Private fee conversion – what about my pension?
Letting go of your NHS contract has some certain advantages, not least a release from the pressure of targets. However your NHS pension should be a consideration if you are making the move to private fee income. Even if you have already done this, or plan to, it is likely that you will have already accrued some NHS pension.
What amount of NHS pension do I already have and what is it worth?
Where you previously held an NHS contract you may have taken little notice of the pension provision arising from this. You will have accrued pension in one or more of the 3 NHS pension schemes: the 1995, 2008 or the 2015 scheme. Which scheme you are in largely depends on when you qualified. Things that differ between each scheme are the rate at which your pension accrues and crucially the retirement age. For the 1995 scheme the retirement age is 60 and the accrual rate is 1.4% of you Net Pensionable Earnings (NPE or ‘NHS pay’). For the 2008 scheme the accrual rate is 1.87% of NPE and the retirement age is 65. For the 2015 scheme the accrual rate is 1.85% of you NPE and the retirement age is 65.
For example, the accrual rate simply means that in a year where you have £100,000 of NPE (not untypical for a full-time NHS practitioner) you will accrue £1,400 of taxable pension at the retirement age of 60. Carry on like this for 35 years and you will have 35 x £100,000 x 1.4% as a pension at age 60, giving you a taxable pension of £49,000 pa. The pension is inflation linked and guaranteed for life with a built in 50% widow’s benefit.
Translated into hard cash, buying an income (known as an annuity) of £49,000 pa would cost around £1.25m in today’s money.
You can find out what your NHS pension is actually worth by getting hold of your Total Reward Statement (www.totalrewardstatements.nhs.uk/) .
As a side note: from 1st April 2022 all active NHS pension members will accrue pension in the 2015 pension scheme. A recent court case resulting in the McCloud judgement means that anyone who was forced in the 2015 scheme back in 2015, will have their service between 2015 and 2022 rolled back into either the 1995 scheme or the 2008 scheme.
NHS income also comes with an additional benefit in the form of death in service. Death in service is usually 2 x your actual NHS pay (depending on which scheme you are in) but only applies to active members or if you have recently retired. Death in service can be replaced by life cover subject to medical underwriting and your age at application.
Replacing the NHS pension
So, the NHS pension might be considered a valuable asset. If you are giving up future NHS pension accrual because you won’t have any NHS income you should consider how to replace this. There are several ways of looking at this:
Replace your NHS pension with a personal pension (often a SIPP): A SIPP is a credible alternative to the NHS pension as your contributions attract tax relief, however there are a few caveats to consider:
- Paying the same amount into a SIPP as you were previously personally contributing to your NHS pension will probably not be enough to provide a pension equivalent to the NHS pension. This is because the government was also contributing to your NHS pension. Some forecasting is required here to ensure you pay an adequate amount into your SIPP to achieve the required fund size at retirement.
- There are limits on how much you can pay into SIPP. This is currently set at £60,000 gross pa. However, if you earn in excess of £260,000 you may have this annual allowance tapered by HMRC.
- A SIPP investment is likely to involve investment risk. Whilst this can be managed, a SIPP doesn’t necessarily provide a guaranteed pension such as the NHS pension.
Setting your patient fees accordingly: Whilst there is no ‘one solution fits all’ here, some forecasting of your retirement income needs might be helpful to better understand your how profitable your practice needs to be. Any fee schedule will be influenced by multiple factors such as location, staffing costs, your equipment considerations, etc.
Where you move from an NHS environment to a private fee environment you should also factor in additional costs such as replacing your NHS pension and or life cover to replace the death in service benefits.
In brief, a major change to your practice, such as reducing your NHS output or removing it altogether, is therefore a time to reconsider your financial planning objectives.
