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Dentists Who Invest

Episode 32

How The NHS Pension Actually Works: Part 2

Hosted By: Dr. James Martin

Dr James: 

Fans of the Dentists Who Invest podcast. If you feel like there was one particular episode in the back catalog 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 Dennis who Invest podcast. Welcome back, everybody. What’s good? This is another episode of Dennis who Invest. This is episode number 32. This episode is a follow-up to one that we did a while ago, and it was an episode that did tremendously well, actually, and it was a lot about the NHS pension. You may or may not remember it, and I believe it did so well because it spoke to so many people and also it is something that we have this chronically low level of information on. No one actually tells us how the NHS pension works. We’re just told we have fingers waved at us and told that we’re supposed to sign up to it, it’s almost like a received wisdom thing in a way, but if you actually ask those same people, why should we do it? I think a lot of them would actually struggle to flesh them out, unlike my guest here today, who is able to give a more than confident argument, as he did on the last one. His name, in case you don’t remember it, is Luke Hurley. Welcome Luke. Hi James, thanks, welcome back, my friend. So Luke and the last one put it to us why the NHS pension is such a good idea and Luke believes in it wholeheartedly. Today is part two. We’re going to talk about some of the things we didn’t actually get run to speaking about in the last episode, because there is quite a lot to flesh out and there has, of course, been, shall we say, a development since the last podcast, luke in the. McCleod Remedy, which I don’t know much about. I know of its name. Luke is going to talk a little bit more about this, about what that is on this episode today, because it affects every one of us who is in the NHS pension. So look what I was thinking. It might be quite nice, because that episode was a long way ago. There is going to be, no doubt, a few people who have listened to it, who have a few collective cobwebs built up in their head about how the NHS pension works, myself included. So I was wondering if you could speak a little bit about how the NHS pension works, because it’s not just your traditional. We contribute to a huge pot and then it’s there waiting for us when we reach retirement age. It’s a little bit different, isn’t it?

Luke: 

Yeah, very different. So I’ll give you a quick run through some of the key points again. As to how it works, I think the first and primary thing to understand is that it isn’t a pot of money. So instead of it building up an investment account in the same way that a SIP or a private pension would, it’s actually building up an income. So it’s a promise from the UK government to pay you a fixed, guaranteed and index-linked ie inflation-protected income in later years and it’s almost like a salary from the government when you stop work. That’s going to keep pace with the cost of living as it rises over time. So it’s actually closer, in my opinion, to the state pension than something like a SIP or a personal pension or a stakeholder pension, which many people might have and for me that’s the biggest misconception is not really understanding how it builds up and what it’s going to provide you with at retirement age. I think that the big one is in terms of contributions. So your contributions, the money you’re paying, the money that’s been deducted and that you can see on a payslip, for example, that is not going into a pot somewhere. That is, in fact, more like a membership fee. It’s almost like the cost of entry. They’re tear the corner to how much you earn, but it’s not actually what’s driving the growth in your pensions. They’re not being allocated to you in a separate pot somewhere waiting for you to start drawing down on the money that you’ve built up. So what is driving the pension is actually your earnings, your NHS earnings. So if you’re 100% NHS, then obviously you’re going to have a full pension. If you’re not 100% NHS, then you’re not going to have a full pension. And that’s pretty key to understand, because it’s obviously important then for people in that situation to possibly top up what they’re doing in the NHS pension with other vehicles. But every year, the NHS will keep a record, or the NHS pension scheme will keep a record of your NHS earnings, and then they’re going to multiply those earnings by what we call the accrual rate, and the accrual rate is really the secret ingredient for converting your earnings into annual pension. So, to keep it very simple, which is similar to what I did last time, I’ll just focus on the 2015 section. And let’s just say you’ve joined the NHS pension and you’re earning £100,000 for the current tax year, the accrual rate, ie the conversion factor, if you like, for the 2015 section is 1.54, which is pretty much 1.85%. So if you have £100,000 of earnings, then you are adding 1.85%, ie £1,850 of income to the pension that they will then pay you. So that is the amount that they promise to pay you for that one year’s worth of earnings every year for the rest of your life from state pension age. The following tax year, if you earn the same amount £100,000 again. To keep it simple, you’ve added another £1,850 of income that they’re promising to pay you every year for the rest of your life. So you add those two together and you’ve now got a pension worth £3,700. That will be paid to you from state pension age in the 2015 section, which, for younger people, will be £68 at the moment. It could increase, so that process is repeated every year.

