NHS pension versus personal pension
Uniquely, self-employed dentists can be members of the NHS pension scheme. Jon Drysdale looks at the pros and cons
Associates starting their first self-employed NHS job remain members of the NHS pension scheme despite giving up their employed status. Being self-employed and benefiting from an employer’s pension scheme is unique to dentists and General Medical Practitioners. No other professions offer this perk to the self-employed. However, the NHS pension is not what it used to be and many members seek to supplement their pension with additional retirement savings.
Pay more, retire later
What you get out of an NHS pension will depend on when you qualified. Dentists qualifying before 2008 looked forward to a retirement age of 60, contributions rates as low as 6 per cent of NHS income and automatic entitlement to a tax-free lump sum worth three times the pension. However, the global financial crisis of 2008 and subsequent Government imposed ‘austerity’ has changed public sector pension schemes for good.
Any dentist qualifying after 2015 will have their NHS pension age linked to the state pension age. For most this will be age 68. The state pension age may increase further. No longer is automatic tax-free cash available. To take a tax-free lump sum from your NHS pension at retirement you will be required to give up some of your pension on a ratio of 1:12. For example, a lump sum of £60,000 will cost £5,000 of pension.
Contribution rates have increased steadily in recent years and tiered contribution rates now apply. This could mean contributions are as high as 14.5 per cent – more than double the flat rate of 6 per cent that once existed. Most dentists fall into tier 4 or above, with minimum contribution levels of 9.3 per cent. Contribution rates are only set until March 2019 and could rise further (see below).
Assuming you don’t wish to work to age 68 or later, it is important to build up an alternative source of retirement income. For many, the simplest and most flexible arrangement is a personal pension. There are fundamental differences between the NHS pension and personal pensions. An NHS pension is an arrangement between you and the NHS. A personal pension is a savings pot.
An NHS pension example
The NHS pension is based on a proportion (1.85 per cent) of your NHS earnings. If you have £60,000 of NHS income, you will accrue £1,110 of pension at state retirement age in one year alone. Assuming a 37-year career to age 60 and the unlikely event of unchanging NHS income, this might be a pension of £41,070pa at state retirement age (37 x 1.85 per cent x £60,000). The pension is taxable and payable for life.
Personal pension rules
1. For higher rate tax payers, there is no more tax efficient saving than making pension contributions. In the following example, a contribution of £250 has cost only £150.
2. You can’t access your pension pot until age 55.
3. At age 55 or later you can take up to 25 per cent out without any tax liability. Any amount beyond 25 per cent will incur income tax.
4. There is no time limit on drawing your pension.
5. In the event of your death before age 75, the pension is released as cash to your dependants without tax liability. After age 75 you can pass the pension onto your dependents (it remains as a pension).
6. Contributions are limited to £40,000pa and can be stopped and started as you wish.
Think long term
Short-term investment volatility should not concern you early on in your career as the pension will remain invested for many years. The returns of risk-based investments over the longer term have always outpaced cash and inflation by a significant margin. Nevertheless, seek advice on how your pension is invested and review it regularly.
Projecting a contribution of £200 per month over 30 years reveals a final savings pot of £234,000. This assumes investment growth of 7 per cent and increased contributions in line with inflation. While this may not build a pension pot large enough to provide a ‘plan B’ for retirement, it is a good start to complementing your NHS pension income.
About the author
Jon Drysdale is an independent financial adviser for chartered financial planners, PFM Dental, which has offices in Edinburgh and York. Go to www.pfmdental.co.uk