1. Pension decision day passes but
where does that leave you?
Changes to NHS pensions have caused turmoil amongst doctors and medical professionals,
leaving many concerned about their retirement. Recently a 51 year old practitioner sat down
with Thomas Skinner, senior consultant at Smith & Williamson, the accountancy and investment
management group, to discuss his financial options as he approaches retirement. The following
questions and answers are based on that discussion.
1. “I have been busy with work recently
and I haven’t kept up with the changes to
pensions. Have I missed something and made
a mistake?”
The recent changes in March 2015 gave members of the NHS
pension scheme the opportunity to transfer their existing
pension savings in to an alternative section of the scheme.
This was the second time that members were given the
opportunity to transfer their benefits to different NHS
pension schemes, hence the name ’Choice 2’.
The first time that practitioners were given the option to
change their NHS pension benefits followed the introduction
of Section 2008 which was considered more flexible than its
predecessor, Section 1995, and allowed you to draw benefits
without retiring fully. However, as the retirement age for
Section 2008 is 65 many members may have chosen to retain
their Section 1995 benefits, which allows retirement at age
60. If you did not elect to transfer out of the scheme at
either opportunity then your benefits remain in the older
Section 1995 scheme.
Your date of birth is a hugely important factor. Had you been
a 49 year old doctor, any new pension contributions would
automatically be paid into the new Section 2015 scheme
because anyone born after August 1965 was automatically
transferred. Had you been born before April 1962 you would
have been unaffected. However, because you were born
between April 1962 and August 1965 you are able to continue
in one of the older Sections but will have a ’transitional date’
in the future when you will join the new 2015 Section. Your
transitional date is April 2017.
A lot of people are now left in a situation where they have
two schemes. A section 1995 pot that they can no longer
add to, and a growing section 2015 pot. As a result, some
members may choose to wait until state pension age to draw
the second (Section 2015) part of their pension.
To respond to your question, ‘Have you made a mistake?’ No,
it appears not, however, everyone’s situation is different.
Major factors include your anticipated age of retirement and
the amount of private versus NHS work that you do because
of the impact on your eventual pension.
2. “What happens now? Can I still retire at 60?”
Yes, there is nothing to stop you from retiring at 60.
However, this would require you to resign from your NHS
position if you wished to draw your Section 1995 benefits. If
you then continued to work for the NHS, this would be known
as ‘retire and return’. Importantly, this would result in you
being unable to accrue benefits in the 2015 scheme.
Section 2015 has a faster accrual rate, i.e. a shorter amount
of time to accrue benefits but as it is based on average
earnings, rather than final salary, the pot may be smaller
and it has a later retirement age as it is in line with state
retirement. Therein lies the problem for many members; do
they access benefits or keep contributing? Those in private
practice and who have set up a private pension alongside
their NHS pension have much more flexibility over when they
access benefits
3. “I use salary sacrifice, will this affect my
pension?”
Yes. Whether it is a car lease, season ticket loan or another
non-cash benefit, any form of salary sacrifice reduces your
contractual pensionable pay. Whilst this may decrease
your current tax liability, it also reduces your long-term
pensionable pay. In other words, opting for salary sacrifice
reduces the figure used to calculate your pension and as a
result you would receive a lower pension income.
This issue becomes more important when considering your
transitional date, which for you is April 2017. It is worth
remembering that your Section 1995 or Section 2008 are
final salary schemes. However, for these purposes, it is
your salary at your transition date to the new Section
2015 that determines your Section 1995 or Section 2008
benefits at retirement. Therefore, you need to consider your
financial situation both at the date of transition and the
preceding years.
In this, individual case, calculations demonstrated that
remaining in the car lease scheme would reduce the
consultant’s pension by £5,000 a year. So, if you are an
independent practitioner, not only is it worth considering
whether you pay for the vehicle under salary sacrifice, but
also, if it is used for business purposes, as this may mean a
proportion is relievable as a business expense.
August 2015smith.williamson.co.uk

2. 4. “I would like to increase my pension income at
retirement but I understand ‘added years’ have
ceased, what are my alternatives?”
The option to buy added years ended in 2009. It has since
been replaced by “additional pension”. This allows a scheme
member to decide how much additional income they would like
in retirement. The cost is then paid for monthly or by a single
payment, in a similar manner to the added years contract. Unlike
added years, it does not generate tax-free cash automatically
at retirement but, rather, is then added as additional pension
income, depending on how much is purchased at the outset, up to
certain limits. Members can generate a personal quotation on the
NHS pension website and from this quotation consider the current
costs compared to alternative saving options, such as ISAs and
personal pensions.
5. “What do these changes mean for retirement?”
If you want to retire at 60 we would advise you to create a
portfolio of savings and investments, including ISAs, private
pensions and additional pension. This would allow access to
funds to bridge the eight year gap between your Section 1995
pension benefits and your Section 2015 benefits. One suggestion
could be to work part-time as an independent consultant; this
would allow access to the Section 1995 pension, as you are no
longer contributing to an NHS pension scheme, but also provide
sufficient additional income to keep you, and your family, in their
accustomed lifestyle.
Ultimately everyone is unique and so some decisions are
essential! This is a complex area and so professional advice
may be appropriate to advise you on these decisions. First and
foremost, when would you like to retire and in what manner? For
example, do you wish to retire completely or phase retirement?
Once you have made those decisions and considered what you
have already accrued, you need to ask: ‘Will this be sufficient?’
and ‘What are the risks of falling short of hitting your target?’
and finally, ‘What funding options are available to secure the
retirement you desire?’ To summarise, a realistic plan needs to be
drawn up.
Thomas Skinner, senior consultant at Smith & Williamson
t: 020 7131 4492
e: thomas.skinner@smith.williamson.co.uk
smith.williamson.co.uk
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. No
responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.
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