Why are so many opting out of the NHS pension?

NHS staff quitting generous pensions at an alarming rate. Widely regarded as one of the best pensions still available, just why are 16% of employees opting out of this solid-gold retirement plan? It’s a combination of a lack of understanding and the pressure on wages, says Tanya Jefferies

This is an edited version of an article which first appeared on the thisismoney website.

Nearly a quarter of a million active members of the NHS pension scheme have opted out over the past three years, a Freedom of Information (FOI) request by the Health Service Journal has found. NHS workers aged 26-35 are most likely to leave the scheme, with some 30,000 doing so in 2017.

It is particularly concerning that many younger staff are opting out, often because of concerns about affordability, says Chase de Vere Medical, which provides financial advice to health professionals and is a partner of the British Medical Association. Its head, Andrea Sproates, said of the departures, “At present, it is likely that many members are leaving the scheme without a clear understanding of what they’re giving up – a decision they are likely to regret in the future.”

Comparable figures show teachers’ opt out rate from their pension scheme was 3.4 % over the past three years, civil servants’ was 1.45%, and the armed forces’ was 0.04%, according to FOI responses obtained by Royal London.

We look at the reasons why NHS workers are rejecting the chance to participate in a generous pension scheme and what they are giving up.

Why are NHS workers opting out of pensions?

Financial pressures, as well as lack of knowledge of scheme benefits, are believed to be behind the exodus from NHS Pensions. Staff across the public sector have faced a number of squeezes on their take-home pay in recent years which may have contributed to high opt-out levels, according to Steve Webb, former pensions minister and now policy director at Royal London.

Financial pressures, as well as lack of knowledge of scheme benefits, are believed to be behind the exodus from NHS Pensions.

These include a series of public sector pay freezes, or below-inflation increases, the ending of contracting out in 2016, which led to an increase in National Insurance payments, and increased contribution rates into public service pension schemes. Webb adds that, while automatic enrolment into private sector ‘defined contribution’ pensions was phased in very gradually, public sector workers in ‘defined benefit’ schemes were enrolled at the full rate, overnight.

That will have been much more of a ‘shock’ to their take-home pay than private sector workers experienced, but it is not yet clear why the financial pressures, cited above, have had more impact in the NHS than in other public sector pension schemes, says Webb. “The NHS, as an employer, needs to take urgent action to tackle this epidemic of pension opt-outs,” he says. “The NHS needs to find better ways to communicate the value of NHS pensions, otherwise large numbers of NHS staff risk a retirement in poverty.”

Maximum contributions

There is a separate issue thought to be driving opt-outs among older NHS professionals who are closer to retirement, and which could be prompting some to stop work earlier than they would have otherwise done. This is that they are bumping up against the annual allowance – or the lifetime allowance – which is the maximum amount which savers can stash in pension pots each year, or in total over a career, and still receive tax relief on contributions.

The annual allowance is currently £40,000 a year, while the lifetime allowance is set to rise in line with inflation from the present £1,030,000 ceiling to £1,055,000 this April. The lifetime allowance hit a peak of £1.8million in 2010-2012 and has been cut dramatically since then; if you go over the limit you can face hefty charges.

“The near 40% reduction in the lifetime allowance since its peak has become a stealth tax on professionals and a disincentive to both save and, in some cases, work,” says Andy James, head of retirement planning at financial group Tilney. “It is hardly surprising that GPs, and many other individuals in government pension schemes, decide to stop working early, rather than continue with little or no further pension benefit accruing, and so a measure intended to constrain the cost of pension tax reliefs by successive chancellors is now exacerbating staff shortages in the NHS.”

Benefit giveaway

A typical nurse on £25,000 a year currently has to pay a contribution of 7.1% before tax relief and so will save £1,420 by opting out of NHS Pensions, according to Royal London figures. However, nurses also give up a large employer contribution into their pensions and replacing that pension in retirement would cost a lump sum of around £13,000 – meaning that, by opting out, staff are giving up around nine times what they save.

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Royal London has calculated this replacement cost based on buying an inflation-proofed annuity, with partner survivor benefits, at a rate of 3.56% at age 65, using the Money Advice Service comparator site. Chase de Vere Medical points out that younger NHS employees are often on lower salaries and so paying into the NHS Pension Scheme may seem like a big expense for a benefit which is many years away.

For those earning up to £47,846 per annum, employee pension contributions can be up to 9.3%; however, the government pays in 14.3% in England and Wales, 14.9% in Scotland and 16.3% in Northern Ireland. Defined benefit pots offer guaranteed, inflation-proofed pay-outs from retirement until you die and, typically, carry on paying a reduced pension to your spouse if they survive you.

For those earning up to £47,846 per annum, employee pension contributions can be up to 9.3%; however, the government pays in 14.3%.

By comparison, private sector, auto-enrolment ‘defined contribution’ schemes involve far lower staff and employer contributions than public sector ‘defined benefit’ schemes – which are also known as final salary or, more recently, career average, pensions.  Unlike workers in public sector schemes, staff also bear any investment risks when building up their pension pot and may end up investing throughout retirement too, unless they buy an annuity. However, these are currently out of favour due to poor rates and restrictive conditions.

Meanwhile, NHS pension members with large pots who are worried about the lifetime allowance might also be losing out by choosing to leave the scheme or simply retire, tax charges notwithstanding.

NHS pension members with large pots who are worried about the lifetime allowance might also be losing out by choosing to leave the scheme or simply retire, tax charges notwithstanding.

“Many are opting out of the scheme because they are facing tax charges,” Andrea Sproates of Chase de Vere Medical says, “but they may be better off staying put, even after the tax charges are taken into account, or they could find ways to reduce their tax charges, for example, by taking a larger retirement lump sum.”

The NHS pension scheme is one of the most generous available. Anyone thinking of leaving should seek independent professional advice before doing so because reducing expenditure in the short term may cost you dearly in the long term.

What does NHS Pensions say?

Theresa Britton, head of NHS Pensions, offered the following response to concerns about the staff opt-out rate.

The NHS pension scheme is the largest centrally administered scheme in Europe and offers excellent benefits for members when they retire.

All new starters receive information about the scheme and can join at any time throughout their careers. Clearly, it is always an individual choice regarding how to prepare for retirement. The employer contribution is 14.38% and employee contribution is based on what they earn.

We also work closely with NHS Employers and issue all scheme members with an annual Total Rewards Statement which outlines the benefits of working for the NHS, including details of their pension. In line with the auto-enrolment practices, all NHS employees are automatically enrolled into the NHS pension scheme by their employer unless they elect to opt out.

A person may opt out of the NHS pension scheme for many reasons; however, we do not hold data as to their reasons why. Although the number of individuals opting out may appear to have risen in recent years, this may be due to the ‘three year cycle’.

Where a person has opted out, their employer must enrol them back into the scheme after three years unless the person decides to opt out again. For example, a person who opted out of the scheme in 2014/15, and decided to opt out again in 2017/18 is counted twice. While the number of individuals opting out may have increased, there is no evidence to suggest any significant trends.

All NHS employers must provide their employees with local information about the scheme and, in most cases, the employer actually pays more in pension contributions than their employee does.

All NHS employers must provide their employees with local information about the scheme and, in most cases, the employer actually pays more in pension contributions than their employee does.

The NHS pension scheme communicates valuable information to members and their dependants, through various sources including newsletters, the NHS Business Services Authority website and a personalised Annual Benefit Statement (Total Reward Statement).

This statement demonstrates the growth in the value of their NHS pension benefits year-upon-year, the level of life assurance cover provided by the scheme and highlights information on the wider benefits of working within the NHS.

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