Dr James: 

That’s got a lot higher, hasn’t it 68.

Luke: 

Yeah so the 95 section, the pension age was 60. And what they’ve effectively done over time has been nudging that back, which is how that you know, when they reform the pension to make it more affordable, that’s what they’ve ultimately done. That’s the biggest change.

Dr James: 

Wow interesting, Sorry, you were saying.

Luke: 

Yeah, no. So if you repeat that process let’s say you repeat that for 10 years and you’re adding 1,850 pounds of pension every year for 10 years then you’ve got 18,500 pounds of annual pension paid to you from state pension age for the rest of your life, which is obviously quite a good foundation for 10 years worth of work. But actually it’s better than that because of what we call the revaluation factor. So 100,000 pounds of earnings in 2021 is going to buy you an awful lot more than it will in 2031, 10 years later because of inflation. So what they do when they keep a record of your earnings is they actually uplift those earnings with inflation, cpi plus 1.5%, to ensure that your pension is actually keeping pace with the cost of living and the growth is actually in excess of inflation in the country. For me, that’s a really valuable aspect to the pension and I was actually quite surprised that that extra 1.5% revaluation was not impacted by the reform that they put in place in 2015.

Dr James: 

Okay, interesting. And there’s a few other components the revaluation factor we were saying off camera that it would be very helpful via this format the podcast format is very difficult to get across how that does affect your earnings in the long run without some sort of diagram, without some sort of visual aid, because I do get that, it’s good and I have seen compounding graphs of which display compounding over time and they’re almost always exponential. But as to how that specifically affects it, that would be interesting to see. But if anybody wants to know some more about that, feel free to contact. Look on the group. He is on the group, as I say. So look early and you’ll be able to find him just in the group members and look, we’ll be able to help you understand that one. This is what we basically spent about 40 minutes, 50 minutes fleshing out on the last podcast and I’m keen to get too sucked into it today for everybody’s benefit, because we want to build on what we created last time. But look how it has just a very nice summary of how it works in principle there. Look, we mentioned at the start the Maclaude Remedy. I do not know the first thing about the Maclaude Remedy. I’ve only heard of it because you’ve mentioned it to me. Are you able to enlighten us all as to what that is?

Luke: 

Yeah. So in 2015, the government made changes to reform the majority of public sector pension schemes, so that’s not just the NHS, that’s all public sector pension schemes. For the NHS, that led to the introduction of the 2015 section, and members were moved into it from their legacy sections, which would be the 95 section or the 2008 section. So what they previously built up in their legacy section was protected, but the new benefits from 2015 onwards were going to be built up in this new section of the pension scheme. However, when they did that, the reforms did not apply to certain members who were within 10 years of their normal pension age on the 31st of March 2012. So these older members were allowed to remain in their legacy sections for longer, and that was known as transitional protection. Others were actually offered something called tapered protection, which is where their move into the 2015 section was delayed because of their age, and it ended up in the courts. It was actually the judges and the firefighters that launched the action, and the Court of Appeal found that this was discrimination on age grounds, and the government accepted it and has therefore proposed to put things right for members that were affected.

Dr James: 

Excellent, excellent, good stuff. So presumably there is some way that we can take advantage of this ruling.

Luke: 

Yeah, it’s going to be rolled out. I mean, everybody who had service or was in service on or before the 31st of March 2012, and continued in service after the 1st of April 2015 will be affected. There’s nothing you personally have to do. But, yeah, as I said, if you had service before the 31st of March 2012, and you’re still in service after the 1st of April 2015, then you will be affected.

Dr James: 

I see, and what specifically are they doing about it then?

