Should you opt-out of the NHS pension?
NHS doctors and consultants seem to be opting out of the NHS pension scheme at an alarming rate. But why?
The Government’s introduction of the Tapered Annual Allowance has resulted in senior staff of the NHS (often with £150,000+ earnings) being heavily penalised by tax charges, often as a result of taking on additional shifts. The “NHS pension tax trap” is affecting many senior and even middle-ranking NHS staff.
These tax charges are due to new ‘pension taper’ rules that reduce how much you can contribute to a pension as your earnings grow. If you exceed it, you can expect a hefty tax bill through the post which often amounts to £thousands.
In March 2020, the government budget announced that the threshold for being subjected to this pension taper would increase. Now, only individuals with total earnings of over £240,000 are hit.
NHS pension considerations
It’s important to weigh up the extra salary with the benefit of remaining in the pension. How much pension will you receive if you opt-out vs if you stayed in?
You’ll also need to consider other benefits, things like death in service (usually 2x salary) and ill-health benefits. The cost of replacing these benefits through private insurance can be very expensive.
For most people, staying in the NHS pension is likely to be the best option. Why? Because if you are paid in salary instead, you’ll still be taxed on it. And all things being equal, £1 in the NHS pension is worth more than £1 in cash.
Paying a tax charge on money contributed to your pension is uncomfortable. But a retirement without dignity and independence is going to be far more uncomfortable.
Yes, the upfront tax charge is a bitter pill to swallow. But the benefits are likely to be worth it.
Is there an alternative to opting out of the NHS pension?
Some NHS trusts are offering staff the ability to opt-out of their NHS Pension Scheme. In return, they will receive their contributions and their employers’ pension contribution as additional salary. This can potentially increase their salary by up to 35%.
The announcement on 11th September 2019 that NHS staff could “limit their pension accrual in increments of 10% and enable employers to recycle their unused pension contributions back into the individual’s salary”) couple be a viable alternative, though the detail of how this will work in practise is still unclear.
The recent increase to the threshold taper should result in the majority of NHS staff avoiding the taper, however, there will still be some consultants, surgeons, anaesthetists, etc. that are likely to get caught.
The Government’s consultation suggests introducing flexible pension accrual in the future. This will give NHS staff more control and flexibility over their salaries and pensions.
That said, there is no doubt that many of these senior NHS staff would require taking advice on the appropriate rate of benefit accrual for them in the future. This is because they need to compare the value of their benefits from remaining in the scheme with opting out.
If you’re an NHS doctor or consultant wanting to get some clarity on the best way forward for you and your pension, we offer a free 60 min consultation to review your options.
All the best,
James Mackay, Independent Financial Adviser in Bristol
Financial Advisor Bristol and Pension Advisor Clifton
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