NHS Pensions Frequently Asked Questions

Some commonly asked questions about the NHS Pension scheme, if you have a query that is not answered here, please give us a call on 0800 881 8085 or complete the enquiry form to the right for a call back and we will be happy to discuss your scheme.

Q. Lord Hutton announced proposed changes to Public Sector Pensions including The NHS Pension - what are the main changes?

A. Future Changes to the NHSPS:

The report contained a number of important changes to the future of public sector pension schemes to include the following key recommendations:-

  • Past service pension rights should continue to be linked to final earnings for current scheme members.
  • As soon as practical, current members should are moved to new schemes for future pension service based on a benefit design of Care Average Revalued Earnings (CARE).
  • Accrued pensions for active members should be revalued in line with average earnings until retirement and then increase in line with prices in payment.
  • A single benefit design should be maintained and differences between low and high earners should be addressed by tiered contribution rates.
  • Flexible retirement should be encouraged and abatement of pensions should be eliminated. Also, caps on pensions should be removed or significantly lifted.
  • The retirement age under the new scheme should be directly linked to the State Pension Age (i.e. 65 increased to 66 in 2010).
  • For the uniformed services (army, police and fire-fighters) the retirement age should be increased from 55 to 60.
  • All public sector schemes should issue Annual Benefit Statements to active scheme members and use technology to engage with members.
  • The new schemes should be implemented before the end of the current parliamentary term (i.e. by 2015).

Q. The Government has made changes to pension legislation limiting the amount I can contribute each year to £50,000. What does that mean in practice?

A. The Annual Allowance reduced significantly to £50,000 from 6th April 2011 from £255,000. The Annual Allowance restricts the level of pension savings that can be made in any one year with the benefit of full tax relief. Pension savings include any pension contributions paid on your behalf (for example by an employer or other third party). Where pension savings are made that exceed the Annual Allowance a tax charge will be levied. The tax charge will mirror the amount of tax relief provided on the excess contribution, effectively clawing back the tax relief provided. Tax relief continues to be provided at your highest marginal rate of tax.

As well as the reduction of the Annual Allowance, the Government has introduced changes as to how annual pension benefits within the NHSPS (and other defined benefit schemes) are valued for testing against the Annual Allowance. Until 5th April 2011 a standard actuarial factor of 10:1 was used. From 6th April 2011, the factor was increased to 16:1 although it will be possible to revalue the starting pension in each year by the increase in the Consumer Prices Index (CPi) to partly offset the impact of the higher factor. The relevant annual increase in the CPi to the previous September is used to revalue the pension. The increase in the CPi for the year to September 2010 was 3.1%.

Self Employed GP 1995 section with pensionable salary of £130,000 and £3m Lifetime Earnings

Opening Value £42,000.00 1.4% of £3,000,000
£672,000.00 Multiply by Annual Allowance factor of 16
£126,000.00 Add potential Tax Free Cash (3 times Pension)
£798,000.00 Total
£822,738.00 Increase by 3.1% (CPI figure for Sept of year before)
Closing Value £3,201,000.00 31st March increased by dynamisation of 6.7% (Sept CPI +1.5%)
£3,331,000.00 Add £130,000 for this year
£46,634.00 1.4% of value
£139,902.00 Add Tax Free Cash
£886,046.00 Total

Allowance is Closing Value £886,046 – Opening Value £822,738 = £63,308


Do not forget to include any private pension contributions in the calculation.

Carry Forward of Unused Relief:

To assist manage "spikes" in pension increases the Government has introduced a carry forward facility. This allows any unused tax relief from the previous 3 tax years to be carried forward and used to justify any contributions in excess of the £50,000 Annual Allowance. Indeed, the carry forward facility has been made available retrospectively by establishing a ‘deemed’ Annual Allowance of £50,000 for each of the tax years; 2008/09, 2009/10 and 2010/11. The main condition to qualify for carry forward from those 3 tax years is that you had to have been a member of a registered pension scheme in each year. It is not a requirement that you had to make a contribution in each year.

Q. The Lifetime amount I can have in my pension has been reduced to £1.5 million, what should I do as it looks as though my pension benefits will exceed this?

A. The SLA reduced down to £1.5 million from 6th April 2012. This represents a reduction of £300,000 from the previous SLA of £1.8 million. Whilst the Government will review the SLA again in 2016, there is no guarantee that it will increase in the future. The SLA is the total amount of tax privileged pension savings that you are allowed to accumulate within registered pension schemes. Once benefits are taken that exceed the SLA then a tax charge is levied. The tax charge is 55% if the excess if taken as an immediate lump sum. If the excess pension savings are used to provide pension income then the tax charge is reduced to 25%, although it should be borne in mind that the pension income will then be subject to tax.