Luke: 

Well, to address the discrimination you’ll, basically you’ll be returned to your legacy sections. So for the period between 2015 and 2022, which they’re now calling the Remedy period you will actually be moved back into your original legacy section, which will either be the 95 section or the 2015 section. Then, when you get to actually start taking your pension, you’ll be given the option of whether you want to categorize that period between 2015 and 2022, have that period of time as membership in the legacy section, or whether you actually still want it to be in the 2015 section. So you’ll be given a choice at the point at which you want to start taking your pension, and which section is best for you will be largely influenced by when you actually want to start taking the benefits. So, yeah, it’s an exercise of choice In the short term in terms of what people will see. They’ll see, when they go into their total reward statements, that everything they built up in the 2015, from 2015 to 2022 has been converted back into the old section that they’re in, and then, when they actually get to retirement or pension age, they will then have a choice to make. I see.

Dr James: 

So just to delve into that just a little bit more, can you give us a tangible example of how that might affect our decision making? So let’s say, someone wants to take their pension when they’re 70, they might choose to be one of the legacies in 1995, or they might not do that because they get less money. Can you just flash that out just a tiny little bit so we can understand?

Luke: 

Yeah. So I think they. Let’s say, you’re a dentist, you’ve got a 1995 section membership which meant that you could, in that section of your pension, you could start drawing on the pension at 60. And you were moved into the 2015 section and therefore you had a that those benefits were accessible from state pension age. Well, what that’s giving you the opportunity to do is convert more of your you know those years into the 95 section, which you can draw earlier. So it really how it’s going to impact people is going to be based on when they actually want to start taking their pension, and if they want to start taking it earlier, then it’s going to make more sense for them to have it in the section that’s going to be closest to their pension age. So there’s nothing that they need to worry about on that front just yet, because everybody’s going to be different. We can’t predict the future, but they will provide the facts to the people at the point of taking the pension to say, look, had that period of time been in the 95 section, then this is what you would have ended up with. Had it been in the 2015 section, then this is what you would have ended up with. So it’s a calculation that will be done at the point of taking the pension.

Dr James: 

I see. So it’s their obligation to let us know, when we reach this age, what those discrepancy and those numbers might be right. So that’s something that they will tell us. So you said this earlier, but we don’t have to do anything right now per se because of this ruling.

Luke: 

No, there’s nothing immediately that needs to be done. This is going to take some time to roll out. There might need to be new legislation to actually implement this stuff and it’s going to drag out. I mean, it’s a huge undertaking for the pension administrators to put this right. It’s going to cost quite a lot of money for the government and truth. Nobody needs to put in a legal claim to be eligible. This really is just about awareness. Where I do think people need to be careful is, you know, there’s possibly some wider implications and headaches in truth. So the first is in relation to the lifetime allowance. Now, if your pension is being changed and the section that you’ve built up benefits in from 2015 to 2022 has changed, then that’s going to impact on your value for lifetime allowance purposes. So if you’re closer towards taking your pension, then that’s going to be quite relevant. Annual allowance tax that’s a big one that’s going to have an impact on your annual allowance calculations that you’ve been doing over the past few years since 2015. If people are close to retirement, then that’s going to be an issue because they probably won’t be able to put these changes in place if you’re about to retire and that’s certainly going to be an issue for you, and I think what they’re saying on that front is that they will try and backdate things and sort that out as soon as they possibly can. And there have been some members who have opted out because of the annual ounce charges, for example. They’ve actually come out of the pension scheme and the government is fully aware of this and I believe they’re going to take steps to try and put that right as well. So for me, the biggest impact will be from an annual ounce perspective. Calculations will need to be redone. Some people may have overpaid tax once you’ve got the new figures. Some will have underpaid tax and that’s going to be a bit of a mess, in truth, to put right for people.

Dr James: 

My limited understanding of the law in the UK would say that if someone is liable for causing you harm or causing you to lose money, that they’re responsible for putting that right by giving you enough so that you would be in the position that you would have been otherwise. If I’m correct, so has it been the case just yet where any individual dentist has needed to go through the courts to rectify this with the government, or could you foresee that being possible?

