Does the NHS pension scheme still represent good value for money?

“Is it worth being in the NHS Pension Scheme or should I be doing something else to fund my retirement?”

With NHS Pension Scheme contributions as high as 14.5% of pay for some, penalties of 5% per year if you want to take benefits ‘early’ at 60, and possible tax charges if your NHS Pension causes you to breach your annual or lifetime allowances, that’s a question you could easily be forgiven for asking.

On the one hand, the new pension freedoms have made personal pensions the obvious, more attractive alternative. On the other hand, the NHS Pension Scheme’s fringe benefits are hard to replicate elsewhere. Benefits such as the Ill Health Retirement Pension, Life Cover (death in service), and uplifts for the spouses pension.

To truly answer the question “Does the NHS Pension Scheme still represent good value for money?”, here are 3 age dependent examples*: age 25, 35 and 45. Remember, many in their 50+ year olds aren’t affected by the 2015 Scheme changes.

You’re 25 years old

Your basic pay is £30,000. Your planned retirement age is 68 (state pension age). You have little or no pension in the old 1995 and/or 2008 NHS Pension Schemes and you are a member of the 2015 NHS Pension Scheme.

NHS Pension vs Personal Pension for a 25 year old

  • 1 year’s NHS Pension contribution will give you an NHS Pension of £2,365.25 per annum (index linked) at age 68.
  • To provide an equivalent pension at age 68, you would have to pay 29.7% of your basic pay that year into a personal pension. That’s 20.4% more than the 9.3% contribution that you currently pay into your NHS Pension.

You’re 35 years old

Your basic pay is £45,000. Your planned retirement age is 65 (earlier than state pension age). You have some pension in the old 1995 and/or 2008 NHS Pension Schemes and you are a member of the 2015 NHS Pension Scheme.

NHS Pension vs Personal Pension for a 35 year old

  • 1 year’s NHS Pension contribution will give you an NHS Pension of £1920.91 per annum (index linked) at age 65.
  • To provide an equivalent pension at age 65, you would have to pay 43.3% of your basic pay that year into a personal pension. That’s 34% more than the 9.3% contribution that you currently pay into your NHS Pension.
You’re 45 years old

Your basic pay is £80,000. Your planned retirement age is 60 (much earlier than state pension age; early retirement penalties will apply). You have some pension in the old 1995 and/or 2008 NHS Pension Schemes and you are a member of the 2015 NHS Pension Scheme.

NHS Pension vs Personal Pension for a 45 year old

  • 1 year’s NHS Pension contribution will give you an NHS Pension of £1,638.12 per annum (index linked) at age 60.
  • To provide an equivalent pension at age 60, you would have to pay 41.11% of your basic pay that year into a personal pension. That’s 27.61% more than the 13.5% contribution that you currently pay into your NHS Pension.

So, is the NHS Pension Scheme still good value for money?

With the examples above, it would take either some extreme investment choices or high contributions to match the equivalent NHS Pension. Not only is the NHS Pension Scheme still good value for money, importantly, a major part of your retirement planning is taken care of for you.

Other considerations worth noting

If you expect to have annual or lifetime pension allowance issues in the future, the excess tax charges that you’ll incur will affect the generous nature of the NHS Pension. Financial advice should be sought if you think that these allowances may affect you now or in years to come.

You should also note that, if annuity rates increase, the outcome of the NHS Pension ‘value for money’ debate may well change. For that reason alone, it’s worth keeping up-to-date and regularly reviewing both your retirement plan and your overall financial plan.

Whilst this is article looks at the comparable cost of replicating NHS pension scheme benefits, it is not designed to provide advice in terms of whether you should join, remain or leave the NHS pension scheme. You should always think very carefully before making such a decision. The NHS website is very informative (link?) but you should also speak to a qualified financial adviser who really understands the NHS scheme and can relate the advantages and disadvantages to your individual circumstances so that you are an informed position.

* Each example given: uses 1 year’s pension contribution in isolation; provides the equivalent proportion of income needed to produce a similar pension if the individual opted out of the NHS Pension and used a personal pension and lifetime annuity instead; uses a lifetime annuity with inflationary increases and a spouse’s pension for calculating the personal pension benefits. Earnings can and do vary from those given.

Our articles are designed to be informative but do not constitute financial advice. We recommend seeking specialist advice before making a decision.

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The Financial Conduct Authority does not regulate offshore investments, tax advice, estate planning and some forms of mortgages. The tax reliefs referred to on our articles are those currently applying in the United Kingdom to UK Tax Residents. These tax reliefs are liable to change. The value of any tax relief available will depend upon the individual circumstances of the taxpayer.

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