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Dentists Who Invest

Episode 249

The NHS Pension Summarized

Hosted By: Dr. James Martin

James: 

Fans of the Dennis who Invests podcast. If you feel like there was one particular episode in the back catalogue in the anthology of Dennis who Invests podcast episodes that really, really really was massively valuable to you, feel free to share that with a fellow dental colleague who’s in a similar position, so their understanding of finance can be elevated and they can hit the next level of financial success in their life. Also, as well as that, if you could take two seconds to rate and review this podcast, it would mean the world. To me. What that would mean is that it drives this podcast further in terms of reach so that more dentists across the world can be able to benefit from the knowledge contained therein. Welcome, welcome to the Dentists who Invest podcast. What is up everybody? Welcome back to the Dentists who Investistry invest podcast. Guys, this is a podcast I’ve been looking forward to for quite some time, because we are here today to talk about the nhs pension. Eagle eyed or eagle eared. Listeners of the podcast know that we already have two, but they were so long ago that I wanted to revisit it, make an all-in-one podcast which covers the salient points of the NHS pension, and to assist me in achieving that today, I have sat across the table the virtual table, because of course this is on Zoom my good friend, financial advisor Ian Hawke.

James: 

Ian, how are you today? Good thanks, james. How are you? Yeah, I’m 10 out of 10, mate. I’m looking forward to this. I’m looking forward to having an all-under-one-roof NHS podcast, because the NHS podcast, those two NHS podcasts that we have already are like by far and away runaway successes compared to the rest of the other podcasts. They’ve all done well, but those ones have done particularly well. So I’m really excited to create this today because I know it’s going to help a lot of people. Good, yes, hot topic, always a hot topic, huge topic, and you know what? The stuff in here will be relevant for doctors as well. So we should definitely get the message out there about that too, which I’m sure we will in due course. Ian, you’re relatively new to the Dentist Infest group because we met not that long ago. Maybe it might be nice to do a little bit of an intro.

Ian: 

Yeah, definitely. So I’ve been giving financial advice for God 24 years I don’t look like it, but about 24 years. I’ve been working with dentists and medics for probably about seven years independently and specializing in the NHS and retirement for about well, my whole career actually, but mainly the seven years just gone in dentists and medics.

James: 

Top stuff. Let’s jump straight in. So people who have listened to the previous NHS podcast will know that it works a little differently from your traditional pension. So instead of me taking the words out of your mouth, ian, and us repeating ourselves, let’s go ahead. I’ll let you cover that, because, of course, you’re the man with the knowledge and you do this every day.

Ian: 

Yeah, definitely. So I think if we start with a kind of refresher, because within the NHS there is one NHS pension scheme but there’s three components that you will be in, or you could be in one or two or three of them, and these will depend on when you joined the NHS but also some choices that you made along the way. So the original pension scheme, the original NHS pension scheme, is the 1995 pension scheme. This is kind of the original gold-plated pension scheme that you’d be in if you joined the NHS prior to 2008. And the way this pension scheme works is different. It depends on whether you’re a hospital dentist or whether you’re a principal, and the way this pension scheme works is different. It depends on whether you’re a hospital dentist or whether you’re a principal. And effectively what happens is that if you’re a hospital dentist, then you’re on a final salary pension and each year that you work in the NHS you accrue one 80th of your pension as a salary, as a pension. If you’re a principal, however, it’s a bit different. You are in a career average pension scheme and each year that you work in the NHS you put up a pot of pension Over your lifetime that builds up and then you get that pension at the end of the when you retire. Effectively, the way this pension works, you can retire at the age of 60. And when it comes to retirement, you get an income for life which is guaranteed and index linked, and you also get a tax-free lump sum of three times your pension. So that’s the 1995 pension Final salary. Hospital dentists retire at 60 and you get an income plus tax-free lump sum.

Ian: 

2008, though, they changed the pension scheme and they introduced the 2008 pension scheme. If you were already in the 1995 scheme, you were given the choice as to whether you want to move into the 2000 scheme or not. So you’re given a choice. What I found is from experience most people didn’t, and I’ll explain why in a moment. So the way this pension differs is the way you accrue benefits is better. So you accrue benefits quicker because if you’re a hospital dentist, rather than accruing 180th of your pensionable pay, like in the 95 scheme, in the 2008 scheme you accrue 180th. So basically, you accrue benefits quicker. However, you have to work five years longer to unlock those benefits because the retirement age got pushed back to 65. So it went from 60 to 65. And this is why most people said actually, let’s stick with the 95.

James: 

Can I jump in? Sorry there, just for two seconds, of course, I’m not sure if I misheard you Did you say that the accrual rate in the 95 scheme is 180th, and then also in 2008, it’s also 180th, 160th. Ah, okay, okay, I don’t know if that was a slip of the tongue, but I think you said 180th as well and I was trying to compute that in my head. I just wanted to jump in to clear that up. So the accrual rate is higher, but we have to wait longer to get the pension, exactly.

Ian: 

Yes, sorry, it’s 180th, 95, 160th, 2008. So they kind of give you an incentive to say, look, you’ll get benefits quicker, but you have to wait five years longer to unlock them. Also, with the 2008 scheme, there’s no automatic lump sum at retirement. So rather than getting an income plus a lump sum in the 1995 scheme, in the 2008 scheme you just get an income. There is no tax-free lump sum, which is also interesting. And again, that’s another reason why people thought actually no, but you were given the choice whether you moved into the scheme. By the way, if you joined the NHS after 2008, you automatically joined the 2008 scheme. Okay, you missed the 1995 scheme.

Ian: 

Thirdly, in 2015, they changed the pension scheme again and they introduced the 2015 scheme and the way this one worked was again very similar. They again they moved away from these final salary pension schemes and they moved towards more career average for hospital, hospital dentists, um for um, principals it kind of remained the same, being a career average, principals or associates or specific principles. Um, yeah, principles work a bit differently, right, okay, oh, sorry, so principles and associates are the same. Hospital dentists are different, gotcha, yeah, yeah, yeah, that’s right. Yes, you have to categorize what you are If you’re a principal or an associate dentist, then you’ve always been career average. If you’re a hospital dentist, then you’ve always been final salary, but now you’re career average gotcha, so it’s changed every time. Um, so the new 2015 scheme, as I said, yeah, mainly career average. So everyone so associates and principals are now the same as hospital dentists as far as being career average.

Ian: 

And the way they did the 2015 scheme is the accrual rate again was better, because it’s now 154th, as you might know already. So it went 180th, 160th, 154th. But again you have to work even longer to get the benefits because now retirement age is state retirement age, which was currently 67 or 68. But by the time you get to retirement, james or me, it’s going to be probably 70, because state retirement age will move back. There’s no question about that. And again, this 2015 pension there’s also no automatic lump sum at retirement, it’s just a pension income and that’s basically the three schemes. So what you’ll find is that a lot of people will have two schemes. They’ll be in the 95 and the 2015, or the 2008 and the 2015, most likely. I’ve also seen people in all three. So you’ll have a different combination of different benefits in these three schemes and that’s kind of the summary of how it works.