Dr James: 

Fans of the Dennis who Invest podcast. If you feel like there was one particular episode in the back catalog in the anthology of Dennis 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 Dennis who Invest podcast. Welcome back, everybody. What’s good? This is another episode of Dennis who Invest. This is episode number 32. This episode is a follow-up to one that we did a while ago, and it was an episode that did tremendously well, actually, and it was a lot about the NHS pension. You may or may not remember it, and I believe it did so well because it spoke to so many people and also it is something that we have this chronically low level of information on. No one actually tells us how the NHS pension works. We’re just told we have fingers waved at us and told that we’re supposed to sign up to it, it’s almost like a received wisdom thing in a way, but if you actually ask those same people, why should we do it? I think a lot of them would actually struggle to flesh them out, unlike my guest here today, who is able to give a more than confident argument, as he did on the last one. His name, in case you don’t remember it, is Luke Hurley. Welcome Luke. Hi James, thanks, welcome back, my friend. So Luke and the last one put it to us why the NHS pension is such a good idea and Luke believes in it wholeheartedly. Today is part two. We’re going to talk about some of the things we didn’t actually get run to speaking about in the last episode, because there is quite a lot to flesh out and there has, of course, been, shall we say, a development since the last podcast, luke in the. McCleod Remedy, which I don’t know much about. I know of its name. Luke is going to talk a little bit more about this, about what that is on this episode today, because it affects every one of us who is in the NHS pension. So look what I was thinking. It might be quite nice, because that episode was a long way ago. There is going to be, no doubt, a few people who have listened to it, who have a few collective cobwebs built up in their head about how the NHS pension works, myself included. So I was wondering if you could speak a little bit about how the NHS pension works, because it’s not just your traditional. We contribute to a huge pot and then it’s there waiting for us when we reach retirement age. It’s a little bit different, isn’t it?

Luke: 

Yeah, very different. So I’ll give you a quick run through some of the key points again. As to how it works, I think the first and primary thing to understand is that it isn’t a pot of money. So instead of it building up an investment account in the same way that a SIP or a private pension would, it’s actually building up an income. So it’s a promise from the UK government to pay you a fixed, guaranteed and index-linked ie inflation-protected income in later years and it’s almost like a salary from the government when you stop work. That’s going to keep pace with the cost of living as it rises over time. So it’s actually closer, in my opinion, to the state pension than something like a SIP or a personal pension or a stakeholder pension, which many people might have and for me that’s the biggest misconception is not really understanding how it builds up and what it’s going to provide you with at retirement age. I think that the big one is in terms of contributions. So your contributions, the money you’re paying, the money that’s been deducted and that you can see on a payslip, for example, that is not going into a pot somewhere. That is, in fact, more like a membership fee. It’s almost like the cost of entry. They’re tear the corner to how much you earn, but it’s not actually what’s driving the growth in your pensions. They’re not being allocated to you in a separate pot somewhere waiting for you to start drawing down on the money that you’ve built up. So what is driving the pension is actually your earnings, your NHS earnings. So if you’re 100% NHS, then obviously you’re going to have a full pension. If you’re not 100% NHS, then you’re not going to have a full pension. And that’s pretty key to understand, because it’s obviously important then for people in that situation to possibly top up what they’re doing in the NHS pension with other vehicles. But every year, the NHS will keep a record, or the NHS pension scheme will keep a record of your NHS earnings, and then they’re going to multiply those earnings by what we call the accrual rate, and the accrual rate is really the secret ingredient for converting your earnings into annual pension. So, to keep it very simple, which is similar to what I did last time, I’ll just focus on the 2015 section. And let’s just say you’ve joined the NHS pension and you’re earning £100,000 for the current tax year, the accrual rate, ie the conversion factor, if you like, for the 2015 section is 1.54, which is pretty much 1.85%. So if you have £100,000 of earnings, then you are adding 1.85%, ie £1,850 of income to the pension that they will then pay you. So that is the amount that they promise to pay you for that one year’s worth of earnings every year for the rest of your life from state pension age. The following tax year, if you earn the same amount £100,000 again. To keep it simple, you’ve added another £1,850 of income that they’re promising to pay you every year for the rest of your life. So you add those two together and you’ve now got a pension worth £3,700. That will be paid to you from state pension age in the 2015 section, which, for younger people, will be £68 at the moment. It could increase, so that process is repeated every year.

