The number of workers choosing to leave the NHS Pension Scheme is on the rise despite the benefits on offer. NHS employees could be giving up a huge amount of retirement income in relation to their contributions, figures show.
Data from the NHS Business Services Authority show 245,561 NHS staff have opted out of the pension scheme in the last three years. It’s a figure that represents 16% of active members, according to Royal London calculations. With one in six not choosing to save into their Workplace Pension, some NHS employees could find themselves struggling financially when they retire or missing out on valuable benefits.
The number opting out of the NHS Pension Scheme is around five times higher than the figure recorded by other comparable public pension funds:
- Around 3.4% of members of the Teachers’ Pension Scheme opt out
- 1.45% of those eligible for the Civil Service Pension Scheme do the same
- And just 0.04% of members of the Armed Forces Scheme stop pension contributions
While the NHS Pension Scheme has gone through a number of changes in recent years, it’s still an attractive scheme for many employees. The scheme is a Defined Benefit pension, meaning you’ll receive a pre-defined income when you reach retirement. However, the changes mean you could receive a retirement income dependent on either your salary when you leave, a career average, or a combination of the two. The current contribution rate varies, depending on salary, ranging from 5% to 14.5%.
Steve Webb, Director of Policy at Royal London, said, “The NHS as an employer needs to take urgent action to tackle this epidemic of pension opt-outs. All public sector workers have faced a squeeze on their take-home pay in recent years, but it is the NHS where this has translated into shockingly high numbers of people leaving the pension scheme.”
While financial pressure is a reason some may be opting out, changes to tax relief limits are also having an impact. Whatever the reason for considering opting out, there are other factors to carefully think about before going ahead with plans.
Opting out to save money in the short term
The contributions for members of the NHS Pension Scheme can initially seem high, particularly when compared to Defined Contribution alternatives. However, the benefits typically outweigh this. As a result, the short-term gains of stopping contributions can mean significantly missing out in the long term.
Royal London estimates that in order to receive the same level of pension benefits, workers opting out would have to contribute a lump sum around nine times what they save. Being a member of the scheme is often a savvy financial move when you look at it from a long-term financial perspective.
For example, the research found that an NHS worker earning £25,000 would have to contribute 7.1%, equating to £1,420 income after tax each year, if they opted out. But replacing that pension in retirement would cost around £13,000.
Opting out due to limits for high earners
For high-earners within the NHS, the recent changes may have made the scheme less attractive than it once was.
In 2016, the tapered Annual Allowance was introduced. This means that the allowance for those with an income of more than £150,000 can result in additional tax charges. The Lifetime Allowance has also been reduced significantly over time and is currently £1.03 million. Again, exceeding this allowance can result in further taxation. As a result, some high-earners with the NHS have chosen to stop making pension contributions in order not to breach the limits.
Despite this, the auxiliary benefits should still mean you think carefully before leaving the scheme. One of the key benefits of the NHS scheme is the protection it can provide loved ones should you die. A qualifying nominated partner, for example, can receive a lump sum when you die, equivalent to around two times your annual earnings. An adult dependent’s pension and children’s pension can also give you peace of mind that your death wouldn’t cause financial hardship to your family.
Taking a balanced approach
Whatever your reasons for considering leaving the NHS Pension Scheme, taking a balanced approach is crucial. You should spend some time weighing up the long-term implications before you make any decision. It’s a step that could affect your financial security, and that of your family, in the future.
Financial planning can help you understand the short, medium and long-term implications of opting out of a pension scheme, giving you the information if you decide to leave. Should you decide that opting out is right for you, it can also help you to create a wider plan to ensure that your financial security isn’t negatively affected.
Please note: A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation, which are subject to change in the future.
