Most consultants who have worked in the NHS will be aware of the Added Years scheme, which was replaced by the Additional Pension scheme in April last year.
The Additional Pension scheme offers considerably more choice and flexibility than the Added Years scheme. Benefits are purchased in tranches of £250 up to a maximum additional pension of £5,000 per annum. These benefits are index linked each year. There is no automatic tax-free lump sum; however this can be taken by commuting part of the pension.
The benefits purchased are known from outset. The cost of purchasing is fixed for the first four years, after this they are subject to a regular review where costs may be increased. It is possible to purchase benefits in one of two ways, either through a lump sum payment or via a monthly payment plan. If payments are made monthly the member can choose to pay over any period up to 20 years, although payments must cease by normal retirement.
It is significantly cheaper to purchase benefits via a lump sum. As an example, a 45 year-old-male doctor, purchasing £1,000 per annum in extra pension, would pay a total of £19,872 if he chose to pay over the 15 years until retirement. If those same benefits were purchased as a lump sum the cost would be £12,880.
Unlike Added Years, under the Additional Pension scheme a consultant has the option to choose not to purchase periphery benefits that would not get used. For example, a pension can be purchased without spouses benefits if these are not appropriate. The new scheme also differentiates between male and females. Although this does make benefits more expensive for female applicants.
It isn’t all good news however. As predicted the cost of the new scheme is significantly greater. A 40-year-old male will pay in the region of 6% more for the same benefits under the new scheme, and a 50-year-old male closer to 14% more. The cost for female doctors is greater still.
Spouse and dependant benefits are also reduced. Added Years provide spouse and dependant’s pensions, but the new scheme has an additional charge to add on these benefits.
So, the Additional Pension scheme is significantly more flexible than its predecessor but the downside is the cost. For many the old scheme was expensive, but the new scheme is more expensive still.
However, in times of investment uncertainty the guarantees provided will be attractive to many.
● Justine Roberts is a director of Medical & Financial, which provides independent financial consultancy to doctors. Contact her at Justine@medicalandfinancial.com, or visit www.medicalandfinancial.com for more information.
Tags: Pensions
