What your NHS pension statement isn’t telling you

Edited November 2024

For many dentists, understanding their NHS pension is crucial to helping them calculate how much money they will have when they retire. Unfortunately, the Annual Benefit Statement or Total Rewards Statement, provided by NHS pensions, doesn’t give you all the information you need to make informed choices about your future.

Thomas Dickson, Chartered Financial Planner at Wealthwide explains the five key parts that are missing and what you need to do to fully understand what your pension will be worth at retirement.

Total Rewards Statement

Once you have managed to get hold of your Annual Benefit Statement, you will be able to see the pension you have accrued to date (or at least to the date specified on the statement). However, you will need to add in any superannuation since that statement date as well as the pension you are likely accrue from now up to your retirement date. If you are plan to remain working in the NHS, you can also add a further 1.5% dynamisation factor each year on your existing accrued pension. This is in addition to the inflation factor. Although this might not seem significant, a £40,000 pension increasing by just the dynamisation factor of 1.5% compound over 15 years would increase to £50,000 - a 25% increase in your pension.

Annual Allowance - Scheme Pays

In recent years, many members have exceeded their annual allowance of £60,000 (or less if their income was over £260,000). If they had no unused allowances to carry forward from previous years, then this creates an annual allowance tax charge. They either had to pay this tax charge personally to HMRC or ask the NHS scheme to pay on their behalf by electing for scheme pays.

Electing for “scheme pays” means your final pension will be reduced to cover the tax the NHS has paid on your behalf (except for the 2019/20 tax year when NHS England agreed to pay this without reduction). The NHS also charges interest at a set rate plus inflation.

To work out what impact this will have, you need to have a record of all the scheme pays elections you have made (you can contact NHS pensions if you don’t have this to hand), multiply each year by the interest rate plus inflation and divide by another factor based on when you plan to retire. You then deduct this from the benefits payable at retirement which you can find on your Total Rewards Statement.

Lifetime Allowance

The Finance Bill 2023/24 included the measures needed to abolish the lifetime allowance from 6 April 2024. However, any lump sums paid from pensions that are in excess of £268,275 [25% of £1,073,100] remain subject to income tax. Those with either Fixed or Individual Protection are entitled to a higher pension commencement lump sum.

Please note any personal pension values also need to be taken into account when calculating if you are affected by the lifetime allowance.

So if your lump sum is higher than £268,275, remember to deduct your marginal rate of tax for the excess. Many of our clients opt to have a reduced pension, and increase their pension commencement lump sum to £268,275 and provided they have not already taken any other pensions, this can be paid tax-free. You just need to tick the following box on your AW8 form when you claim your pension benefits: B. The maximum tax free amount, or… tick yes!

McCloud judgment

Following the McCloud judgment, members benefits accrued from April 2015 to April 2022, will automatically fall into their 1995 or 2008 section pension. This means that these benefits can be paid at age 60 (1995 section) or 65 (2008 section) rather than being linked to the State Pension Age. NHS pensions haven recently started sending out members remedial statements that confirm the McCloud impact on retirement benefits. All superannuation since April 2022 will fall into the 2015 section and benefits are payable from your state retirement age - likely to be 67 or 68 for most dentists.

Taking the NHS pension before your normal retirement age

Many members are concerned there is a penalty for taking benefits before their normal retirement age. However, we feel that the better term for this is an ‘actuarial adjustment’. I would definitely encourage all members to do the maths, and although the annual pension will be lower (1995 section: age 59 - 4%, age 58 - 8%, age 57 - 12%) it is worth remembering that you would be getting the pension for an additional one, two or three years, and the breakeven point is often nearly 20 years into retirement. If you are no longer accruing any benefits, taking the pension early could allow you to have the financial freedom to do the things you want to do, and in some cases might actually reduce the amount of tax you pay.