A guide to pensions in the NHS and private sector

A workplace pension is a financial scheme where an employee saves a percentage of their salary each month in a fund for their retirement. Their employer also puts extra money into the fund. Government underwrites these savings so the money is protected, and also gives tax breaks to encourage people to save into personal pensions. When the employee retires, they draw down the money and use it to fund their retirement. This is known as the ‘pension contract’. 

The NHS pension scheme is excellent value for money and has generous guaranteed benefits (see more below) that significantly exceed what is available in the private sector or from other forms of saving plans. However, even private sector schemes pensions are excellent forms of saving because the employer also puts in more money – typically at least matching the employees’ contributions. Government also heavily regulate private pensions so the investments are relatively safe. 

Workplace pensions are in addition to the State Pension, which most workers access at the State Retirement Age, as long as they have paid enough National Insurance (NI) contributions. NI contributions are taken from wages and benefits as a tax by the Government.

Why do I need a workplace pension?

The State pension was only ever designed to meet a pensioner’s basic needs and so additional pensions are needed if people want to afford the retirement they’d like to live.

A bit of the history

Workplace pensions were promoted after the Second World War to provide greater financial security. Before the war, the State Pension was very low and all benefits were means tested, with many not qualifying. Many workers lived in fear of retirement or getting injured at work. 

The Beveridge Report, published in 1942, set out a vision for a better, safer and fairer society when the fighting ended. The report had two main elements designed specifically to remove insecurity and poverty in old age. There were:

• A basic state pension for all, funded through a new tax called national insurance.
• A second workplace pension to top up the state pension, with tax incentives to encourage workers to contribute.

The pensions aimed to provide enough money to maintain an independent standard of living for the employee and any of their dependents. In the case of NHS staff, this was set at a maximum of 50 per cent of their final salary (plus the State Pension), based on the number of years worked. For example, most people were expected to work for 40 years, so the second workplace pension would be worth 1/80th for each year of service. For people who were expected to work for 30 years, such as graduates, the pension was worth one 60th for each year.

Changes to the workforce and working patterns meant the pension model has needed to adapt and become more flexible over time. For example, more people have periods where they work part-time and may come in and out of the NHS during their career. The model has adapted so how much you get back for each year is higher (1/54th of your earnings), and there is no cap on your pension related to your final salary (see more detail below)

How do I know I’ll get my money?

Pensions have become incredibly important to the economy, and many people rely on them. The government underwrites the pension contract, which was tightened in the wake of pension scandals in the late 1980s and early 90s. In one example, newspaper owner Robert Maxwell stole from the Mirror Group’s pension fund to pay his debts.

All pensions are a safe form of investment – but public sector pensions are the safest of all because the government is the employer. In the NHS, there isn’t really an investment pot because the contributions go to the Treasury. Countries can’t really go bankrupt, and the pension pot or liabilities cannot be sold off.

Pension benefits

If you remain in the scheme, your NHS pension now grows (also called ‘accrual’) by 1/54th of your pensionable pay. You can take this without any penalty when you reach the state pension age of 67. If you work past 67, you can continue to make contributions to increase your pension pot until you reach the age of 77. If you choose to retire before 67, your annual pension is reduced by a formula that ensures you get the same amount of benefit but spread over a slightly longer period. Currently, the average age at which people draw their NHS pension is around 62. 

NHS unions are constantly pressing to improve the benefits even further, by making flexible retirement easier and more beneficial. Unions also have seats on the NHS Pension Scheme Board and actively monitor and advise on if the scheme is working as fairly and efficiently as it should to maximise the benefits for scheme members.

When you retire, you can also choose to receive a tax-free lump sum up to a maximum of 25 per cent of the capital value of your pension, but with a corresponding reduction in pension payments. The capital value is set by a formula in legislation.

Pensionable pay covers up to your normal 37.72 hours Agenda for Change contract. Usually, overtime and additional hours (and allowances relating to overtime) are not pensionable, which means you don’t pay contributions on this money. The exception is if you work less than 37.72 hours a week (ie. part time) when all your pay is pensionable up to the equivalent of a full-time contract. 

Additional Benefits

If you are on paid maternity leave or in receipt of sick pay, your pension continues to grow as if you were working normally – your employer makes up your reduced contributions.

The NHS Scheme also has additional employment insurance in the form of an ill-health early retirement scheme. This means if you are found to be unable to work through to your normal retirement age, some or most of your pension will be made up, and you will be able to draw it early without further loss. For example, if someone is assessed as qualifying for ill-health early retirement when they are 40, most of their pension could be made up as if they’d worked to 67 – and paid to them from aged 40. 

