Staying in vs opting out of the NHS Pension Scheme

Introduction

The NHS Pension Scheme represents a significant and valuable component of the remuneration package for those employed within the NHS. Offering a reliable and generous pension upon retirement, the scheme ensures financial stability and peace of mind for countless healthcare professionals. However, understanding the full extent of these benefits, and the potential repercussions of opting out, is crucial for making informed decisions about one's financial future.

Benefits of being in the NHS Pension Scheme

1. Defined benefit pension

One of the primary advantages of the NHS Pension Scheme is its defined benefit structure. Unlike defined contribution schemes, where the pension amount depends on investment performance, a defined benefit pension guarantees a specific income upon retirement. This income is calculated based on years of service and pensionable income, offering predictability and security.

2. Tax relief

Contributions to the NHS Pension Scheme are eligible for tax relief, meaning that the amount paid into the scheme is deducted from gross income before income tax is applied. This tax-efficient saving mechanism enhances the overall value of pension saving.

3. Ill health retirement

In the unfortunate event of ill health preventing continued employment, the NHS Pension Scheme offers ill health retirement benefits. Depending on the severity of the condition, members may be entitled to an enhanced pension, providing vital financial support during challenging times.

4. Death in service benefits

Another crucial benefit is the provision of death in service benefits. In the event of a member's death while still employed by the NHS, a lump sum payment is made to their nominated beneficiaries. Additionally, eligible dependants may receive ongoing pension benefits, ensuring financial support for loved ones.

5. Pension increases

Benefits in the 2015 scheme and practitioner benefits within the 1995/2008 sections increase by a dynamisation factor, which is inflation plus 1.5%. Other members with benefits in the 1995/2008 schemes are based on final pensionable pay figures, and increases in pensionable pay should cause these legacy scheme benefits to increase.

Consequences of opting out of the NHS Pension Scheme

If you opt out of the pension scheme and have two or more years of qualifying scheme membership, you will be treated as a deferred member. If you have less than two years of qualifying service, then your contributions may be refunded to you (less tax) if you do not resume pensionable service within five years of leaving.

Deferred members have different benefits to active members of the scheme.

1. Pension increases

Opting out of the NHS Pension Scheme means benefits already accrued will increase in line with inflation only. Members miss out on the additional 1.5% uplift, and increases in pensionable pay do not lead to increased pension entitlements. Rejoining the scheme within five years will generate a catch-up of missed increases in the year of rejoining the scheme. This can cause issues for annual allowance tax charges due to the catch-up in the year of rejoining. If the member is opted out for more than five years, then the benefits will only increase in line with inflation.

2. Reduced tax efficiency

Without the tax relief benefits associated with the NHS Pension Scheme, employees opting out must seek alternative retirement savings vehicles. These alternatives may not offer the same level of tax efficiency, potentially reducing the overall value of the retirement savings.

3. Other benefits lost

Opting out of the NHS Pension Scheme also means losing death in service benefits, ill health retirement benefits, access to redundancy options in relation to pension benefits, and the use of partial retirement/drawdown. In addition, those with historical Mental Health Officer (MHO) status can only retire from age 55 onwards if they’re in active pensionable service in a role which would have held MHO status had the 1995 section rules prevailed.

The death in service benefits change once you’ve been a deferred member for longer than 12 months, and the key differences are:

4. Added years and ERRBO contracts

Opting out of the pension scheme for more than 365 days will terminate any added years or additional pension contracts. ERRBO contracts will continue as long as the break is less than five years.

Need help?

The NHS Pension Scheme provides a host of valuable benefits, including a defined benefit pension, tax relief, ill health retirement benefits, death in service benefits, and pension increases. Opting out of the scheme changes or removes these benefits.

It’s essential to consider the long-term implications before making the decision to opt out, and we strongly recommend seeking independent financial advice.

Get in touch with your usual Larking Gowen contact or email enquiry@larking-gowen.co.uk

George Crowe