As a physio working in the NHS, you’re likely to be facing fundamental changes in your pension contributions in the years ahead. Frontline explains how the changes will hit you in the pocket and could undermine your future financial security.
The government’s proposals will hit members in three ways, making you:
- Pay more by increasing contributions by just under 50 per cent on average,
- Get less by raising the normal NHS pension age in stages to 68 by 2046, and bringing the normal NHS staff pension age in line with the state pension age, and
- Work longer by cutting benefits available when you retire, by moving away from a final salary pension to one based on a career average.
- Contributions will go up
- Under government plans announced in October 2010, many public service workers will see their contributions rise by just under 50 per cent on average by April 2014.
- The government plans to increase the amount you pay into your pensions by an average of 3.2 percentage points by 2014. Most people pay around 6.5 per cent of their pensionable pay towards their pension.
- This is due to take place between April 2012 and April 2014.
- This increase in contributions alone will mean a Band 6 physiotherapist on pay point 21, working full time and earning £25,528 a year, would have to pay an additional £383 a year before tax relief by 2014.
- A Band 7 on pay point 26, earning £30,460 a year, would pay an additional £822 gross.
- A Band 8A on pay point 33, on £38,851 a year, would pay £1049 gross extra.
A career average will replace your final salary scheme
The government is proposing to replace the current final salary scheme with a career average, or Career Average Revalued Earnings (CARE) scheme. The plan is for the new NHS career average scheme to be introduced by 2015.
You and your employer will continue to contribute to your pension if it moves to a career average scheme, but the move will mean most members will get a reduced pension once they retire.
Career average schemes calculate your pension on your average earnings over the whole time you have been a member of the scheme. The way they work means anybody who has made any career progression will be disadvantaged.
If that’s not enough, you will be losing out yet more, because ministers want not just to change to CARE, but to change the ‘accrual’ rate as well. This will mean that the amount of income you earn towards your pension for each year will be lower than you expected. Some experts have suggested that it could be as much as 25 per cent lower.
Cost of living
Also, the way your pension income is protected from increases in the cost of living has already been changed.
The government imposed a decision that it would no longer link NHS pension increases in payment to the retail price index (RPI).
It is now tied to a measure of inflation known as the consumer price index (CPI), which is usually a lower annual rate. The RPI in September 2010, which this April’s increase was based on, was 4.6 per cent whereas CPI was 3.1 per cent.
Over time this could cut the real value of your income in retirement by a further 10 or 15 per cent.
Experts categorise career average schemes as ‘defined benefit’ schemes like your current final salary scheme. But what you receive when you retire will be less predictable than with your current final salary pension, making planning for your future financial security more difficult.
The NHS retirement age could go up
The government is proposing to introduce an automatic link between the NHS normal pension age and the state pension age, which is currently due to rise in stages up to age 68 in 2046. This could see older members working one to six years longer, with younger members (aged under 34) working up to eight years longer.
For those aged 34 and younger it would mean not being able to take a full NHS pension until the age of 68. Those aged between 34 and 42 would be able to retire on a full NHS pension at 67. Those aged 42 to around 57 would be able to retire on a full pension at 66. You would, of course, have to pay contributions for these extra years.
You could still retire before your new normal pension age, as decided by the government, but your income would be ‘actuarially reduced’, by roughly 4.2 per cent a year on current arrangements.
How much will you lose?
Check out our new pensions calculator – go to www.csp.org.uk/pensions and follow the link to the NHS Pensions Ready Reckoner
For information on the decision taken by the CSP’s Industrial Relations Committee, see page 9. For more information on how NHS pension plans affect you go to: www.csp.org.uk/pensions
- Career average scheme: For each year you are a member of the pension scheme, a proportion of your annual pensionable pay is set aside. The amount depends on the accrual rate, expressed as a percentage or a fraction (1/60th). This sum is then up-rated annually to reflect inflation or annual earnings. This could be CPI, RPI or national average earnings. This is called career average revalued earnings (CARE).
- Final salary scheme: a scheme where your pension is a proportion of your pay near to retirement rather than being based on your average earnings over the whole time you have been a member of the scheme.
- CPI – consumer price index: is a measure of inflation that is more narrowly defined (excluding housing costs for example) and so is generally lower than the retail price index (RPI). It typically runs behind wages, including NHS rises.
- Accrual rate: The rate (or formula) used to calculate the pension benefit in a defined benefit occupational pension scheme. The NHS 2008 pension scheme is based on 1/60th of your pensionable salary in the last few years.
- Pension income: the amount you will receive each year in retirement
- Actuarially reduced: a pension taken early, whose value is reduced by an actuary to allow for the fact the pension will be taken for longer.
- Normal pension age: the age at which you can take your full NHS pension.
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