Dr James: 

That’s got a lot higher, hasn’t it 68.

Luke: 

Yeah so the 95 section, the pension age was 60. And what they’ve effectively done over time has been nudging that back, which is how that you know, when they reform the pension to make it more affordable, that’s what they’ve ultimately done. That’s the biggest change.

Dr James: 

Wow interesting, Sorry, you were saying.

Luke: 

Yeah, no. So if you repeat that process let’s say you repeat that for 10 years and you’re adding 1,850 pounds of pension every year for 10 years then you’ve got 18,500 pounds of annual pension paid to you from state pension age for the rest of your life, which is obviously quite a good foundation for 10 years worth of work. But actually it’s better than that because of what we call the revaluation factor. So 100,000 pounds of earnings in 2021 is going to buy you an awful lot more than it will in 2031, 10 years later because of inflation. So what they do when they keep a record of your earnings is they actually uplift those earnings with inflation, cpi plus 1.5%, to ensure that your pension is actually keeping pace with the cost of living and the growth is actually in excess of inflation in the country. For me, that’s a really valuable aspect to the pension and I was actually quite surprised that that extra 1.5% revaluation was not impacted by the reform that they put in place in 2015.

Dr James: 

Okay, interesting. And there’s a few other components the revaluation factor we were saying off camera that it would be very helpful via this format the podcast format is very difficult to get across how that does affect your earnings in the long run without some sort of diagram, without some sort of visual aid, because I do get that, it’s good and I have seen compounding graphs of which display compounding over time and they’re almost always exponential. But as to how that specifically affects it, that would be interesting to see. But if anybody wants to know some more about that, feel free to contact. Look on the group. He is on the group, as I say. So look early and you’ll be able to find him just in the group members and look, we’ll be able to help you understand that one. This is what we basically spent about 40 minutes, 50 minutes fleshing out on the last podcast and I’m keen to get too sucked into it today for everybody’s benefit, because we want to build on what we created last time. But look how it has just a very nice summary of how it works in principle there. Look, we mentioned at the start the Maclaude Remedy. I do not know the first thing about the Maclaude Remedy. I’ve only heard of it because you’ve mentioned it to me. Are you able to enlighten us all as to what that is?

Luke: 

Yeah. So in 2015, the government made changes to reform the majority of public sector pension schemes, so that’s not just the NHS, that’s all public sector pension schemes. For the NHS, that led to the introduction of the 2015 section, and members were moved into it from their legacy sections, which would be the 95 section or the 2008 section. So what they previously built up in their legacy section was protected, but the new benefits from 2015 onwards were going to be built up in this new section of the pension scheme. However, when they did that, the reforms did not apply to certain members who were within 10 years of their normal pension age on the 31st of March 2012. So these older members were allowed to remain in their legacy sections for longer, and that was known as transitional protection. Others were actually offered something called tapered protection, which is where their move into the 2015 section was delayed because of their age, and it ended up in the courts. It was actually the judges and the firefighters that launched the action, and the Court of Appeal found that this was discrimination on age grounds, and the government accepted it and has therefore proposed to put things right for members that were affected.

Dr James: 

Excellent, excellent, good stuff. So presumably there is some way that we can take advantage of this ruling.

Luke: 

Yeah, it’s going to be rolled out. I mean, everybody who had service or was in service on or before the 31st of March 2012, and continued in service after the 1st of April 2015 will be affected. There’s nothing you personally have to do. But, yeah, as I said, if you had service before the 31st of March 2012, and you’re still in service after the 1st of April 2015, then you will be affected.

Dr James: 

I see, and what specifically are they doing about it then?

Luke: 

Well, to address the discrimination you’ll, basically you’ll be returned to your legacy sections. So for the period between 2015 and 2022, which they’re now calling the Remedy period you will actually be moved back into your original legacy section, which will either be the 95 section or the 2015 section. Then, when you get to actually start taking your pension, you’ll be given the option of whether you want to categorize that period between 2015 and 2022, have that period of time as membership in the legacy section, or whether you actually still want it to be in the 2015 section. So you’ll be given a choice at the point at which you want to start taking your pension, and which section is best for you will be largely influenced by when you actually want to start taking the benefits. So, yeah, it’s an exercise of choice In the short term in terms of what people will see. They’ll see, when they go into their total reward statements, that everything they built up in the 2015, from 2015 to 2022 has been converted back into the old section that they’re in, and then, when they actually get to retirement or pension age, they will then have a choice to make. I see.

