There’s lots of noise across social media on the NHS Pension Scheme, especially about opting out. Some of this emanates from data which has recently become available following a Freedom of Information data request. (1)
Is this a problem?
Maybe. There are likely to be two main ‘opters out’ groups. The first will be those who choose to not participate due to affordability, lack of understanding or other priorities (perceived or real). Across Europe’s largest employer, this should not be seen as unusual or alarmist.
The second group – those generating the social media comment – is the ‘higher earners’ who have some sort of pensions tax issue. It’s this group which makes me sigh inwardly.
My business is built on making sure the pensions decisions individuals make are better informed. So, you shouldn’t be surprised that I’m passionate about it. I aim to empower individuals to scrutinise, assess and understand their own position taking into account a range of factors. It doesn’t mean making life-changing decisions based on basic or misguided observations from Twitter.
Is help necessary?
For most financial decisions we rely on either good quality research or professional help. Examples include insurance, mortgages, personal loans and some holidays. Yet I know of numerous examples of individuals who have opted out of the NHS pension Scheme without taking advice, or worse, taking advice from those who have overlooked or misinterpreted key facts.
The pensions tax regime is an enigma. It creates uncertainty and an emotive response. Add in years of changes and distrust and cynicism is to be expected … which in turn can lead to decisions rooted in emotion, not facts.
Anyone considering opting out of the pension scheme for any period needs to set aside their emotive response and fully understand the value of the benefit they will be giving up. This is not just your own pension, but also your dependants’ pension and death in service benefits. It is possible to do this yourself in the same way it is possible to carry out a medical procedure on yourself. But would you? And if you did would you do it based on what you learnt on social media?
The importance of reframing
Reframing is a cognitive technique which changes the way you look at something to alter your perception of it. In this context, it is helpful to reframe a possible pensions tax charge as a ‘pensions adjustment’. In combination with all the relevant facts and information, this will improve the quality of the decision you make. Consider this example:
Scenario – reframed
What if I said you have received a pay increment and because of this, your pension has increased by £5,000 per annum? Not only have you had an increase in your take home pay but your pension has increased significantly. You will receive an additional £5,000 per annum when you retire, until you die, increased in line with inflation. Your dependant benefits, payable on your death, are also increased by around £2,250 per annum. A positive outcome.
Scenario – before ‘reframing’
What if I told you that behind the schemes, your pay increment had actually increased your pension by £6,000 per annum. However, you had a pensions tax charge (2) arising from the pay increment. In total this was £22,400, which feels like an enormous number and would generate the aforementioned emotional response. But the Scheme can pay this tax charge for you, in return for a benefit reduction. This is what reduces the £6,000 per annum to £5,000 per annum.
Scenario – relying on your emotional response
Yes, it is a tax charge, and it is a big number. It is (let’s be honest) calculated in a ridiculous fashion and we would all prefer that this were reviewed and amended to something more sensible. But if your emotional response had been to opt out of the scheme, your pension would not be increased. You would not be adding that £5,000 per annum to your pension or the £2,250 per annum to your dependant benefits.
Are you lecturing me?
Maybe. Consider also the Lifetime Allowance which is assessed at the time you put your benefits into payment, i.e., not now. Exceeding the allowance will mean paying a tax charge on the excess. However, the pension benefits still increase. Reframing this as an adjustment, rather than as an attack on your finances may increase your pension benefits by £ tens of thousands.
Public sector pensions are hugely valuable and you should scrutinise, assess and understand your own position before surrendering them. You may need help and support with this, but that’s okay because the sums involved are significant and it is important. It doesn’t mean you have to agree with the tax, it just means you make better decisions about how to mitigate its impact.
(1)
(2)
The data is from a Freedom of Information data request by Quilter Financial Advisers
The tax charge referred to would be the Annual Allowance and this is a realistic scenario, i.e. it could happen.