James: 

You know I’m super intrigued to break down how the payouts look if you’re in two, three schemes, how those combos look. Let’s jump into that in just a moment. Let’s delve down to a little bit more of a fundamental level. We use the term accrual rate. Let’s bear in mind that for some people listening to this, that may even be new to them in itself. Let’s talk about accrual rate and then let’s talk about what I just mentioned. How does the accrual rate?

Ian: 

work. So to put it simply, the way the accrual rate works, the way the NHS pension works, there’s only two ways that your pension or three ways actually your pension grows. It is years of service salary and inflation. So the way they work it out. If we look at the 2015 scheme because everybody’s in that scheme now it’s an easy way to work it out. If you earn £54,000 a year, then for working one year in the NHS, you accrue one 54th of £54,000, which is £1,000. So you work one year, you earn £54,000, you earn £1,000 of pension benefit, and that’s how the accrual rate works. It’s obviously different in the old legacy schemes, the 1995 and 2008. It was 180th and 160th and 154th, but effectively that’s how it works. If you earn £54,000, 154th of that is £1,000. And that is an annual pension you’ll build up every year if your pension remains sorry, if your income remains at 54 000 pounds and what we should mention as well is that that does not mean you’ll be contributing 1 000 pounds.

James: 

you actually contribute more than that. You contribute effectively your membership fee, which, of course, is calculated effectively via banding. So if you earn 10, 10,000 NHS, it’s what Like you maybe know better than me 5%, yeah. Then if it’s like when you get to the next band, it’s more and more and more, so that’s your membership fee.

Ian: 

Exactly, yeah, so that’s exactly the right phrase to call it. It’s kind of a membership fee, so it doesn’t matter what you pay towards this pension, it won’t affect what you get from this pension. So it’s banded. So the most you pay is 14.5% and the least is, I think it’s 5.2%.

James: 

Awesome. And then there was one thing that we wanted to touch upon earlier, which I just mentioned, and it was after the accrual rate, and that was remind me. It was in my head just two seconds ago.

Ian: 

Was it the lump sum? You get on some and some, you don’t get. Lump sum, all right.

James: 

Thanks for reminding me. It was about the payouts and how those look, depending on, because what you’ve given us already is a very clear message If you’re in the 2015 scheme when we hit state pension age, then we get paid the passive income for the rest of our life, based on whatever pot that we have effectively. Let’s say we have somebody who’s in 2008 and 2015. Does that mean they get part of their pot paid when they hit 65, I believe it was from memory and then part of their pot at state pension age? How does that look?

Ian: 

Yeah, exactly right. So you have two different pots that are available to you and they’re available at different times. So if you go to the extreme, let’s just say you have 1995 benefits and 2015 benefits. What that means is when you get to 60, you can unlock your 1995 benefits, but you’ve got to wait seven years to unlock the 2015 benefits. So you’ve either got to kind of carry on working or do this retirement return when you can take a pension and kind of carry on working. So there’s a bit of a disconnect there. It’s less severe. It’s the 2008 pension and the 2015 pension, because it’s only like a two or three-year gap there. But yeah, effectively when you retire from the NHS, you don’t just retire. You’ve got two different dates and you need to kind of plan how you do that. You need to think about that in advance.

James: 

Tell me, how does that look? That sort of partial retirement? Do they negotiate reduced hours, reduced income? How does that work?

Ian: 

Yeah. So what normally happens is you agree with your practice or your principle if they’ll take you back first of all, and then you retire. You take your what we call the legacy benefits, which are the 1995 or 2008. You take those benefits and then you can come back to work on probably reduced hours because you could probably work two days a week and earn the same because you’ve got your pension income coming in, and then that will kind of sustain you until the age of 67 or 68, when the rest of your pension is available.

James: 

And are you required to do that? Are you required to reduce your hours?

Ian: 

No, you can actually come back and work almost whatever you want, as long as there’s an agreement with the practice effectively.

James: 

Ah, interesting stuff. I did not know that. Okay, thank you. Let’s change gears now and talk about allowances, because what we’ve done just then is give everybody a really nice concise summary of how the pension works, how the contributions work and how we are remunerated when we are reimbursed towards the end of our career, when we reach retirement age effectively. Annual allowances £40,000 is the pension annual allowance. Is that something we need to worry about when we’re contributing solely via our NHS pension? Are we likely to exceed that Also? And also then what we’re going to do is we’re going to chuck in a SIP and other pensions as well. But let’s look at it purely from the perspective of NHS pensions, just for the moment.

Ian: 

Yeah. So the NHS pension, the way annual allowance works, is something you can’t control. So it’s something you definitely need to be aware of, and whether you breach annual allowance will depend on how much NHS work you do and how much your NHS earnings are. So the first kind of myth to get rid of I think we’ve done it already is that your pension contributions have no bearing on your pension growth. That’s the first thing to talk about, and you said think of it as a membership fee. That that’s the first thing to talk about, and you said think of it as a membership fee. That’s exactly the right way to view it.

Ian: 

Now, the way your pension grows for a defined benefit scheme, which is the NHS scheme, is it’s all to do with how much your pension grows in any given tax year. So what they do is they look at the value of your pension at the start of the year, they increase it by inflation and they look at the pension at the end of the year and however much is grown by. They take that figure, they multiply it by 16, and that tells you your pension growth and that’s how it works within a defined benefit NHS scheme. So you can’t control that. It just kind of happens because inflation impacts that as well. So that’s something you can’t control. When you’re looking at annual allowance for and I won’t be jumping ahead here for a SIP or a personal pension, it’s much simpler what you physically contribute to a SIP or a personal pension will count towards your £40,000 annual allowance. So if you pay £20,000 in to your pension, your personal pension, then you’ve used £20,000 of your £40,000 annual allowance limit.

James: 

Right got you. So, if I’ve understood that correctly, basically it’s not really we only have to partially think about this when we’re contributing solely towards the NHS pension, because we’re not likely to exceed it unless our income is really really really high ticket. Have I understood that correctly?

Ian: 

Sort of yeah, it’s hard to judge it, but it does really dictate and it can be controlled by your NHS earnings. If you’ve only got small NHS earnings, then it’s unlikely you’re going to breach this £40,000 based on your NHS work alone. If you have more significant NHS earnings, then you could be close or go over this 40,000. There’s also a caveat to this for higher earners. If you’re a higher earner, then there’s something called annual allowance tapering and once you earn over £200,000, then your £40,000 annual allowance that you have could diminish down to as little as £4,000 if you’re a higher earner. So you have to be careful of these things. There’s not really a blanket yes or no answer. Every individual is different and just take stock of your own situation is what I would say.

James: 

Cool, all right, we could probably delve loads deeper on that, but I think that’s enough complexity for today. That’s the perfect level of understanding that we need to proceed because we want to keep this quite high level without boiling, delving down right down into the nitty gritty. Okay, so you touched upon this SIPs and NHS pensions. How do we mitigate this? How do we be aware of exceeding our annual allowance?

