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Pension plans

Insight: pensions
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Phil Mileham
National Sales Manager, Wesleyan Medical Sickness

 

Public sector pensions have once again been making big headlines. In March this year, Lord Hutton published his final report making detailed recommendations on how public sector pension schemes can be made more sustainable and affordable, while still providing an adequate level of retirement income.

Phil Mileham
National Sales Manager, Wesleyan Medical Sickness

 

Public sector pensions have once again been making big headlines. In March this year, Lord Hutton published his final report making detailed recommendations on how public sector pension schemes can be made more sustainable and affordable, while still providing an adequate level of retirement income.

The report's findings impact on everyone who is entitled to a public sector pension, including the NHS Pension Scheme.
The key recommendations are:

  • Existing final salary schemes should be replaced by new schemes where a member's pension entitlement is still linked to their salary, but related to their career average earnings.
  • The normal pension age (usually 60-65, depending on whether doctors are in the 1995 or 2008 section of the NHS Pension Scheme) should be raised to the State Pension Age, which is rising to 66 over the coming years.
  • The pension promises already earned by members should be honoured in full and the final salary link for past service for current members should be maintained.
  • Increase members' contribution rates.

If all the recommendations are accepted, it could mean public sector workers will be asked to pay more, to earn less pension, and retire later. However, nothing has yet been agreed, but the reports so far will still raise concerns from those who are relying on the NHS Pension Scheme for their retirement and, as such, they may want to put plans in place to ensure the changes affect them as little as possible.

For GPs within the NHS who are already participating in a type of 'career average' scheme, one key aspect of the Hutton Report is what the rate of accrual will be in future. Until this accrual rate is established, no firm comparisons between the new and current schemes can be properly made. In reality, it is fair to assume most current members will be adversely affected, particularly younger members whose normal retirement age will be extended to 68 and who may spend most of their medical career in the new scheme. Those closer to retirement will be far less affected as they will have already enjoyed the lion's share of their pensionable service under the current arrangements.

As for the benefits that have already been built up in the NHS scheme, Lord Hutton recommended that pension promises already earned by members should be honoured in full, including the right to take those benefits at their existing normal retirement age. In practice, this means the benefits built up to the date of change will be effectively ring-fenced.

For example, a member who had been building up benefits that would currently be paid at 60 without any reductions in the existing scheme should still be able to take those pension rights at age 60. Only future service will be based on the new benefit basis, including the later normal retirement ages.
It should still be possible to take the total benefits aged 60 or 65 under the new scheme, but any pension due under the new basis would be reduced accordingly to take account of this earlier payment.

The coalition government has already made a number of changes to the taxation of pensions generally, as well as making some preliminary alterations to public sector pensions.
From 6 April, the maximum amount that can be saved into a pension with tax relief each year – known as the annual allowance – reduced from £255,000 to just £50,000. This includes any increases in the NHS Pension Scheme benefits and contributions to any other pensions. From 6 April 2012, the standard lifetime allowance, which is the total amount of pension savings someone can build up tax efficiently over a lifetime, will reduce from £1.8m to £1.5m.

A survey of GPs, carried out earlier this year by Wesleyan Medical Sickness, from across the country revealed 48% of them don't understand these changes, with one in five not even aware the rules were changing. It's important not only to be aware of these changes but understand them, because going over the allowances could lead to unexpected tax bills.
Any amount over the Annual Allowance will be liable for a tax charge based on your highest marginal rate of tax, likely to be 40-50%. If the Annual Allowance is exceeded, there is a facility that allows you to offset part or all of the excess against any unused allowance from the previous three years, known as 'carry forward'.

There will also be a tax charge on any amount over the Lifetime Allowance, which could be up to 55% depending on whether the surplus is taken as an income or as a lump sum.
Another key change for doctors working in the NHS and enjoying an inflation-proof pension is the way the government actually measures inflation. They have changed from using the Retail Price Index (RPI) to the Consumer Price Index (CPI). As CPI generally rises more modestly than RPI, this is expected to result in lower NHS pension benefits.

For public sector pensions as a whole, the government has already announced that contributions by members of these schemes should increase on average by approximately 3% of their pensionable pay, meaning GPs will have to pay more to remain a member of the NHS scheme.

This increase in contributions will have an effect on the amount of disposable income GPs have to put into a private pension. This, coupled with all the other pension changes and tax implications, may lead to concerns that the new NHS scheme won't provide the necessary income in retirement, which is why they should talk to a qualified financial adviser to discuss what options are available.

It is worth remembering that while the new pension scheme may provide inferior benefits to the current version, it will still be a generous scheme. GPs will have the option of staying in, opting out, or (if old enough) taking early retirement, but at this early stage, especially as none of Hutton's recommendations have yet been implemented, any knee-jerk decisions should be avoided.

As regards how far the government will implement Lord Hutton's proposals, over the coming months it can expect growing political pressures from all sides, and consultations with employees and unions could affect the recommendations. Until the final decisions have been announced, no proper analysis can be carried out.

Lord Hutton believes it should be possible to introduce the new and restructured schemes by the end of the current Parliament in 2015. But whatever the outcome, the government has already stated that increases to contributions will start to be implemented much earlier.

Finally, those GPs that are also employers will have to take into account the auto-enrolment rules for pensions that are due to be introduced in October 2012. All UK employers will be required to automatically enrol eligible employees into a 'qualifying workplace pension scheme', either to an existing company pension scheme if it meets certain criteria or into NEST (National Employment Savings Trust), a simple, low-cost pension scheme being introduced by the government.

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