We have said 50:50 may not always be as effective an option as members might think.
It will take analysis in any particular case.
So Royal London has gone one step further here to see how the numbers might stack up for a typical hospital clinician under a 50:50 plan, compared with full membership and with simply declining overtime work.
Case study
Ursula is a 50-year-old anaesthetist in Leeds with pensionable pay of £127,000 as at March 31 2019.
She has been accruing benefits under the NHS career average scheme since April 1 2015, but she also has 15 years of final salary benefits in the NHS 1995 section, which – as long as there has been no break in service of more than five years – remain linked to her final salary when she comes to retire.
Her contributions to the scheme are 14.5 per cent of pensionable pay.
In 2019-20 she expects to earn additional pay of £8,000 in additional non-pensionable overtime.
She receives a pay award of £3,810 on April 1 2019 and as she has no carry forward available, is concerned that the impact of the tapered annual allowance means she should leave the NHS scheme.
Her plan is to retire in 10 years at age 60 when she will be able to take her 1995 section benefits without actuarial reduction.
Ursula is not yet certain whether she will take her career average benefits at the same time, in which case they will be actuarially reduced for early payment, or at a later date.
The table summarises the outcome of Royal London’s analysis shown as the overall benefit to Ursula against costs.
For the 50:50 plan we have assumed that Ursula pays 50 per cent of the standard NHS contribution and receives 50 per cent growth in her career average benefits in return.
We have assumed her preserved final salary benefits are unaffected by this election and remain linked to the salaries she earns in the career average scheme.
| Option 1 Hypothetical 50:50 plan | Option 2 Full contribution | Option 3 Stay in scheme on full contribution but decline overtime |
Ursula’s costs (tax charge + gross contribution) | £9,484 | £24,140 | £22,540 |
Additional benefit accrued | Pension = £2,356 Lump sum = £2,143 | Pension = £3,615 Lump sum = £2,143 | Pension = £3,615 Lump sum = £2,143 BUT £8,000 less taxable income |
Estimated gross value of additional pension over 20-year retirement | £89,445 | £137,249 | £137,249 |
Gross costs as a proportion of estimated total gross benefits | 10.6% | 17.6% | 21.2% |
Source: Royal London
In Ursula’s case, the 50:50 plan looks like a reasonable option. But analysis will be needed in any particular case.
Royal London will be issuing an update to its adviser policy paper, ‘Why paying a tax charge isn’t always a bad thing’ soon.
This will contain the detailed numbers for this case study, more information about options for doctors and on giving advice in this space.
Moira Warner is senior business development manager at Royal London
