If becoming a doctor was your first job, the concept of pensions might be new to you. Upon starting, you may have been enrolled in the NHS pension scheme, so it’s worth learning more about it.
What is the NHS pension?
In its simplest form, a pension is a fund into which an employee and employer make contributions, which then becomes available to that employee upon retirement.
Pensions come in many shapes and forms. The NHS pension can be unlike most others found in the private sector so it’s important to understand how it works and what to expect, so you can make the right decisions.
As this page is primarily targeted to new doctors, in this article I will focus on the 2015 Scheme (which is the most recent update to the rules of the NHS pension scheme). Members who were working in the NHS prior to 2015 would have contributed to the 1995 Scheme and 2008 Scheme, but anyone currently under the age of 60 has been fully converted to the 2015 Scheme.
We’ve got a future post planned on the 1995 and 2008 schemes, so stay tuned.
How does the NHS pension work?
The NHS pension is a “Defined Benefit” or DB pension. This means that it’s NOT like your typical “pension pot” scheme (those are called “Defined Contribution” or DC pensions).
In DC pensions, you and your employer both pay contributions “into” a “pot”, that then becomes available for you to use once you retire. You can take money out of that pot, and it has a finite amount. Once you’ve used it up, it’s gone.
DB pensions used to be more common, but are now rare (except, thankfully, for the NHS pension). In these pensions, you and your employer pay a fee during your employment (also called contributions). However, this fee has no bearing on how much your pension is worth. Instead, your pension is a defined benefit that you are paid indefinitely during retirement.
In the NHS, your defined benefit is based on your salary, meaning that the amount you are paid in retirement is determined by how much you earned while working in the NHS. There is no limit to how much you can get paid, unlike DC pensions.
As you can imagine, the NHS DB pension is therefore much more generous than more common DC pensions and is considered to be a major perk of working in the NHS.
How much does it cost to join the NHS pension?
Being part of the NHS pension is a lot like paying membership fees. Your contributions don’t go into a pot, but they do give you access to a benefit during retirement.
The cost of paying into the NHS pension is fixed as a percentage of your pensionable salary.
Your pensionable salary is currently defined as your basic pay, for doctors in training. This excludes overtime, weekends, enhanced rate hours or locum hours paid.
The percentage fee varies based on how much you earn. See the table below from NHS Employers.
|Annual salary||% Contribution|
|Up to £15,431.99||5.0%|
|£15,432.00 to £21,477.99||5.6%|
|£21,478.00 to £26,823.99||7.1%|
|£26,824.00 to £47,845.99||9.3%|
|£47,846.00 to £70,630.99||12.5%|
|£70,631.00 to £111,376.99||13.5%|
|£111,377.00 and over||14.5%|
Your employer, the NHS, also contributes an extra 20.6% of your salary’s value “toward your pension”. This is just for their accounting purposes, and has no bearing on your actual pension value – so this should be ignored from your perspective.
It’s worth remembering that your pension contribution payments are deducted from your salary pre-tax, and are thus “tax-efficient”. This means you don’t pay tax on these contributions, so it’s a handy way of reducing your tax bill!
How much will the NHS pension pay me in retirement?
As mentioned earlier, the NHS pension is a Defined Benefit scheme, meaning the amount you get paid in retirement depends on an average of your pensionable salary during employment.
In the most recent version of the NHS pension scheme, the amount you are paid is calculated in two stages.
Step 1: the value of your benefit (also called the “build-up rate”) is calculated. This is equal to 1/54th of your pensionable salary (just under 2%).
Step 2: your benefit is increased in line with inflation (“revalued”) for every year you stay a member of the scheme (i.e., pay your contributions).
This is repeated for every year you work and earn a salary in the NHS (and pay your pension contributions!), and the total of all of these years’ rewards is added up to give you your annual retirement payment.
The following graphic from the NHS Pensions 2015 Members’ Guide explains how the process works:
If you’re currently employed by the NHS, you can see the value of your current “reward” here.
If you’re wondering whether the NHS pension offers a good return on investment, or is a good use of money, the calculator below can be used to estimate the future value of your current payments.
So how much will the £200 a month I’m paying now be worth later on?
It’s worth noting that upon retirement, you can opt to have up to 25% of your pension value paid up-front as a lump sum. In overly simplified terms, you would receive £12 for every £1 in annual payments you forfeit – but this is subject to multiple terms and conditions set by NHS Pensions and HMRC.
When can I get my pension?
Your NHS pension is paid from retirement until the day you die.
The default age of retirement in the 2015 scheme is the “State Pension Age” set by the government. Figuring out when this is can be slightly complicated, as it’s liable to change all the time. If you were born after 1978, the default age is 68. The calculator above can help you work this out, or otherwise, you can use the official gov.uk calculator.
You can actually take some of your pension early (as early as age 55), but your payments will be reduced to adjust for receiving payments earlier and for longer (in theory). The calculator above will also help you work this out. You can also take your pension later (up to age 75) and have the payments increased.
Leaving or taking a break
New starters often ask about what happens if they decide later on to leave the NHS, leave the UK or take a break from contributing. Full details of this can be found here.
You can generally leave the NHS pension and transfer your benefits to another pension scheme, or receive the benefits on retirement.
Depending on how long you take a break from contributing, your pension may or may not continue to rise with inflation.
And if you do decide to leave the UK, your pension can be paid to foreign bank accounts!
There are also a number of benefits to your family members in the event of your death. These include a lump sum payment for your spouse or partner, an adult dependent’s pension, and children’s pension. A full list of these benefits are listed in this member’s guide (page 22-28).
Should I contribute to a private pension as well?
You should carefully consider whether a private pension (supplemental to the NHS pension) will suit your needs. One thing to bear in mind when you do so is the lifetime allowance.
The lifetime allowance is the maximum allowed tax-free value of your “pension pot”. In 2019-20, this limit is £1,055,000. Above this amount, tax will be due to HMRC.
As a Defined Benefit (DB) pension, the NHS pension has to be evaluated slightly differently when it comes to taxes and HMRC, as there is no “pension pot” to value accurately.
In HMRC’s eyes, the value of the NHS “pension pot” is equal to 20 times the annual defined benefit of your pension.
So for example, if you are due to receive £40,000 per year in pension as your defined benefit, HMRC sees this as a “pension pot” worth £800,000.
Remember, the lifetime allowance is £1,055,000, and this is calculated as 20 times your defined benefit. This means once your defined benefit crosses £52,750, then your NHS pension has crossed the lifetime allowance.
Having an NHS pension above this lifetime allowance and a private pension, therefore, may negate some of the benefits of having a pension, as you may end up paying tax on this later on.
This is why it’s worth considering a private pension very carefully.
The bottom line?
Pensions can be complicated, particularly based on everyone’s individual circumstances. The above guide is meant to be a simple introduction to understanding how the NHS pension scheme works.
If you have any specific questions, the NHSBSA website is a useful place to start looking in some more detail, in addition to the links above. It’s always worth considering an independent financial advisor who may be able to make specific recommendations based on your needs.
If you have any feedback or questions, do leave a comment or get in touch.