Ian: 

Yes, you just need to be in control of it, I guess. So to find out where you are in relation to your NHS and how much that has grown each year, you can request from the NHS Pensions Agency an annual allowance statement and what this statement will tell you is how much your pension has grown for the previous tax year. So if you request one now, you’ll get your pension growth for the 2021-22 tax year plus the three previous tax years. And if you look at that and think actually there’s a bit of headroom, I haven’t used much of my allowance, then actually a personal pension could be a way to actually go back and say actually look, let’s put a bit more money into a pension because pensions are really good and they’re very tax efficient.

Ian: 

So you can go back and use what’s called carry forwards, which means if you haven’t used all of your pension allowance this 40,000 pension allowance in the three previous years, you can actually go back and retrospectively use it with a personal contribution to a SIP, for example, can retrospectively use it with a personal contribution to a SIP, for example. So it’s just about getting those two working. If you’ve been very close to your annual allowance based on your NHS work, then a private pension might not be the appropriate thing for you and you might want to think about other things like ISIS and things like that. So just kind of take stock, but request an annual allowance statement and that will give you a bit of a headroom check on where you’re at.

James: 

Awesome. Thank you for that. Let’s move forwards and on to the lifetime allowance now, because this is the one that we are most likely to need to watch out for right.

Ian: 

Yeah, it could be. It’s funny it’s the one that’s got the most press. But I’m probably less worried about lifetime allowance than annual allowance, if I’m honest, but it’s certainly something to consider.

James: 

Actually do you know what just before we do? How does that? Before we do lifetime allowance? How does that penalty look for us exceeding the annual allowance? Let’s talk about that, because that’s going to put some meat in the bone for what you’ve just said yeah, definitely, definitely.

Ian: 

So, yeah, right. So the way the way annual allowance works is, um, yeah, right. So the way annual allowance works is any growth you have in your pension or any personal SIP contributions that you make that exceed £40,000, they are taxed at your marginal rate. So marginal rate means if you’re a basic rate taxpayer, they’re taxed at 20%. If you’re a higher rate taxpayer, they’re taxed at 40%. If you’re an additional rate taxpayer, they’re taxed at 45%. But you can also use that carry forward facility for this as well. So say, for example, one tax year you have pension growth that’s 50,000 pounds, let’s just say so. You know you’re 10,000 over right. But if you go back three years and realize that actually in the three previous years you’ve got some unused allowance, you can drag it forward to kind of offset that.

James: 

Real quick guys. I’ve put together a special report for dentists, entitled the seven costly and potentially disastrous mistakes that dentists make whenever it comes to their finances. Most of the time, dentists are going through these issues and they don’t even necessarily realize that they’re happening until they have their eyes opened, and that is the purpose of this report. You can go ahead and receive your free report by heading on over to wwwdentistoinvestcom forward slash podcast report or, alternatively, you can download it using the link in the description. This report details these seven most common issues. However, most importantly, it also shows you how to fix them Really. Looking forward to hearing your thoughts. That works retrospectively. Does it work prospectively? Is there a rollover?

Ian: 

No, it only works backwards, not forwards. Otherwise that’d be really good. But yeah, they don’t let you do that. Funnily enough, actually, there’s a weird anomaly which we’re going to talk about later, when we talk about CPI, where you can have negative annual allowance pension growth and funnily enough, so, say, for example, you have minus £5,000 annual allowance pension growth. And funnily enough so say, for example, you have minus £5,000 annual allowance, which can happen. You can’t actually use that for anything. They just class that as a zero growth input rather than a minus five. You can carry forwards if that makes sense.

James: 

So you mean, if we’re £5,000 off Actually yeah, can we just cover that again? So minus £5,000,. How would that situation arise?

Ian: 

Yeah, so it could arise and we’re going to discuss this in a bit, so maybe jump the gun. But CPI inflation when one year there’s high inflation and the following year there’s low inflation, it can actually cause your pension value to be less than the year before for annual allowance. And it doesn’t happen very often, which is why it’s a bit of an anomaly. It’s not common. But the situation we’re in now with inflation is it could become a reality actually. So if there was high inflation one year and the following year there was lower inflation, there’s a chance your pension growth could be a minus figure rather than a plus figure. So, for example, the one I just said, let’s just say your pension growth was minus 5,000, but you can’t do anything with that. It’s classed as a zero input. You can’t use that minus 5,000 pounds to offset future gains, if that makes sense.

James: 

Yeah, I think I got it a little bit more just then. Thank you for that, and you know what. We’re going to cover it in more detail later anyway, so we’re all good. Yeah, Okay, cool. Annual allowance. We’ve nailed it, We’ve done it to death. Let’s talk. Let’s now talk about lifetime allowance, and how does that look? Maybe it might be nice to cover the lifetime allowance what it is first of all and then develop the concept from there.

Ian: 

Yeah, definitely so. Annual allowance we’ve talked about this is an annual limit that your pension can grow by. Lifetime allowance is different. This is how much can your pension pot be over your lifetime before you have to pay any additional tax? And this limit is set at 1.03 million and 100 pounds, which sounds like a really enormous figure actually, but it’s very easy to breach, especially if there’s good NHS earnings in there.

Ian: 

So the way it works is any pension you have up to 1.073100, all you pay is normal income tax on that pension. When you draw it like normal standard terms, any pension growth over 1.073 million, you’ll pay an additional lifetime allowance tax charge on that excess when you take that pension at retirement. So whenever you choose to retire and the taxation it can be different depending on how you take it. If you take the excess as an income, then the tax is 25%. If you take the excess growth over the 1.073 million as a lump sum, then it’s 55% tax charge. So it depends how you take those two different tax charges and these are in addition to your normal income tax charges.

James: 

So lifetime allowance is certainly something that, um, you need to be aware of for sure 100, and the interest and or should I say worry anything about the lifetime allowance is how the government have played with it over the last few years, and let’s hope that trend doesn’t continue, because maybe you’ll know these figures better than me. But what was it like in 2012? It was like 1.83 million, then it was 1.5, then it went to 1 million. Now it’s back up a little bit, because it is index linked, I believe as well.

Ian: 

So let’s hope that trend doesn’t continue yeah, well, it’s frozen until 2024, um, but but now we’ve got a new you know a new prime minister. Whether they view that differently, we don’t know. So watching the space to see what happens there yeah, it’s the pension kitty.

James: 

They always read it exactly. So lifetime allowance, annual allowance we’ve pretty much covered the majority of things we need to consider when it comes to the nhs pension.