Dr James: 

So just to delve into that just a little bit more, can you give us a tangible example of how that might affect our decision making? So let’s say, someone wants to take their pension when they’re 70, they might choose to be one of the legacies in 1995, or they might not do that because they get less money. Can you just flash that out just a tiny little bit so we can understand?

Luke: 

Yeah. So I think they. Let’s say, you’re a dentist, you’ve got a 1995 section membership which meant that you could, in that section of your pension, you could start drawing on the pension at 60. And you were moved into the 2015 section and therefore you had a that those benefits were accessible from state pension age. Well, what that’s giving you the opportunity to do is convert more of your you know those years into the 95 section, which you can draw earlier. So it really how it’s going to impact people is going to be based on when they actually want to start taking their pension, and if they want to start taking it earlier, then it’s going to make more sense for them to have it in the section that’s going to be closest to their pension age. So there’s nothing that they need to worry about on that front just yet, because everybody’s going to be different. We can’t predict the future, but they will provide the facts to the people at the point of taking the pension to say, look, had that period of time been in the 95 section, then this is what you would have ended up with. Had it been in the 2015 section, then this is what you would have ended up with. So it’s a calculation that will be done at the point of taking the pension.

Dr James: 

I see. So it’s their obligation to let us know, when we reach this age, what those discrepancy and those numbers might be right. So that’s something that they will tell us. So you said this earlier, but we don’t have to do anything right now per se because of this ruling.

Luke: 

No, there’s nothing immediately that needs to be done. This is going to take some time to roll out. There might need to be new legislation to actually implement this stuff and it’s going to drag out. I mean, it’s a huge undertaking for the pension administrators to put this right. It’s going to cost quite a lot of money for the government and truth. Nobody needs to put in a legal claim to be eligible. This really is just about awareness. Where I do think people need to be careful is, you know, there’s possibly some wider implications and headaches in truth. So the first is in relation to the lifetime allowance. Now, if your pension is being changed and the section that you’ve built up benefits in from 2015 to 2022 has changed, then that’s going to impact on your value for lifetime allowance purposes. So if you’re closer towards taking your pension, then that’s going to be quite relevant. Annual allowance tax that’s a big one that’s going to have an impact on your annual allowance calculations that you’ve been doing over the past few years since 2015. If people are close to retirement, then that’s going to be an issue because they probably won’t be able to put these changes in place if you’re about to retire and that’s certainly going to be an issue for you, and I think what they’re saying on that front is that they will try and backdate things and sort that out as soon as they possibly can. And there have been some members who have opted out because of the annual ounce charges, for example. They’ve actually come out of the pension scheme and the government is fully aware of this and I believe they’re going to take steps to try and put that right as well. So for me, the biggest impact will be from an annual ounce perspective. Calculations will need to be redone. Some people may have overpaid tax once you’ve got the new figures. Some will have underpaid tax and that’s going to be a bit of a mess, in truth, to put right for people.

Dr James: 

My limited understanding of the law in the UK would say that if someone is liable for causing you harm or causing you to lose money, that they’re responsible for putting that right by giving you enough so that you would be in the position that you would have been otherwise. If I’m correct, so has it been the case just yet where any individual dentist has needed to go through the courts to rectify this with the government, or could you foresee that being possible?

