Do you have an Added Years Contract? Today we explore Added Years and the implications of all the recent pension changes on your Added Years Contract.
Added Years Contracts - An Introduction
Added Years was only available in the 1995 NHS Pension Scheme (it is not available in the 2008 or 2015 NHS Pension Schemes). It provided doctors with the option to maximise their NHS Pension Scheme membership up to their Normal Pension Age. The option to purchase Added Years Contracts was withdrawn on 31st March 2008 however of course existing contracts are still in force. Added Years contracts were taken out by purchased lump sums or by regular investment. The maximum you could pay towards an Added Years Contract was 9% of your pensionable pay.
The total membership you are allowed in the 1995 NHS Pension Scheme is 40 years at age 60 (age 55 for MHO members) and 45 years overall. Therefore any Added Years contract is restricted to these limits.
Increasing Your Pension Through Added Years
By taking out an Added Years Contract doctors can increase their pension, lump sum and dependant benefits.
- If you are a hospital doctor, each added year provides an extra 1/80th of your final pensionable pay at retirement
- If you are a GP, your average annual dynamised earnings during the period of the purchase will be multiplied by the amount of the years bought. This amount is then added to your total dynamised earnings in your career. As usual, your total career earnings is then multiplied by 1.4% to calculate your pension.
For both Officers and GPs a lump sum will be payable of three times your added years pension.
Tax Implications of your Added Years Contract
Your Added Years contributions will attract tax relief at your highest rate of income tax up to 100% of your UK earnings in the relevant tax year. This then, on the face of it, makes Added Years a very tax efficient retirement strategy. However, increasing your pension through Added Years can also mean you breach the Annual Allowance and/or the Lifetime Allowance.
In the terms of the Annual Allowance, any Added Years purchased in a tax year will contribute to your growth in pension benefits in any one year. This will mean that you are more likely to breach the Annual Allowance and therefore have to pay an Annual Allowance tax charge.
Similarly, in terms of the Lifetime Allowance, purchasing Added Years will increase your benefits and therefore the capital value of your 'Pension Pot' which makes it more likely to then breach the Lifetime Allowance and therefore have to pay a Lifetime Allowance charge.
Leaving, Cancelling, Opting Out, Ill Health, Death
You are now able to cancel an Added Years contract at any time in writing to the NHS Pensions Agency. However remember you cannot restart the contract if you stop and your eventual pension benefits will be less as you will have paid in less than originally anticipated.
If you have a break from the NHS Pension Scheme of under 1 year then you are able to come back and re-start your Added Years contract. If you come back and rejoin the NHS Pension Scheme after 1 year you will not be able to resume your AddedYears contract and you will only receive benefits at retirement for the amount of contributions you actually made.
If you retire through ill health prior to the age of 60 your Added Years contract will be paid in full for you and no further cost to youand you will be credited for all the Added Years you originally elected to purchase.
If you die before the age of 60 and you were contributing to an Added Years contract, the contract will be paid in full and added to the benefits payable to any dependants. This will be based on the pension that would have been paid had you retired on health grounds as at the date of death.
If you decide to take early retirement before your Added Years contract was due to be completed you will be credited with the portion of the contract completed at the date of retirement and this will be actuarially reduced to reflect its early payment.
Recent NHS Pension Changes
If you have an Added Years contract you will be able to continue to pay into it even after you transfer to the new 2015 NHS Pension Scheme. The contract will then continue to provide benefits under the current 1995 Section rules. These benefits will become payable at the contract end date irrespective of whether your retire at this time.
If you chose to move your NHS Pension benefits to the 2008 Scheme your Added Years contract would have been terminated and you will only be credited with the contributions made up to the date of transfer.