Ian: 

Let’s talk about the mcleod judgment oh, that’s, that’s a fun one, yeah, okay. So, mcleod judgment, this is all to do with when the government introduced the 2015 pension scheme. Okay, what happened was, when they introduced this 2015 pension scheme, there was a rule about who moved into this pension scheme and who didn’t. And just to summarise it, to put it into perspective, effectively, what happened was around about 2015,. Older members didn’t have to join this 2015 scheme at all, whereas younger members did, and this rule was a bit complex. So what the rule was was, they said, if you were within 10 years of your normal retirement age as of 2012, you didn’t have to move into this 2015 scheme. So say, for example, you’re in the 1995 scheme and you were below the age of 50 at 2012. You didn’t have to go into this 2015 scheme. You just stayed in your old legacy scheme, didn’t worry about things, you carried on as you were. If you were under 50 in 2012, then, basically, you were forced to move into this 2015 scheme. There was no choice. Now, saying this out loud, you think well, that doesn’t sound fair, does it? And it’s not fair because what’s happening here is age discrimination. So older members didn’t have to move into the scheme and younger members did. So there was a court case that was brought against the NHS pension and they deemed it to be unlawful. This rule was ridiculous. So the 2015 scheme itself wasn’t unlawful, but it was this rule about who went into it and who didn’t. So what they decided to do was they tried to figure out how to unpick this, and what they decided to do was they decided that between 2015 and 2022, between 2015 and 2022, whoever was eligible members at that point, what was going to happen was, if they moved to the 2015 scheme as of 2015, they were going to move everyone back into the old legacy scheme for this seven-year period, which is called the remedy period, which is between 2015 and 2022. So effectively, to put it into context, if at 2015, you were moved into this 2015 scheme, for the next seven years, they’re going to move you back into the old legacy scheme. So that’s what they’re doing.

Ian: 

And then what happens is there’s further decisions to be made because, when it comes to retirement, you are then given a choice about whether you want your pension benefits to be calculated in the 2015 scheme or in your legacy scheme for that seven-year remedy period, so the period from 2015 to 2022, they will say to you look, if you calculate and have your pension calculated in the 1995 scheme, for example, this is what you’ll get. If you have your pension for this remedy period calculated in the 2015 scheme, this is what you get, and then you pick the outcome that suits you the best. You have to make a choice at retirement. So it’s really confusing. Don’t expect to understand it straight away, because it’s really complex and it’s still rumbling on, but that is basically what’s happening. They’re trying to unpick what they’ve done, and people that were moved to the 2015 scheme got moved back to the legacy scheme and then you choose at retirement if you want that choice to happen or not. Are we finished? Just finished, just then?

James: 

yeah, pretty much yeah, I’m just waiting to see what your face looks like. You know what the nhs pension is a beast of a subject it really is, and it almost requires a flipping degree in itself to understand. But you know, that’ll be helpful for people who are listening who find themselves in that scenario, even if it means that they know that they need to get some help on that one, some professional help. So it’s always helpful, it’s always roi positive, cool, right then.

James: 

We touched upon this earlier, but I wanted to flesh it out in more detail just before we wrap things up, because I actually think that what we’ve done today is the perfect amount of complexity versus not going too deep, because, of course, as we said at the beginning, this is supposed to be an all-in-one, all-under-one roof nhs pension podcast, and we could probably make about three or four podcasts on this, and we could probably make a podcast in the mcleod judgment on its own by the flipping signs of it. So let’s talk about the CPI rate and something called the disconnect, which I just see that you’ve sent me over here on the items for discussion today, but I’m actually a little unfamiliar with this myself, so it might be nice to explain this.

Ian: 

Yeah, so this is quite a current topic and it’s only come to light because of the current inflation world. And let me explain why this is going to cause, or could cause, a problem, and it’s all to do with annual allowance. So we go back to annual allowance. So, if you remember the way we calculate annual allowance for your NHS pension is the value of your pension at the start of the year. We increase it by inflation and it’s the value of the pension at the end of the year, and then the difference is how much your pension grows by. But oh, do you want to ask a question?

James: 

No, no, no. I held up my three fingers there because I thought you were going to say contributions, inflation, and then there was something else that you mentioned earlier. But that’s something else, is it?

Ian: 

Yeah, that’s what makes your pension grow. But yeah, this is the calculation to work out how it works, and particularly inflation. So, as I said, they take the value of your pension at the start of the year but they increase it by inflation. But the inflation rate they use is from the previous year’s September rate. So, for example, last year’s September CPI rate was 3.1%. So at the start of the year they increase your pension by 3.1%. Then you have a full year of working in the NHS.

Ian: 

But what also happens with your pension again, especially if you’re a principal or an associate, is that every year your pension is what we call revalued, which means that your pension pot you’ve accrued in previous years gets increased. And what they do is they increase your existing pension pot by CPI in the current year plus 1.5%. So let me explain how this works. So what they’ve done at the start of the year they’ve increased your pension by 3.1%, but your pension has actually grown by inflation in the current year, and the current year’s inflation isn’t 3.1%, it’s closer to 10%. So effectively, there’s an additional 7% worth of growth. That’s happened purely down to inflation and it’s nothing to do with how much your pension is really grown by it’s only inflation, because when they increase your pension at the start of the year by inflation, they’re assuming that inflation at the previous year was similar to what it is in the current year and therefore there’s no disconnect.

Ian: 

So what should happen is they should increase your pension at the start of the year by 3.1%, let’s say, and the following year they would expect inflation to be similar. So there’s no disconnect. There’s no big growth because it might go from 3.1 to 3.2, just for argument’s sake. But the current inflation environment we’re in, we’ve suddenly gone from inflation from 3.1 to probably 10. So this is creating a pseudo growth in your pension and people that wouldn’t normally get an annual allowance tax charge may well get an annual allowance tax charge this year. Purely down to inflation. Quite complex again, I know, and there’s lots of figures bouncing around here, but this hopefully gives you a bit of a starting point. Does that make a bit of sense?

James: 

Inflation is high. Pretty much, yeah, it does. Yes, In summary, inflation is high, so therefore keep an eye on your contributions versus your annual allowance.

Ian: 

Effectively. Yeah, and just because inflation is high, it’s not normally a problem, it’s just the way they view it. They use, uh, cpi from the previous year in one of them and cpi from the current year in another one, so that there’s a disconnect. You’ll hear talked about.

James: 

That was the word that I was unfamiliar with disconnect, but you’ve yeah, that’s good, interesting to hear yeah.

Ian: 

So it’s quite complex and it it might happen this year, maybe one other, and then you might not see it again. So it’s a bit of an anomaly, but it’s something you need to be aware of now, especially people with big pension pots. Already you know principals things like that associates. You’ll see potentially some impact around annual allowance of this when you wouldn’t normally.

James: 

Got you. Thank you so much, ian. You’ve done a wonderful job of explaining the nhs podcast today, the nhs pension sorry, I beg your pardon on this podcast today. Thank you so much for your time. If anybody’s interested in speaking to ian, you can find ian on the group ian hawk. Feel free to search his name in the members bar. Ian. Thank you once more for your generous you spending your time with us generously today. I hope to speak to you once again very soon. Thanks, james. Positive review so others can learn about this podcast and benefit from it. I would also encourage any fans of the podcast to sign up to the free Facebook community from which the podcast originated. Please search Dentists who Invest on Facebook and hit join to become part of a community of thousands of other dentists interested in improving their finances, well-being and investing knowledge. Looking forward to seeing you on there.