Dr James: 

Fans of the Dennis who Invest podcast. If you feel like there was one particular episode in the back catalog in the anthology of Dennis 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 Dennis who Invest podcast. Welcome back, everybody. What’s good? This is another episode of Dennis who Invest. This is episode number 32. This episode is a follow-up to one that we did a while ago, and it was an episode that did tremendously well, actually, and it was a lot about the NHS pension. You may or may not remember it, and I believe it did so well because it spoke to so many people and also it is something that we have this chronically low level of information on. No one actually tells us how the NHS pension works. We’re just told we have fingers waved at us and told that we’re supposed to sign up to it, it’s almost like a received wisdom thing in a way, but if you actually ask those same people, why should we do it? I think a lot of them would actually struggle to flesh them out, unlike my guest here today, who is able to give a more than confident argument, as he did on the last one. His name, in case you don’t remember it, is Luke Hurley. Welcome Luke. Hi James, thanks, welcome back, my friend. So Luke and the last one put it to us why the NHS pension is such a good idea and Luke believes in it wholeheartedly. Today is part two. We’re going to talk about some of the things we didn’t actually get run to speaking about in the last episode, because there is quite a lot to flesh out and there has, of course, been, shall we say, a development since the last podcast, luke in the. McCleod Remedy, which I don’t know much about. I know of its name. Luke is going to talk a little bit more about this, about what that is on this episode today, because it affects every one of us who is in the NHS pension. So look what I was thinking. It might be quite nice, because that episode was a long way ago. There is going to be, no doubt, a few people who have listened to it, who have a few collective cobwebs built up in their head about how the NHS pension works, myself included. So I was wondering if you could speak a little bit about how the NHS pension works, because it’s not just your traditional. We contribute to a huge pot and then it’s there waiting for us when we reach retirement age. It’s a little bit different, isn’t it?

Luke: 

Yeah, very different. So I’ll give you a quick run through some of the key points again. As to how it works, I think the first and primary thing to understand is that it isn’t a pot of money. So instead of it building up an investment account in the same way that a SIP or a private pension would, it’s actually building up an income. So it’s a promise from the UK government to pay you a fixed, guaranteed and index-linked ie inflation-protected income in later years and it’s almost like a salary from the government when you stop work. That’s going to keep pace with the cost of living as it rises over time. So it’s actually closer, in my opinion, to the state pension than something like a SIP or a personal pension or a stakeholder pension, which many people might have and for me that’s the biggest misconception is not really understanding how it builds up and what it’s going to provide you with at retirement age. I think that the big one is in terms of contributions. So your contributions, the money you’re paying, the money that’s been deducted and that you can see on a payslip, for example, that is not going into a pot somewhere. That is, in fact, more like a membership fee. It’s almost like the cost of entry. They’re tear the corner to how much you earn, but it’s not actually what’s driving the growth in your pensions. They’re not being allocated to you in a separate pot somewhere waiting for you to start drawing down on the money that you’ve built up. So what is driving the pension is actually your earnings, your NHS earnings. So if you’re 100% NHS, then obviously you’re going to have a full pension. If you’re not 100% NHS, then you’re not going to have a full pension. And that’s pretty key to understand, because it’s obviously important then for people in that situation to possibly top up what they’re doing in the NHS pension with other vehicles. But every year, the NHS will keep a record, or the NHS pension scheme will keep a record of your NHS earnings, and then they’re going to multiply those earnings by what we call the accrual rate, and the accrual rate is really the secret ingredient for converting your earnings into annual pension. So, to keep it very simple, which is similar to what I did last time, I’ll just focus on the 2015 section. And let’s just say you’ve joined the NHS pension and you’re earning £100,000 for the current tax year, the accrual rate, ie the conversion factor, if you like, for the 2015 section is 1.54, which is pretty much 1.85%. So if you have £100,000 of earnings, then you are adding 1.85%, ie £1,850 of income to the pension that they will then pay you. So that is the amount that they promise to pay you for that one year’s worth of earnings every year for the rest of your life from state pension age. The following tax year, if you earn the same amount £100,000 again. To keep it simple, you’ve added another £1,850 of income that they’re promising to pay you every year for the rest of your life. So you add those two together and you’ve now got a pension worth £3,700. That will be paid to you from state pension age in the 2015 section, which, for younger people, will be £68 at the moment. It could increase, so that process is repeated every year.

Dr James: 

That’s got a lot higher, hasn’t it 68.

Luke: 

Yeah so the 95 section, the pension age was 60. And what they’ve effectively done over time has been nudging that back, which is how that you know, when they reform the pension to make it more affordable, that’s what they’ve ultimately done. That’s the biggest change.