Any existing entitlement to enhanced or primary protection from A-day will be honoured.

Strategies for Managing the Lifetime Allowance

It is important to plan ahead in order to manage the potential impact on your pension savings from the Lifetime Allowance. This applies equally if you are subject to the standard lifetime allowance or have a higher personal allowance due to eligibility for; primary, enhanced or fixed protection. Whilst it may not necessarily be a complete disadvantage to incur a Lifetime Allowance tax charge, it would generally be preferable to avoid such a charge if at all possible.

The simplest way to manage the Lifetime Allowance is to regularly monitor the level of your pension savings and the growth achieved on these savings. In respect of the NHSPS it is important to monitor future changes in pensionable earnings, as they are likely to be key consideration for management of the Lifetime Allowance.

Where it is highly likely that your projected pensions savings will exceed the Lifetime Allowance available at your normal retirement age, then certain decisions can be made to minimise the resulting tax charge. These include the following key strategies:-

Opting out of the NHSPS.

It is possible to submit a written election to opt-out of the NHSPS scheme for future service. This will result in you being treated as a deferred member of the scheme, much in the same way as if you had left pensionable service with your employer.

In addition to the NHSPS pension benefits, any decision to become a deferred member has a significant impact on a number of valuable associated benefits. Furthermore, these change once you have been a deferred member for more than a period of 12 months.

The key differences can be summarised as follows:-

Death within 12 months of leaving scheme Death after 12 months of leaving scheme
Lump sum of three times annual pension Lump sum of three times annual pension
No six months short term pension payable No six months short term pension payable
Widow’s pension of 50% of tier two Ill Health retirement Pension Widow’s pension of 50% of members pension as at date of death (no enhancement)
Widower’s or partner’s pension of 50% of Ill health retirement Pension (post 6.4.88 membership only) Widower’s or partner’s pension of 50% members pension as at date of death (post 6.4.88 membership only)
Dependant’s pension of 25% of tier two Ill Health Retirement Pension (up to maximum of 50% for two or more dependants) Dependant’s pension of 25% of tier two Ill Health Retirement Pension (up to maximum of 50% for two or more dependants)

It should also be understood that for a deferred member any future ill-health retirement is only paid if the deferred member is unable to undertake any regular employment and no IHRP enhancement is provided. The rules on the payment of a serious ill-health lump sum are no different for deferred members.

Consequently, any decision to opt-out of future service should not be taken lightly. It is unlikely to be in the best interests of the vast majority of scheme members to make the decision to opt-out. In general terms therefore, it should be noted that opting-out is unlikely to be in your financial interest. Accruing additional pension benefits, albeit subject to a possible Lifetime Allowance tax charge, is normally a better option than opting-out. Any decision to opt-out should therefore be an exception rather than the norm.

Maximising your Pension Commencement Lump Sum (PCLS) on retirement.

Due to the different ways that pension and lump sums are valued for testing against the Lifetime Allowance, selecting a higher PCLS usually means that less of the available Lifetime Allowance is used up at the time of taking your pension benefits. Tools are available that allow you to calculate the maximum PCLS that you can select and the pension exchanged as a result.

Allocation of Pension to a Dependant.

Subject to certain conditions, you may give up (allocate) part of your pension to provide for a pension, to be paid after your death, to another person. That person may be a spouse, civil partner, nominated partner or someone who is dependent upon you for support. Choosing to allocate will result in a reduction to your retirement pension. If an allocation is made in favour of the spouse, civil partner, or nominated qualifying partner, they will get the allocated pension as well as their survivor’s pension from the scheme.

To apply to allocate part of your pension in this way you must be in good health and will need to have a medical examination at your own expense. It is not necessary for the beneficiary to be medically examined, but you should satisfy yourself that the person is likely to live as long as you. This is because of the fact that If the beneficiary dies before you, the allocation cannot be cancelled under any circumstances, and the allocated part of the pension would be lost forever. You will only be allowed to cancel or change an application to allocate a pension before it is accepted by the NHS Pensions Agency.

It is not possible to allocate more than one third of your pension and any pension for the beneficiary must be, at least, £260.00 a year. Your pension (post allocation) must also exceed the beneficiary’s allocated pension. The amount of pension the beneficiary will receive depends on your age, the beneficiary’s age and whether the individual is male or female.

This course of action results in a reduction in the ‘deemed’ value of your pension for the purposes of testing against the Lifetime Allowance. However, an allocation of pension to your beneficiary should only be exercised with extreme caution, after full consideration of the key issues.

Taking pension benefits early and leaving NHS service.