James: 

Fans of the Dentists who Invest podcast. If you feel like there was one particular episode in the back catalogue in the anthology of Dentists who Invest podcast episodes that really, really really was massively valuable to you, feel free to share that with a fellow dental colleague who’s in a similar position, so their understanding of finance can be elevated and they can hit the next level of financial success in their life. Also, as well as that, if you could take two seconds to rate and review this podcast, it would mean the world. To me. What that would mean is that it drives this podcast further in terms of reach so that more dentists across the world can be able to benefit from the knowledge contained therein. Welcome, welcome to the Dentists who Invest podcast. What is up everybody? Welcome back to the Dentists who Invest podcast. Guys, this is a podcast I’ve been looking forward to for quite some time, because we are here today to talk about the nhs pension. Eagle eyed or eagle eared. Listeners of the podcast know that we already have two, but they were so long ago that I wanted to revisit it, make an all-in-one podcast which covers the salient points of the NHS pension, and to assist me in achieving that today, I have sat across the table the virtual table, because of course this is on Zoom my good friend, financial advisor Ian Hawke.

James: 

Ian, how are you today? Good thanks, james. How are you? Yeah, I’m 10 out of 10, mate. I’m looking forward to this. I’m looking forward to having an all-under-one-roof NHS podcast, because the NHS podcast, those two NHS podcasts that we have already are like by far and away runaway successes compared to the rest of the other podcasts. They’ve all done well, but those ones have done particularly well. So I’m really excited to create this today because I know it’s going to help a lot of people. Good, yes, hot topic, always a hot topic, huge topic, and you know what? The stuff in here will be relevant for doctors as well. So we should definitely get the message out there about that too, which I’m sure we will in due course. Ian, you’re relatively new to the Dentist Infest group because we met not that long ago. Maybe it might be nice to do a little bit of an intro.

Ian: 

Yeah, definitely. So I’ve been giving financial advice for God 24 years I don’t look like it, but about 24 years. I’ve been working with dentists and medics for probably about seven years independently and specializing in the NHS and retirement for about well, my whole career actually, but mainly the seven years just gone in dentists and medics.

James: 

Top stuff. Let’s jump straight in. So people who have listened to the previous NHS podcast will know that it works a little differently from your traditional pension. So instead of me taking the words out of your mouth, ian, and us repeating ourselves, let’s go ahead. I’ll let you cover that, because, of course, you’re the man with the knowledge and you do this every day.

Ian: 

Yeah, definitely. So I think if we start with a kind of refresher, because within the NHS there is one NHS pension scheme but there’s three components that you will be in, or you could be in one or two or three of them, and these will depend on when you joined the NHS but also some choices that you made along the way. So the original pension scheme, the original NHS pension scheme, is the 1995 pension scheme. This is kind of the original gold-plated pension scheme that you’d be in if you joined the NHS prior to 2008. And the way this pension scheme works is different. It depends on whether you’re a hospital dentist or whether you’re a principal, and the way this pension scheme works is different. It depends on whether you’re a hospital dentist or whether you’re a principal. And effectively what happens is that if you’re a hospital dentist, then you’re on a final salary pension and each year that you work in the NHS you accrue one 80th of your pension as a salary, as a pension. If you’re a principal, however, it’s a bit different. You are in a career average pension scheme and each year that you work in the NHS you put up a pot of pension Over your lifetime that builds up and then you get that pension at the end of the when you retire. Effectively, the way this pension works, you can retire at the age of 60. And when it comes to retirement, you get an income for life which is guaranteed and index linked, and you also get a tax-free lump sum of three times your pension. So that’s the 1995 pension Final salary. Hospital dentists retire at 60 and you get an income plus tax-free lump sum.

Ian: 

2008, though, they changed the pension scheme and they introduced the 2008 pension scheme. If you were already in the 1995 scheme, you were given the choice as to whether you want to move into the 2000 scheme or not. So you’re given a choice. What I found is from experience most people didn’t, and I’ll explain why in a moment. So the way this pension differs is the way you accrue benefits is better. So you accrue benefits quicker because if you’re a hospital dentist, rather than accruing 180th of your pensionable pay, like in the 95 scheme, in the 2008 scheme you accrue 180th. So basically, you accrue benefits quicker. However, you have to work five years longer to unlock those benefits because the retirement age got pushed back to 65. So it went from 60 to 65. And this is why most people said actually, let’s stick with the 95.

James: 

Can I jump in? Sorry there, just for two seconds, of course, I’m not sure if I misheard you Did you say that the accrual rate in the 95 scheme is 180th, and then also in 2008, it’s also 180th, 160th. Ah, okay, okay, I don’t know if that was a slip of the tongue, but I think you said 180th as well and I was trying to compute that in my head. I just wanted to jump in to clear that up. So the accrual rate is higher, but we have to wait longer to get the pension, exactly.

Ian: 

Yes, sorry, it’s 180th, 95, 160th, 2008. So they kind of give you an incentive to say, look, you’ll get benefits quicker, but you have to wait five years longer to unlock them. Also, with the 2008 scheme, there’s no automatic lump sum at retirement. So rather than getting an income plus a lump sum in the 1995 scheme, in the 2008 scheme you just get an income. There is no tax-free lump sum, which is also interesting. And again, that’s another reason why people thought actually no, but you were given the choice whether you moved into the scheme. By the way, if you joined the NHS after 2008, you automatically joined the 2008 scheme. Okay, you missed the 1995 scheme.

Ian: 

Thirdly, in 2015, they changed the pension scheme again and they introduced the 2015 scheme and the way this one worked was again very similar. They again they moved away from these final salary pension schemes and they moved towards more career average for hospital, hospital dentists, um for um, principals it kind of remained the same, being a career average, principals or associates or specific principles. Um, yeah, principles work a bit differently, right, okay, oh, sorry, so principles and associates are the same. Hospital dentists are different, gotcha, yeah, yeah, yeah, that’s right. Yes, you have to categorize what you are If you’re a principal or an associate dentist, then you’ve always been career average. If you’re a hospital dentist, then you’ve always been final salary, but now you’re career average gotcha, so it’s changed every time. Um, so the new 2015 scheme, as I said, yeah, mainly career average. So everyone so associates and principals are now the same as hospital dentists as far as being career average.

Ian: 

And the way they did the 2015 scheme is the accrual rate again was better, because it’s now 154th, as you might know already. So it went 180th, 160th, 154th. But again you have to work even longer to get the benefits because now retirement age is state retirement age, which was currently 67 or 68. But by the time you get to retirement, james or me, it’s going to be probably 70, because state retirement age will move back. There’s no question about that. And again, this 2015 pension there’s also no automatic lump sum at retirement, it’s just a pension income and that’s basically the three schemes. So what you’ll find is that a lot of people will have two schemes. They’ll be in the 95 and the 2015, or the 2008 and the 2015, most likely. I’ve also seen people in all three. So you’ll have a different combination of different benefits in these three schemes and that’s kind of the summary of how it works.

