NHS pension scheme: Nearly a quarter of a million active members have opted out in the past three years
The NHS is being urged to give staff financial advice to combat an ‘eyewatering’ 16 per cent opt-out rate from its pension scheme.
Health service workers are shunning the valuable scheme because of a lack of understanding of the benefits they are giving up, according to a pensions expert.
There are also fears many NHS staff feel unable to afford the pension contributions.
Nearly a quarter of a million active members have opted out in the past three years, a Freedom of Information request by the Health Service Journal found.
NHS workers aged 26-35 are mostly likely to leave the scheme, with some 30,000 doing so in 2017.
It is particularly concerning many younger staff are opting out, often because of concerns about affordability, says Chase de Vere Medical, which provides financial advice to health professionals and is a partner of the British Medical Association.
Its head, Andrea Sproates, said of the departures: ‘At present it is likely that many members are leaving the scheme without a clear understanding of what they’re giving up, a decision they are likely to regret in the future.’
She adds: ‘The whole package of being a member of the NHS Pension Scheme is extremely valuable, but is under-valued by a lack of understanding and awareness of what members’ contributions are really paying for, how much the Government adds and the benefits the scheme provides.
‘It is clear from the eye-watering opt-out rates that there is a huge need for NHS employees to be provided with financial education or advice, so that they can make informed decisions about their pension scheme.’
Comparable figures showed teachers’ opt out rate from their pension scheme was 3.4 per cent over the past three years, civil servants’ was 1.45 per cent, and the armed forces’ was 0.04 per cent, according to FOI responses obtained by Royal London.
Meanwhile, some 10million people have now been auto-enrolled into pension schemes, with the opt-out rate running under 10 per cent.
The NHS is Britain’s biggest employer, and one of the top ten biggest employers globally.
We look at the reasons NHS workers are rejecting the chance to participate in a generous pension scheme and what they are giving up. NHS Pensions also gives its response below.
Why are NHS workers opting out of pensions?
Financial pressures as well as lack of knowledge of scheme benefits are believed to be behind the exodus from NHS Pensions.
Staff across the public sector have faced a number of squeezes on their take-home pay in recent years which may have contributed to high opt-out levels, according to Steve Webb, former pensions minister and now policy director at Royal London.
These include a series of public sector pay freezes or below-inflation increases, the ending of contracting out in 2016 which led to an increase in National Insurance payments, and increased contribution rates into public service pension schemes.
What are defined benefit and defined contribution pensions?
Generous gold-plated defined benefit – or final salary – pensions provide a guaranteed income after retirement until you die.
Most private sector employers have now replaced them with stingier and riskier defined contribution pensions.
These take contributions from both employer and employee and invest them to provide a pot of money at retirement, but the worker bears all the investment risk.
Webb adds that while automatic enrolment into private sector ‘defined contribution’ pensions was phased in very gradually, public sector workers in ‘defined benefit’ schemes were enrolled at the full rate overnight.
That will have been much more of a ‘shock’ to their take-home pay than private sector workers experienced, but it is not yet clear why the financial pressures cited above have had more impact in the NHS than in other public sector pension schemes, says Webb.
‘The NHS as an employer needs to take urgent action to tackle this epidemic of pension opt-outs,’ he adds.
‘The NHS needs to find better ways to communicate the value of NHS pensions, otherwise large numbers of NHS staff risk a retirement in poverty.’
There is a separate issue thought to be driving opt-outs among older NHS professionals who are closer to retirement, and which could be prompting some to stop work earlier than they would have otherwise.
This is that they are bumping up against the annual allowance or the lifetime allowance, which is the maximum savers can stash in pension pots each year or in total over a career and still get tax relief on contributions.
What happens if your pension payments breach annual or lifetime limits?
If you put more than £40,000 in a year into your pension, you won’t get any tax relief on any amount above that limit.
If your employer does it on your behalf, it has to levy your usual income tax rate on anything above the limit.
The lifetime allowance is not a limit on how much can be paid into a pension, as savers can continue paying in above it.
However, hefty tax charges will then hit them when they retire. Any money above this level taken as income incurs an extra 25 per cent charge and as a lump sum it incurs a 55 per cent charge – this comes on top of normal income tax.
This effectively makes paying into a pension above the lifetime allowance uneconomical, as any benefits built up are heavily penalised.
The annual allowance is currently £40,000 a year, while the lifetime allowance is set to rise in line with inflation from the present £1,030,000 ceiling to £1,055,000 this April.
The lifetime allowance hit a peak of £1.8million in 2010-2012 and has been cut dramatically since then. If you go over the limit you face hefty charges – see the box below.