It is possible to take your NHSPS early from age 55 onwards. Your pension benefits are reduced by an actuarial factor for each year that benefits are taken early. The reduction is applied due to the fact that your pension is paid early and therefore over a greater number of years. You will also cease to accrue future pension benefits. Taking benefits early will reduce the amount of the Lifetime Allowance used, when compared with unreduced benefits at normal retirement age. Future pension savings are also not accumulated. The key decision is therefore foregoing future pension savings in favour of early payment of scheme benefits.

Taking pension benefits early and remaining in NHS service.

It is also possible to take your NHSPS benefits but then return to employment with the NHS. This is sometimes referred to as ‘24 hr retirement’ because a period of at least 24 hours must have elapsed before you are allowed to return to work. Furthermore, during the first month after returning to work you will not be allowed to work more than 16 hours in any one week.

It is essential to bear in mind that permission must be obtained, in writing, from your employer confirming that they are happy to agree with this arrangement prior to making a decision.

Of course, another key issue is the level of the Lifetime Allowance given that this reduced from 6th April 2012, although very little can be done to influence the level of the Lifetime Allowance in the future. This is very much down to Government policy

Q. I have personal pensions as well as the NHS Pension, do I still have to buy an annuity?

A. Important changes have been made to how pension benefits are paid on retirement. The benefits payable under the NHSPS are largely unaffected by the new rules. However, other pension arrangements may be able to benefit from the increased accessibility and flexibility afforded by the new rules.

As well as the introduction of Flexible Drawdown, the Government has simplified some of the rules governing the treatment of benefits pre and post age 75. These largely affect drawdown contracts, sometimes referred to as ‘unsecured pensions’. Drawdown relates to the ability to take pension income directly from a money purchase pension fund as opposed to through the purchase of an annuity. However, to ensure that the capital within a pension fund is not significantly eroded by income payments, the Government Actuary’s Department (GAD) lays down the maximum permitted annual income. The main changes are as follows:-

  • New GAD rates (used to restrict the level of annual income that can be taken from a drawdown contract) have been used from April 2011. These have been updated to reflect current morality experience.
  • The maximum income allowed under standard drawdown rules reduced from 120% to 100% of the new GAD limits.
  • The maximum income allowed most be reviewed at least triennially before age 75 and then annually from age 75 onwards.
  • In the event of death in drawdown the residual fund can be used to provide lump sum death benefits. These will be subject to a special tax deduction of 55% (up from the previous 35% tax rate). There is no longer a distinction between death before or after age 75.

With Flexible Drawdown the fundamental feature is that the maximum permitted pension is unrestricted. There is no GAD maximum income level. It will be possible to take as much income as is required from one year to the next. Indeed, it will be possible to take the whole of the pension fund as a single pension payment. Any pension payment will be subject to income tax in the normal manner. It is still possible to take no income, should circumstances dictate.

To qualify for flexible drawdown, it will be necessary to declare the existence of secure pension income of at least £20,000 per annum. The £20,000 level is expected to increase over time. This is referred to as the Minimum Income Requirement (MIR). This secure pension income can be paid up of State Pensions, secure income from an Occupation Pension Scheme and income provided through existing annuity contracts. Existing drawdown income or unsecured pensions are not deemed to represent secure pension income. The NHSPS annual pension will qualify as secure income for the purposes of flexible drawdown.

Once flexible drawdown is selected it will not be possible to make further pension savings without incurring a tax charge. This is because the Annual Allowance for anyone taking flexible drawdown income will be ‘nil’. As such, all pension savings will be subject to a tax charge at an individual’s highest marginal rate.

Flexible drawdown allows flexibility and access. If an individual meets the £20,000 MIR and has made the decision not to make any further pension savings then it would be prudent to have flexible drawdown as a possible option. This would require individuals to make a declaration to the Scheme Administrator(s) of their existing money purchase pension plans. Once the declaration has been made, flexible drawdown becomes an option for later use (if appropriate). This also then guards against an increase in the £20,000 MIR level, as you only need to satisfy the conditions for flexible drawdown at the time of making the declaration.

The main advantage of flexible drawdown is the lack of a maximum GAD restriction on the level of annual pension that can be taken. This provides much greater access to pension funds and a higher degree of flexibility in choosing the annual pension entitlement.

In contrast the main disadvantage of flexible retirement relates to the tax treatment of taking pension income. Any payments would be subject to income tax deductions in the year of payment and so, large payments are likely to incur the highest rate of tax. Pension funds also have tax advantages in that they are largely free of investment and capital gains tax and also, enjoy favourable inheritance tax treatment. Removing funds from a registered pension scheme can therefore result in higher rates of income, capital gains and inheritance tax. This should be carefully considered before taking advantage of flexible drawdown.

There are risks associated with flexible drawdown and so, this option is unlikely to be a suitable option for all individuals. Whilst flexible drawdown does allow access to pension funds, this does have a potential detrimental affect on future income.