James: 

You know I’m super intrigued to break down how the payouts look if you’re in two, three schemes, how those combos look. Let’s jump into that in just a moment. Let’s delve down to a little bit more of a fundamental level. We use the term accrual rate. Let’s bear in mind that for some people listening to this, that may even be new to them in itself. Let’s talk about accrual rate and then let’s talk about what I just mentioned. How does the accrual rate?

Ian: 

work. So to put it simply, the way the accrual rate works, the way the NHS pension works, there’s only two ways that your pension or three ways actually your pension grows. It is years of service salary and inflation. So the way they work it out. If we look at the 2015 scheme because everybody’s in that scheme now it’s an easy way to work it out. If you earn £54,000 a year, then for working one year in the NHS, you accrue one 54th of £54,000, which is £1,000. So you work one year, you earn £54,000, you earn £1,000 of pension benefit, and that’s how the accrual rate works. It’s obviously different in the old legacy schemes, the 1995 and 2008. It was 180th and 160th and 154th, but effectively that’s how it works. If you earn £54,000, 154th of that is £1,000. And that is an annual pension you’ll build up every year if your pension remains sorry, if your income remains at 54 000 pounds and what we should mention as well is that that does not mean you’ll be contributing 1 000 pounds.

James: 

you actually contribute more than that. You contribute effectively your membership fee, which, of course, is calculated effectively via banding. So if you earn 10, 10,000 NHS, it’s what Like you maybe know better than me 5%, yeah. Then if it’s like when you get to the next band, it’s more and more and more, so that’s your membership fee.

Ian: 

Exactly, yeah, so that’s exactly the right phrase to call it. It’s kind of a membership fee, so it doesn’t matter what you pay towards this pension, it won’t affect what you get from this pension. So it’s banded. So the most you pay is 14.5% and the least is, I think it’s 5.2%.

James: 

Awesome. And then there was one thing that we wanted to touch upon earlier, which I just mentioned, and it was after the accrual rate, and that was remind me. It was in my head just two seconds ago.

Ian: 

Was it the lump sum? You get on some and some, you don’t get. Lump sum, all right.

James: 

Thanks for reminding me. It was about the payouts and how those look, depending on, because what you’ve given us already is a very clear message If you’re in the 2015 scheme when we hit state pension age, then we get paid the passive income for the rest of our life, based on whatever pot that we have effectively. Let’s say we have somebody who’s in 2008 and 2015. Does that mean they get part of their pot paid when they hit 65, I believe it was from memory and then part of their pot at state pension age? How does that look?

Ian: 

Yeah, exactly right. So you have two different pots that are available to you and they’re available at different times. So if you go to the extreme, let’s just say you have 1995 benefits and 2015 benefits. What that means is when you get to 60, you can unlock your 1995 benefits, but you’ve got to wait seven years to unlock the 2015 benefits. So you’ve either got to kind of carry on working or do this retirement return when you can take a pension and kind of carry on working. So there’s a bit of a disconnect there. It’s less severe. It’s the 2008 pension and the 2015 pension, because it’s only like a two or three-year gap there. But yeah, effectively when you retire from the NHS, you don’t just retire. You’ve got two different dates and you need to kind of plan how you do that. You need to think about that in advance.

James: 

Tell me, how does that look? That sort of partial retirement? Do they negotiate reduced hours, reduced income? How does that work?

Ian: 

Yeah. So what normally happens is you agree with your practice or your principle if they’ll take you back first of all, and then you retire. You take your what we call the legacy benefits, which are the 1995 or 2008. You take those benefits and then you can come back to work on probably reduced hours because you could probably work two days a week and earn the same because you’ve got your pension income coming in, and then that will kind of sustain you until the age of 67 or 68, when the rest of your pension is available.

James: 

And are you required to do that? Are you required to reduce your hours?

Ian: 

No, you can actually come back and work almost whatever you want, as long as there’s an agreement with the practice effectively.

James: 

Ah, interesting stuff. I did not know that. Okay, thank you. Let’s change gears now and talk about allowances, because what we’ve done just then is give everybody a really nice concise summary of how the pension works, how the contributions work and how we are remunerated when we are reimbursed towards the end of our career, when we reach retirement age effectively. Annual allowances £40,000 is the pension annual allowance. Is that something we need to worry about when we’re contributing solely via our NHS pension? Are we likely to exceed that Also? And also then what we’re going to do is we’re going to chuck in a SIP and other pensions as well. But let’s look at it purely from the perspective of NHS pensions, just for the moment.

Ian: 

Yeah. So the NHS pension, the way annual allowance works, is something you can’t control. So it’s something you definitely need to be aware of, and whether you breach annual allowance will depend on how much NHS work you do and how much your NHS earnings are. So the first kind of myth to get rid of I think we’ve done it already is that your pension contributions have no bearing on your pension growth. That’s the first thing to talk about, and you said think of it as a membership fee. That that’s the first thing to talk about, and you said think of it as a membership fee. That’s exactly the right way to view it.

Ian: 

Now, the way your pension grows for a defined benefit scheme, which is the NHS scheme, is it’s all to do with how much your pension grows in any given tax year. So what they do is they look at the value of your pension at the start of the year, they increase it by inflation and they look at the pension at the end of the year and however much is grown by. They take that figure, they multiply it by 16, and that tells you your pension growth and that’s how it works within a defined benefit NHS scheme. So you can’t control that. It just kind of happens because inflation impacts that as well. So that’s something you can’t control. When you’re looking at annual allowance for and I won’t be jumping ahead here for a SIP or a personal pension, it’s much simpler what you physically contribute to a SIP or a personal pension will count towards your £40,000 annual allowance. So if you pay £20,000 in to your pension, your personal pension, then you’ve used £20,000 of your £40,000 annual allowance limit.

James: 

Right got you. So, if I’ve understood that correctly, basically it’s not really we only have to partially think about this when we’re contributing solely towards the NHS pension, because we’re not likely to exceed it unless our income is really really really high ticket. Have I understood that correctly?

Ian: 

Sort of yeah, it’s hard to judge it, but it does really dictate and it can be controlled by your NHS earnings. If you’ve only got small NHS earnings, then it’s unlikely you’re going to breach this £40,000 based on your NHS work alone. If you have more significant NHS earnings, then you could be close or go over this 40,000. There’s also a caveat to this for higher earners. If you’re a higher earner, then there’s something called annual allowance tapering and once you earn over £200,000, then your £40,000 annual allowance that you have could diminish down to as little as £4,000 if you’re a higher earner. So you have to be careful of these things. There’s not really a blanket yes or no answer. Every individual is different and just take stock of your own situation is what I would say.

James: 

Cool, all right, we could probably delve loads deeper on that, but I think that’s enough complexity for today. That’s the perfect level of understanding that we need to proceed because we want to keep this quite high level without boiling, delving down right down into the nitty gritty. Okay, so you touched upon this SIPs and NHS pensions. How do we mitigate this? How do we be aware of exceeding our annual allowance?