Were you to unfortunately die whilst still working in the NHS, your dependents would qualify for an immediate payment known as a Death In Service (DiS) payment - usually twice your annual pensionable pay, plus early access to your pension.  

These additional benefits only apply to those who continue to remain active in the NHS pension scheme. 

What happens to my pension if I leave the NHS?

Anyone paying into the scheme is called an “active” member. If you stop paying into the scheme, either by opting out or if you leave the NHS and work for an employer who wasn’t part of the scheme, then you become a “deferred member”, and your pension stops growing.

It is however, protected – and its value is maintained by being increased in line with prices as long as you have been an active member for at least two years. This protection is set in legislation.

If you rejoin the NHS then your pension is reactivated and starts to grow by 1/54th of your earnings again. Below we have an example of a member following a typical radiography career pathway, showing how their pension grows over time. 

If you leave the NHS to work somewhere else in the UK, your new employer must ask if you want to enrol in their pension scheme. You can do thi,s and it will have no impact on the value of your NHS pension – although of course when you retire, all of your retirement income will be subject to tax in the same way as when you are working.

Even if you leave the NHS to work abroad you will still be entitled to your NHS pension when you reach your normal retirement age – and the UK government has a legal obligation to find you and make sure you get your pension wherever you are (although it helps if you let the Pension Agency know where you are living even if you have left the UK). 

If you are a deferred scheme member, you and your dependents can still access some benefits based upon your contributions – including access to applying for ill-health early retirement and early access to your pension if you die before normal retirement age. 

Private sector pensions

Most private sector providers are not in the NHS pension scheme. However, they must offer you a chance join a pension scheme – known as auto-enrolment.

Most private sector pensions are administered by insurance and/or investment companies for an employer and scheme members. You and your employer agree to contribute to the scheme, needing to at least match the government’s minimum rates (currently 5 per cent of annual salary for employees and 3 per cent contributed by the employer), although some employers contribute more by at least matching what the employee contributes. These contributions are invested by the pension fund and are expected to grow in value over time. How they are invested is also closely regulated by law.

You should get regular updates on the value of your pension fund. Even if you leave that employer and stop paying into the fund, it should still continue to grow in line with investment returns. Again, this is the same wherever you are in the world, although it is always helpful to let the fund administrators know if and when you move. 

These types of scheme don’t have a guaranteed value at retirement in the way the NHS scheme does. Their exact value will depend on the size of the fund at the point you choose to access the pension. Most schemes will increase contact with you as you reach the expected retirement age for the scheme and set out various options. You may also be able to make additional saving contributions to your private pension fund at different points in your career. Some private pensions can also transfer with you between employers, depending on where you move to.  

You will likely have a range of options for how to draw the money. The SoR would always advise anyone to seek independent financial advice separate from your fund administrators when considering making any decisions about accessing any pension fund.

Unlike the NHS scheme, private sector benefits are not defined in advance but depend on the performance of the investments made on your behalf by pension fund managers.

Tax breaks

The government likes to encourage people to take up second workplace pensions because these take the strain off the state pension scheme. It offers a tax incentive to scheme members by deducting all contributions from taxable earnings rather than from net pay. Tax breaks are also given to your employer to encourage them to support your pension. 

You do, however, pay tax on all your income when you retire, in line with the same rates, rules and regulations as when you are working.

A note on salary sacrifice schemes

The NHS and a number of other employers also sometimes offer workers a range of other benefits where the value is increased by taking it out of pay before tax is calculated – e.g. childcare vouchers or car lease schemes. These are known as salary sacrifice schemes. 

These can be very useful and supportive to people at different points in time. However, it is worth noting that these will be applied to your pension before your pension contributions are calculated, and so will reduce your pensionable pay (and relative contributions) by the equivalent amount. For example, if someone’s pensionable pay would normally be £40,000 and they sacrifice £5,000 a year, their pensionable pay will be calculated as £35,000.

Ongoing help and support for SoR members

The SoR can’t give members financial advice, but we can support members with concerns about any aspect of how their pension is being calculated or administered, as well as helping support members in communication with the Pension administrators (NHSBSA), such as when they are applying to draw their pension or if they are applying for ill-health early retirement.

The SoR advises all scheme members – whether active or deferred – to make sure you get (and preferably keep) an annual pension value statement. We can also help members understand pension communications and challenge any possible errors in their records. Such errors are reasonably unusual but much easier to challenge as they arise than if they are missed. This is even more important now that the NHS scheme is based on how much you earn each year rather than on your earnings as you retire.