead of CPI, which provided a more favourable uplift. But I digress.
Compare that to other pensions or investments, where growth is at the mercy of the markets – and the difference is clear.
It’s like getting money for free
Perhaps the biggest reason why investing elsewhere often can’t compete is that the NHS contributes as well as you. In fact, more than you do. It’s like a gift you’re getting for free. By leaving, you’re essentially turning down free money.
When might it be suitable to invest elsewhere?
That being said, there are instances where it makes sense to look beyond the NHS pension, particularly when it comes to tax allowances.
Your pension contributions are typically set as a percentage of your earnings, and you can’t simply reduce them mid-year to avoid breaching tax limits. The main limit to be aware of is the Annual Allowance, currently £60,000 per year. If the value of your pension savings across all your pension schemes in a tax year exceeds this amount, you could face a tax charge.
For defined contribution schemes, such as personal pensions, this value is based on the actual contributions made. For a defined benefit scheme, the NHS pension scheme the value is based on the increase in pension benefits over the year.
It’s HMRC’s way of curbing tax relief for top earners. And because of how the increase in NHS pension benefits is calculated each year, you can end up breaching the limit without much room to manoeuvre.
In these cases, investing elsewhere – like ISAs, personal pensions, or Self-Invested Personal Pensions (SIPPs) – might offer more flexibility and tax efficiency. These can be tailored to your circumstances, allow earlier access, and support long-term goals such as partial retirement or bridging gaps in income.
It’s not the most flexible scheme
While it is possible to take your NHS pension benefits from age 55 – or even from age 50 for some members – doing so before your scheme’s normal pension age will usually result in a reduced pension due to early retirement penalties.
You are generally tied to the scheme’s normal retirement age if you want to avoid any reduction, which could be as late as 68 depending on your circumstances and the sections of the NHS Pension Scheme you belong to.
This trade-off requires careful thought, especially if you’re considering reducing your working hours before reaching full retirement age.
What if I’m only working partially under the NHS?
If you’re only partially in the NHS system, private pensions can complement your NHS pension. Many dentists use SIPPs or personal pensions to build up a separate pot they can draw from earlier – currently from age 55 (soon rising to 57, and later to 58).
This added flexibility could allow you to go part-time, reduce your hours, or bridge the gap between slowing down and taking your NHS pension.
And this isn’t just for NHS principals – associates or practice owners with mixed NHS/private income can often benefit from layering their retirement planning this way.
What about property?
A popular question – and for good reason. But in most cases, property is less likely to offer the same value for money.
High upfront costs, such as stamp duty and maintenance, plus tax complexities and the stress of dealing with tenants, can quickly diminish returns. While property may have a place in your broader investment strategy – particularly for those already involved in buy-to-let or commercial property – it’s unlikely to match the predictability, security, or returns of the NHS pension.
To wrap-up
Yes, you can invest elsewhere – and in some cases, it makes sense. But to match the NHS pension, any alternative would need to work a lot harder to deliver the same value.
You’d need to make up for the employer contributions, the inflation-linked income, and the guarantees that come with it.
That’s why, for most dentists, the smarter question isn’t: ‘Should I leave the NHS pension?’ but rather: ‘How do I build around it?’
Proper financial planning can help you define what ‘enough’ looks like, reduce uncertainty, and empower you to make confident decisions – whether that’s reducing your hours, transitioning to a part-time role, or simply spending more time doing what matters to you.
Remember: investments may go up or down and you may get back less than you invest. Tax treatment depends on individual circumstances and is subject to change in the future.
You can speak to a dental specialist financial adviser at Wesleyan Financial Services to get guidance on the NHS pension scheme. Visit wesleyan.co.uk/dental or call 0808 149 9416 to book a conversation.
Please note: Charges may apply. You will not be charged until you have agreed to the services you require and the associated costs. Learn more at www.wesleyan.co.uk/charges.
This article is sponsored by Wesleyan Financial Services.