Ian: 

Yes, you just need to be in control of it, I guess. So to find out where you are in relation to your NHS and how much that has grown each year, you can request from the NHS Pensions Agency an annual allowance statement and what this statement will tell you is how much your pension has grown for the previous tax year. So if you request one now, you’ll get your pension growth for the 2021-22 tax year plus the three previous tax years. And if you look at that and think actually there’s a bit of headroom, I haven’t used much of my allowance, then actually a personal pension could be a way to actually go back and say actually look, let’s put a bit more money into a pension because pensions are really good and they’re very tax efficient.

Ian: 

So you can go back and use what’s called carry forwards, which means if you haven’t used all of your pension allowance this 40,000 pension allowance in the three previous years, you can actually go back and retrospectively use it with a personal contribution to a SIP, for example, can retrospectively use it with a personal contribution to a SIP, for example. So it’s just about getting those two working. If you’ve been very close to your annual allowance based on your NHS work, then a private pension might not be the appropriate thing for you and you might want to think about other things like ISIS and things like that. So just kind of take stock, but request an annual allowance statement and that will give you a bit of a headroom check on where you’re at.

James: 

Awesome. Thank you for that. Let’s move forwards and on to the lifetime allowance now, because this is the one that we are most likely to need to watch out for right.

Ian: 

Yeah, it could be. It’s funny it’s the one that’s got the most press. But I’m probably less worried about lifetime allowance than annual allowance, if I’m honest, but it’s certainly something to consider.

James: 

Actually do you know what just before we do? How does that? Before we do lifetime allowance? How does that penalty look for us exceeding the annual allowance? Let’s talk about that, because that’s going to put some meat in the bone for what you’ve just said yeah, definitely, definitely.

Ian: 

So, yeah, right. So the way the way annual allowance works is, um, yeah, right. So the way annual allowance works is any growth you have in your pension or any personal SIP contributions that you make that exceed £40,000, they are taxed at your marginal rate. So marginal rate means if you’re a basic rate taxpayer, they’re taxed at 20%. If you’re a higher rate taxpayer, they’re taxed at 40%. If you’re an additional rate taxpayer, they’re taxed at 45%. But you can also use that carry forward facility for this as well. So say, for example, one tax year you have pension growth that’s 50,000 pounds, let’s just say so. You know you’re 10,000 over right. But if you go back three years and realize that actually in the three previous years you’ve got some unused allowance, you can drag it forward to kind of offset that.

James: 

Real quick guys. I’ve put together a special report for dentists, entitled the seven costly and potentially disastrous mistakes that dentists make whenever it comes to their finances. Most of the time, dentists are going through these issues and they don’t even necessarily realize that they’re happening until they have their eyes opened, and that is the purpose of this report. You can go ahead and receive your free report by heading on over to wwwdentistoinvestcom forward slash podcast report or, alternatively, you can download it using the link in the description. This report details these seven most common issues. However, most importantly, it also shows you how to fix them Really. Looking forward to hearing your thoughts. That works retrospectively. Does it work prospectively? Is there a rollover?

Ian: 

No, it only works backwards, not forwards. Otherwise that’d be really good. But yeah, they don’t let you do that. Funnily enough, actually, there’s a weird anomaly which we’re going to talk about later, when we talk about CPI, where you can have negative annual allowance pension growth and funnily enough, so, say, for example, you have minus £5,000 annual allowance pension growth. And funnily enough so say, for example, you have minus £5,000 annual allowance, which can happen. You can’t actually use that for anything. They just class that as a zero growth input rather than a minus five. You can carry forwards if that makes sense.

James: 

So you mean, if we’re £5,000 off Actually yeah, can we just cover that again? So minus £5,000,. How would that situation arise?

Ian: 

Yeah, so it could arise and we’re going to discuss this in a bit, so maybe jump the gun. But CPI inflation when one year there’s high inflation and the following year there’s low inflation, it can actually cause your pension value to be less than the year before for annual allowance. And it doesn’t happen very often, which is why it’s a bit of an anomaly. It’s not common. But the situation we’re in now with inflation is it could become a reality actually. So if there was high inflation one year and the following year there was lower inflation, there’s a chance your pension growth could be a minus figure rather than a plus figure. So, for example, the one I just said, let’s just say your pension growth was minus 5,000, but you can’t do anything with that. It’s classed as a zero input. You can’t use that minus 5,000 pounds to offset future gains, if that makes sense.

James: 

Yeah, I think I got it a little bit more just then. Thank you for that, and you know what. We’re going to cover it in more detail later anyway, so we’re all good. Yeah, Okay, cool. Annual allowance. We’ve nailed it, We’ve done it to death. Let’s talk. Let’s now talk about lifetime allowance, and how does that look? Maybe it might be nice to cover the lifetime allowance what it is first of all and then develop the concept from there.

Ian: 

Yeah, definitely so. Annual allowance we’ve talked about this is an annual limit that your pension can grow by. Lifetime allowance is different. This is how much can your pension pot be over your lifetime before you have to pay any additional tax? And this limit is set at 1.03 million and 100 pounds, which sounds like a really enormous figure actually, but it’s very easy to breach, especially if there’s good NHS earnings in there.

Ian: 

So the way it works is any pension you have up to 1.073100, all you pay is normal income tax on that pension. When you draw it like normal standard terms, any pension growth over 1.073 million, you’ll pay an additional lifetime allowance tax charge on that excess when you take that pension at retirement. So whenever you choose to retire and the taxation it can be different depending on how you take it. If you take the excess as an income, then the tax is 25%. If you take the excess growth over the 1.073 million as a lump sum, then it’s 55% tax charge. So it depends how you take those two different tax charges and these are in addition to your normal income tax charges.

James: 

So lifetime allowance is certainly something that, um, you need to be aware of for sure 100, and the interest and or should I say worry anything about the lifetime allowance is how the government have played with it over the last few years, and let’s hope that trend doesn’t continue, because maybe you’ll know these figures better than me. But what was it like in 2012? It was like 1.83 million, then it was 1.5, then it went to 1 million. Now it’s back up a little bit, because it is index linked, I believe as well.

Ian: 

So let’s hope that trend doesn’t continue yeah, well, it’s frozen until 2024, um, but but now we’ve got a new you know a new prime minister. Whether they view that differently, we don’t know. So watching the space to see what happens there yeah, it’s the pension kitty.

James: 

They always read it exactly. So lifetime allowance, annual allowance we’ve pretty much covered the majority of things we need to consider when it comes to the nhs pension.

