NHS pension scheme benefits for consultants
Authors: Andy Blake
Publication date: 24 Mar 2007
Wondering if you can afford that chalet in Switzerland? Andy Blake does the sums
The NHS pension scheme for consultants is a traditional final salary pension scheme that provides benefits based on a consultant's pensionable service and salary at retirement. The scheme is one of the largest and most complex pension schemes in the world; this article will hopefully provide an overview of the main features and benefits for consultants.
Pension and lump sum accrual
The basic method of benefit accrual is straightforward; for each year of whole time equivalent service a doctor accrues 1/80 of their final pensionable pay as pension. A doctor with 35 years' service and a salary of £85000 would therefore have their pension calculated thus:
35/80 × £85 000 = £37 187.50
The lump sum, which is always tax free and generally three times the pension, would therefore be £111 562.50.
Final pensionable pay
Final pensionable pay, the figure on which the pension and lump sum are calculated, is the best of the last three years' notional whole time salary. On the day you retire the pensions agency will look back at the last three calendar years and the highest (generally the year before retirement) will be the one on which benefits are based.
The calculation of the final pensionable pay figure is not based on the earnings you have received in the last tax year and nor is it the salary figure that you are earning on the day you retire; typically it will be the earnings that you have received over the last 12 months. It is a retrospective calculation, which takes into account all rates of pay (box 1).
Pensionable pay includes basic salary, merit awards, discretionary points, clinical excellence awards, intensity payments, availability supplements, domiciliary visit fees, and if applicable, London weighting.
It is important to note that whole time service for a consultant equates to 10 programmed activities (PAs) a week; PAs in excess of 10 are not pensionable. It is possible to include as pension any income received for extra duties such as having worked as a medical director or a clinical director, but these must be paid as an extra responsibility allowance rather than an extra PA. Consultants receiving such payments should negotiate the position with their employer but should also be mindful of the fact that unless these payments continue into at least one of the three years before retirement then they are unlikely to be of any value to their pension.
Box 1 | Example of final pensionable pay Doctor retires on 31 December 2006
1.1.06-31.3.06 = 3/12 × £85 000 = £21 250
1.4.06-31.10.06 = 7/12 × £85 850 = £50 079
1.11.06-31.12.06 = 2/12 × £86 880 = £14 480
Final pensionable salary is £85 809
The same whole time equivalent pay figure applies to full time and part time consultants; regardless of whether they work one PA or 10, the same pay figure is used in order not to discriminate against part time consultants.
Although it is the whole time equivalent salary that is used in the calculation of pension benefits, any part time service that you have will be converted to its whole time equivalent—known as “scaled service.” If a consultant were to work for 20 years doing five PAs a week then that service would be scaled down to 10 whole time equivalent years (20 years × 5/10 = 10 years).
An example of how a doctor with a mixture of full time service and part time service would have their total pensionable service calculated at retirement is given in box 2.
The effect of this consultant's part time work has been to reduce the 30.50 years of calendar service to 24.40 years of scaled service. Scaled service is the figure that is used to calculate benefits.
The benefits payable after the death of a member of the NHS pension scheme are generally very good. As well as a death gratuity, a pension can become payable to your legally married husband or wife, a civil partner, and in some cases to your children.
A death gratuity is payable to the family of a consultant after death in service, this tax-free lump sum equates to twice the consultant's actual annual pay, not the whole time equivalent.
When a male consultant dies in service, in addition to the death gratuity, the pensions agency will do a notional calculation of the ill health benefits, and his widow will receive a pension of 50% of the ill health retirement pension that he would have received on the date of death. When a male consultant dies in retirement, 50% of the pension in payment is payable as a spouse's pension.
The calculations are the same for female consultants, but a rather unfair anomaly exists across all public sector schemes; benefits payable to widowers are based only on the female member's service after 6 April 1988, despite the fact that male and female members paid the same contributions during this period. This also applies to a civil partner's benefits.
The BMA have campaigned to successive governments on this issue without success, and it is hoped that in the future it may be possible to overturn the current legal position (which states that a widower's benefits need only be paid from 1990), possibly using the Human Rights Act.
Children's benefits are calculated in the same way as a spouse's benefits but represent 25% of the member's pension, up to a maximum of 50%. It is therefore possible for up to 100% of benefits to become payable on death. Dependent children are defined as being either under 17 or in full time education.
Improving your pension and lump sum
Up until 6 April 2006 extra contributions to the NHS pension scheme were limited to an extra 9% above the 6% that consultants pay as the basic scheme contribution. Although this 9% limit has been removed in respect of contributions to additional voluntary contribution (AVC) and free standing additional voluntary contribution (FSAVC) policies, it still applies to added years contracts.
Added years are a popular method of improving benefits and there are several reasons for this. Unless you have mental health officer status then it would not normally be possible to attain the maximum service of 40 calendar years at age 60, or 45 years service at age 65, without purchasing added years. Consultants also appreciate the fact that the cost represents a fixed percentage of pay with the only risk to the investment being if the government were to go bankrupt, which it is probably fair to say is unlikely. The benefits are easy to understand; one added year provides an extra 1/80 of final pensionable pay as index linked pension and 3/80 as tax-free cash.
Added years contracts must begin from a chosen birthday and continue up to either age 60 or 65. The cost is on a sliding scale; for example, if you bought one added year from age 35 to age 60 it would cost an extra 0.85% of pay; if you delay the purchase until age 50 the cost increases to 2.25%, and at 55 it is 4.58%.
Additional voluntary contributions and free standing additional voluntary contributions
These represent a different method of benefit accrual. They work in much the same way as a personal pension in that contributions are invested and over time the fund will (hopefully) increase with investment returns. The fund must then be used to purchase an annuity, which is a financial mechanism providing extra pension in retirement. From 6 April 2006 it has been possible to pay up to 100% of earnings (less the 6% NHS pension scheme contribution) into an AVC or FSAVC policy and also to take up to 25% of the fund value as tax-free cash.
These methods of improving benefits will suit some consultants more than others and anyone considering paying extra pension contributions should consider taking independent financial advice.
Box 2 | Example of doctor with full time service and part time service
1.1.76-31.12.90—15 years, full time—15 years scaled
1.1.91-31.3.96—5.25 years, 8/10—4.20 years scaled
1.4.96-31.12.00—4.75 years, 4/10—1.90 scaled years
1.1.01-30.6.06—5.50 years, 6/10—3.30 scaled years
Total 30.50 years—24.40 scaled years
Review of the NHS pension scheme
The NHS pension scheme is currently undergoing a review and this is being done by NHS employers, the Department of Health, and staff side representatives with a view to its modernisation. Although it is possible that future NHS employees may be compelled to join a new pension scheme, possibly with a different benefit accrual and retirement age, the government has confirmed that existing members of the scheme will not have their current normal retirement age of 60 increased.
Andy Blake senior pensions officer BMA, London firstname.lastname@example.org