Andy James, head of retirement planning at financial group Tilney, says: ‘The near 40 per cent reduction in the lifetime allowance since its peak has become a stealth tax on professionals and a disincentive to both save and, in some cases, work.
‘It is hardly surprising that GPs and many other individuals in government pension schemes decide to stop working early rather than continue with little or no further pension benefit accruing and so a measure intended to constrain the cost of pension tax reliefs by successive Chancellors is now exacerbating staff shortages in the NHS.
‘The lifetime allowance is fundamentally punitive in nature.
‘Both contributions and accrual are controlled by the annual allowance and so the case of a lifetime cap is dubious.’
What pension benefits are NHS workers giving up?
A typical nurse on £25,000 a year currently has to pay a contribution of 7.1 per cent before tax relief so saves £1,420 by opting out of NHS Pensions, according to Royal London figures.
But nurses also give up a large employer contribution into their pension. And replacing that pension in retirement would cost a lump sum of around £13,000 – meaning by opting out staff are giving up around nine times what they save.
Royal London calculated the replacement cost based on buying an inflation-proofed annuity with partner survivor benefits at a rate of 3.56 per cent at age 65, using the Money Advice Service comparator site.
Chase de Vere Medical says younger NHS employees are often on lower salaries and so paying into the NHS Pension Scheme may seem like a big expense for a benefit which is many years away.
Andrea Sproates: ‘The whole package of being a member of the NHS Pension Scheme is extremely valuable’
It explains that for those earning up to £47,846 per annum, employee pension contributions can be up to 9.3 per cent.
But the Government pays in 14.3 per cent in England and Wales, 14.9 per cent in Scotland and 16.3 per cent in Northern Ireland.
Defined benefit pots offer guaranteed inflation-proofed payouts from retirement until you die, and typically carrying on paying a reduced pension to spouses if they survive you.
By comparison, private sector auto enrolment ‘defined contribution’ schemes involve far lower staff and employer contributions than public sector ‘defined benefit’, also known as final salary or more recently career average, pensions.
Unlike workers in public sector schemes, staff also bear any investment risks when building up their pot, and may end up investing throughout retirement too, unless they buy an annuity. However, these are out of favour due to poor rates and restrictive conditions.
Meanwhile, NHS pension members with large pots who are worried about the lifetime allowance might also be losing out by choosing to leave the scheme or simply retire, the tax charges notwithstanding. See the box below.
Sproates of Chase de Vere Medical says: ‘Senior doctors and consultants would also benefit from financial education or advice.
‘Many are opting out of the scheme because they are facing tax charges, but they may be better off staying put, even after the tax charges are taken into account, or could find ways to reduce their tax charges, for example, by taking a larger retirement lump sum.’
What does NHS Pensions say?
Should you stop contributing to your pension when you hit your annual or lifetime allowance?
Savers who fear a hefty tax penalty could lose out more in the long run if they halt contributions. Read a Mail on Sunday guide here.
Theresa Britton, head of NHS Pensions, offered the following response to concerns about the staff opt-out rate.
The NHS Pension scheme is the largest centrally administered scheme in Europe and offers excellent benefits for members when they retire.
All new starters receive information about the scheme and can join at any time throughout their career. Clearly it is always individual choice regarding how to prepare for retirement.
The employer contribution is 14.38 per cent and employee contribution is based on what they earn.
We also work closely with NHS Employers and issue all scheme members with an annual Total Rewards Statement which outlines the benefits of working for the NHS including details of their pension.
In line with the auto enrolment practices, all NHS employees are automatically enrolled into the NHS Pension Scheme by their employer unless they elect to opt out.
A person may opt out of the NHS Pension Scheme for many reasons; however we do not hold data as to their reasons why.
Although the number of individuals opting out may appear to have risen in recent years, this may be due to the ‘three year cycle’.
Where a person has opted out, their employer must enrol them back into the scheme after three years unless the person decides to opt out again. For example, a person who opted out of the scheme in 2014/15 and decided to opt out again in 2017/18 is counted twice.
While the number of individuals opting out may have increased, there is no evidence to suggest any significant trends.
All NHS employers must provide their employees with local information about the scheme and in most cases the employer actually pays more pension contributions than their employee does.
The NHS Pension Scheme communicates valuable information to members and their dependants, through various sources including newsletters, the NHS Business Services Authority website and a personalised Annual Benefit Statement (Total Reward Statement).
This Statement demonstrates the growth in the value of their NHS pension benefits year upon year, the level of life assurance cover provided by the scheme and highlights information on the wider benefits of working within the NHS.
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