Ian: 

Let’s talk about the mcleod judgment oh, that’s, that’s a fun one, yeah, okay. So, mcleod judgment, this is all to do with when the government introduced the 2015 pension scheme. Okay, what happened was, when they introduced this 2015 pension scheme, there was a rule about who moved into this pension scheme and who didn’t. And just to summarise it, to put it into perspective, effectively, what happened was around about 2015,. Older members didn’t have to join this 2015 scheme at all, whereas younger members did, and this rule was a bit complex. So what the rule was was, they said, if you were within 10 years of your normal retirement age as of 2012, you didn’t have to move into this 2015 scheme. So say, for example, you’re in the 1995 scheme and you were below the age of 50 at 2012. You didn’t have to go into this 2015 scheme. You just stayed in your old legacy scheme, didn’t worry about things, you carried on as you were. If you were under 50 in 2012, then, basically, you were forced to move into this 2015 scheme. There was no choice. Now, saying this out loud, you think well, that doesn’t sound fair, does it? And it’s not fair because what’s happening here is age discrimination. So older members didn’t have to move into the scheme and younger members did. So there was a court case that was brought against the NHS pension and they deemed it to be unlawful. This rule was ridiculous. So the 2015 scheme itself wasn’t unlawful, but it was this rule about who went into it and who didn’t. So what they decided to do was they tried to figure out how to unpick this, and what they decided to do was they decided that between 2015 and 2022, between 2015 and 2022, whoever was eligible members at that point, what was going to happen was, if they moved to the 2015 scheme as of 2015, they were going to move everyone back into the old legacy scheme for this seven-year period, which is called the remedy period, which is between 2015 and 2022. So effectively, to put it into context, if at 2015, you were moved into this 2015 scheme, for the next seven years, they’re going to move you back into the old legacy scheme. So that’s what they’re doing.

Ian: 

And then what happens is there’s further decisions to be made because, when it comes to retirement, you are then given a choice about whether you want your pension benefits to be calculated in the 2015 scheme or in your legacy scheme for that seven-year remedy period, so the period from 2015 to 2022, they will say to you look, if you calculate and have your pension calculated in the 1995 scheme, for example, this is what you’ll get. If you have your pension for this remedy period calculated in the 2015 scheme, this is what you get, and then you pick the outcome that suits you the best. You have to make a choice at retirement. So it’s really confusing. Don’t expect to understand it straight away, because it’s really complex and it’s still rumbling on, but that is basically what’s happening. They’re trying to unpick what they’ve done, and people that were moved to the 2015 scheme got moved back to the legacy scheme and then you choose at retirement if you want that choice to happen or not. Are we finished? Just finished, just then?

James: 

yeah, pretty much yeah, I’m just waiting to see what your face looks like. You know what the nhs pension is a beast of a subject it really is, and it almost requires a flipping degree in itself to understand. But you know, that’ll be helpful for people who are listening who find themselves in that scenario, even if it means that they know that they need to get some help on that one, some professional help. So it’s always helpful, it’s always roi positive, cool, right then.

James: 

We touched upon this earlier, but I wanted to flesh it out in more detail just before we wrap things up, because I actually think that what we’ve done today is the perfect amount of complexity versus not going too deep, because, of course, as we said at the beginning, this is supposed to be an all-in-one, all-under-one roof nhs pension podcast, and we could probably make about three or four podcasts on this, and we could probably make a podcast in the mcleod judgment on its own by the flipping signs of it. So let’s talk about the CPI rate and something called the disconnect, which I just see that you’ve sent me over here on the items for discussion today, but I’m actually a little unfamiliar with this myself, so it might be nice to explain this.

Ian: 

Yeah, so this is quite a current topic and it’s only come to light because of the current inflation world. And let me explain why this is going to cause, or could cause, a problem, and it’s all to do with annual allowance. So we go back to annual allowance. So, if you remember the way we calculate annual allowance for your NHS pension is the value of your pension at the start of the year. We increase it by inflation and it’s the value of the pension at the end of the year, and then the difference is how much your pension grows by. But oh, do you want to ask a question?

James: 

No, no, no. I held up my three fingers there because I thought you were going to say contributions, inflation, and then there was something else that you mentioned earlier. But that’s something else, is it?

Ian: 

Yeah, that’s what makes your pension grow. But yeah, this is the calculation to work out how it works, and particularly inflation. So, as I said, they take the value of your pension at the start of the year but they increase it by inflation. But the inflation rate they use is from the previous year’s September rate. So, for example, last year’s September CPI rate was 3.1%. So at the start of the year they increase your pension by 3.1%. Then you have a full year of working in the NHS.

Ian: 

But what also happens with your pension again, especially if you’re a principal or an associate, is that every year your pension is what we call revalued, which means that your pension pot you’ve accrued in previous years gets increased. And what they do is they increase your existing pension pot by CPI in the current year plus 1.5%. So let me explain how this works. So what they’ve done at the start of the year they’ve increased your pension by 3.1%, but your pension has actually grown by inflation in the current year, and the current year’s inflation isn’t 3.1%, it’s closer to 10%. So effectively, there’s an additional 7% worth of growth. That’s happened purely down to inflation and it’s nothing to do with how much your pension is really grown by it’s only inflation, because when they increase your pension at the start of the year by inflation, they’re assuming that inflation at the previous year was similar to what it is in the current year and therefore there’s no disconnect.

Ian: 

So what should happen is they should increase your pension at the start of the year by 3.1%, let’s say, and the following year they would expect inflation to be similar. So there’s no disconnect. There’s no big growth because it might go from 3.1 to 3.2, just for argument’s sake. But the current inflation environment we’re in, we’ve suddenly gone from inflation from 3.1 to probably 10. So this is creating a pseudo growth in your pension and people that wouldn’t normally get an annual allowance tax charge may well get an annual allowance tax charge this year. Purely down to inflation. Quite complex again, I know, and there’s lots of figures bouncing around here, but this hopefully gives you a bit of a starting point. Does that make a bit of sense?

James: 

Inflation is high. Pretty much, yeah, it does. Yes, In summary, inflation is high, so therefore keep an eye on your contributions versus your annual allowance.

Ian: 

Effectively. Yeah, and just because inflation is high, it’s not normally a problem, it’s just the way they view it. They use, uh, cpi from the previous year in one of them and cpi from the current year in another one, so that there’s a disconnect. You’ll hear talked about.

James: 

That was the word that I was unfamiliar with disconnect, but you’ve yeah, that’s good, interesting to hear yeah.

Ian: 

So it’s quite complex and it it might happen this year, maybe one other, and then you might not see it again. So it’s a bit of an anomaly, but it’s something you need to be aware of now, especially people with big pension pots. Already you know principals things like that associates. You’ll see potentially some impact around annual allowance of this when you wouldn’t normally.

James: 

Got you. Thank you so much, ian. You’ve done a wonderful job of explaining the nhs podcast today, the nhs pension sorry, I beg your pardon on this podcast today. Thank you so much for your time. If anybody’s interested in speaking to ian, you can find ian on the group ian hawk. Feel free to search his name in the members bar. Ian. Thank you once more for your generous you spending your time with us generously today. I hope to speak to you once again very soon. Thanks, james. Positive review so others can learn about this podcast and benefit from it. I would also encourage any fans of the podcast to sign up to the free Facebook community from which the podcast originated. Please search Dentists who Invest on Facebook and hit join to become part of a community of thousands of other dentists interested in improving their finances, well-being and investing knowledge. Looking forward to seeing you on there.

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