Are there alternatives to the NHS Scheme?
You can choose to take out a Personal Pension through an Insurance Company, Bank, Building Society, Unit Trust or Friendly Society. The money you pay during your working life is invested to build up a cash fund which at retirement is used to buy a pension.
Up to 25% of the fund can be taken as a tax-free lump sum at retirement. You can take Personal Pension benefits on retirement at any time from age 50. You do not need to transfer your pension if you move to new employment outside the NHS, but you should remember that a Personal Pension will:
- depend on investment performance and the state of the stock market at the time you retire – neither can be guaranteed;
- be significantly reduced if you want family benefits or limited index-linking.
You will get tax relief on the payments you make, but your employer will normally only pay the minimum contribution required by law.
Commission and administration charges will reduce the amount actually invested to provide your pension. These costs vary but can be considerable.
What do they cost? Contributions vary according to the level of retirement benefits wanted. The lower the contributions, the lower the retirement benefits, so you need to make sure that you have some idea of the level of retirement benefits you are aiming for. Personal Pension providers will give you projected estimates.
You may vary your payments, but they are subject to Inland Revenue maximum limits according to age.
The Securities and Investments Board, which regulates the Personal Pensions Industry, has said employees will nearly always be better off if they belong to their occupational pension scheme
The State Pension Scheme has two parts
Flat-Rate Basic Pension
This is paid at State Pension age. Between April 2010 and 2020, State Pension age will change to 65 for everybody. The basic pension you get depends on your National Insurance contribution record.
An Additional Earnings Related Pension
This is known as State Second Pension (S2P). The amount you get depends on your earnings since April 1978 on which you have paid NI contributions.
Members of the NHS scheme do not pay anything to the earnings related part of the State Pension Scheme. This means you will only get the flat-rate retirement pension from the State, unless you have contributed to S2P in another employment.
The benefits you will get from the NHS scheme will normally be higher than those from S2P. The NHS scheme is contracted out of SERPS under the 1995 Pensions Act. This requires the NHS scheme to meet a statutory standard by giving benefits that are broadly equivalent to, or better than, those in a ‘reference scheme’.
For scheme members with service before 1st April 1997, we guarantee that your NHS pension will be at least as much as the SERPS part of the State pension would have been. This guaranteed amount is called the Guaranteed Minimum Pension.
State pensions are index-linked
- NHS scheme members qualify for a flat-rate basic pension based on their contribution record, though they are contracted out of S2P;
- there are fewer benefits under S2P and they are likely to be lower than those of the NHS scheme.
What does it cost? You will pay the full rate of NI contributions and you will not get any tax relief on this additional contribution.
If you are in any doubt about the right choice for you, get independent financial advice.
The essential thing to remember is that you should make your pension arrangements as early as possible in your working life. Delay will make it more expensive to ensure adequate arrangements later.