How Do State Pension Changes Affect Your NHS Pension?
Within the last 18 months there have been two important changes to the State Pension. With effect from April 2016 a new flat rate State Pension was introduced for new pensioners. Then in July 2017 it was announced the State Pension Age will increase earlier than previously planned. Both of these changes directly affect NHS doctors.
How the introduction of the flat rate State Pension made doctors’ take home salary go down
The change to the flat rate State Pension has had the effect of reducing doctors’ take home pay, unlikely as this may sound.
Prior to the introduction of the new flat rate State Pension there were two elements to the State Pension: the basic State Pension and an Additional State Pension. The Additional State Pension was based on the individual’s earnings and National Insurance contribution record.
Some occupational pension schemes, including the NHS Pension, were contracted out of the Additional State Pension. This means the Scheme guaranteed to pay the additional benefits instead of the State and members paid a lower rate of National Insurance contributions to reflect this.
With the switch to the flat rate State Pension the practice of contracting out has ended. This means NHS Pension members now pay the full rate of National Insurance contributions, which is what has an effect on doctors’ take home pay.
National Insurance Contributions are automatically deducted from salary in the same manner as Income Tax. The National Insurance contribution rates before and after the end of contracting out are compared in the table below:
2015/16 National Insurance Contribution rates were:
-1.4% (i.e. a 1.4% rebate) on earnings from £486-£672 a month
10.6% on earnings from £672-£3,337 a month
12% on earnings from £3,337-£3,532 a month
2% on earnings over £3,532 a month
Current (2017/18) National Insurance Contribution rates are:
0% on earnings from £490-£680 a month
12% on earnings from £680.01-£3,750 a month
2% on earnings over £3,750 a month
How doctors’ retirement age is affected by changes to the State Pension Age
In a parliamentary statement on 19 July 2017 David Gauke, the Secretary of State for Work and Pensions, announced that the increase in the State Pension Age to age 68 is to be brought forward by seven years to between 6 April 2037 and 5 April 2039, rather than 2044-2046 as originally provided for in the Pensions Act 2007.
Doctors born on or after 6 April 1970 will be affected by the earlier State Pension Age increase and this news is of particular relevance for doctors in this group who are building up NHS Pension benefits in the 2015 Scheme. In the 2015 Scheme the Normal Pension Age is the same as State Pension Age. As the Scheme literature states, this will rise if the State Pension Age rises.
Doctors who do not wish to work until age 68 can retire early and take pension benefits before Normal Pension Age. The minimum retirement age is currently 55 but is increasing to 57 by 2028 and will then track ten years below State Pension Age, so is now due to increase further to 58 by 2039. However, if early retirement is taken pension benefits will be reduced.
It is possible to take out an ‘Early Retirement Reduction Buy Out’ contract (ERRBO) to buy out the reduction that would otherwise apply when claiming benefits up to three years before Normal Pension Age (but not earlier than age 65). If taken, you or your employer would pay extra pension contributions. The amount of additional contributions would depend on your age and the number of years’ reduction to be bought out. NHS Pensions have a factsheet for more information on this option.
Normal Pension Age under the 1995/2008 Scheme is unaffected by changes to the State Pension Age.
Find out more
If you would like personalised advice on your pension and retirement planning please contact Richard Higgs CFP FPFS on 0117 955 6599 or firstname.lastname@example.org.