Dr James: 

Wow interesting, Sorry, you were saying.

Luke: 

Yeah, no. So if you repeat that process let’s say you repeat that for 10 years and you’re adding 1,850 pounds of pension every year for 10 years then you’ve got 18,500 pounds of annual pension paid to you from state pension age for the rest of your life, which is obviously quite a good foundation for 10 years worth of work. But actually it’s better than that because of what we call the revaluation factor. So 100,000 pounds of earnings in 2021 is going to buy you an awful lot more than it will in 2031, 10 years later because of inflation. So what they do when they keep a record of your earnings is they actually uplift those earnings with inflation, cpi plus 1.5%, to ensure that your pension is actually keeping pace with the cost of living and the growth is actually in excess of inflation in the country. For me, that’s a really valuable aspect to the pension and I was actually quite surprised that that extra 1.5% revaluation was not impacted by the reform that they put in place in 2015.

Dr James: 

Okay, interesting. And there’s a few other components the revaluation factor we were saying off camera that it would be very helpful via this format the podcast format is very difficult to get across how that does affect your earnings in the long run without some sort of diagram, without some sort of visual aid, because I do get that, it’s good and I have seen compounding graphs of which display compounding over time and they’re almost always exponential. But as to how that specifically affects it, that would be interesting to see. But if anybody wants to know some more about that, feel free to contact. Look on the group. He is on the group, as I say. So look early and you’ll be able to find him just in the group members and look, we’ll be able to help you understand that one. This is what we basically spent about 40 minutes, 50 minutes fleshing out on the last podcast and I’m keen to get too sucked into it today for everybody’s benefit, because we want to build on what we created last time. But look how it has just a very nice summary of how it works in principle there. Look, we mentioned at the start the Maclaude Remedy. I do not know the first thing about the Maclaude Remedy. I’ve only heard of it because you’ve mentioned it to me. Are you able to enlighten us all as to what that is?

Luke: 

Yeah. So in 2015, the government made changes to reform the majority of public sector pension schemes, so that’s not just the NHS, that’s all public sector pension schemes. For the NHS, that led to the introduction of the 2015 section, and members were moved into it from their legacy sections, which would be the 95 section or the 2008 section. So what they previously built up in their legacy section was protected, but the new benefits from 2015 onwards were going to be built up in this new section of the pension scheme. However, when they did that, the reforms did not apply to certain members who were within 10 years of their normal pension age on the 31st of March 2012. So these older members were allowed to remain in their legacy sections for longer, and that was known as transitional protection. Others were actually offered something called tapered protection, which is where their move into the 2015 section was delayed because of their age, and it ended up in the courts. It was actually the judges and the firefighters that launched the action, and the Court of Appeal found that this was discrimination on age grounds, and the government accepted it and has therefore proposed to put things right for members that were affected.

Dr James: 

Excellent, excellent, good stuff. So presumably there is some way that we can take advantage of this ruling.

Luke: 

Yeah, it’s going to be rolled out. I mean, everybody who had service or was in service on or before the 31st of March 2012, and continued in service after the 1st of April 2015 will be affected. There’s nothing you personally have to do. But, yeah, as I said, if you had service before the 31st of March 2012, and you’re still in service after the 1st of April 2015, then you will be affected.

Dr James: 

I see, and what specifically are they doing about it then?

Luke: 

Well, to address the discrimination you’ll, basically you’ll be returned to your legacy sections. So for the period between 2015 and 2022, which they’re now calling the Remedy period you will actually be moved back into your original legacy section, which will either be the 95 section or the 2015 section. Then, when you get to actually start taking your pension, you’ll be given the option of whether you want to categorize that period between 2015 and 2022, have that period of time as membership in the legacy section, or whether you actually still want it to be in the 2015 section. So you’ll be given a choice at the point at which you want to start taking your pension, and which section is best for you will be largely influenced by when you actually want to start taking the benefits. So, yeah, it’s an exercise of choice In the short term in terms of what people will see. They’ll see, when they go into their total reward statements, that everything they built up in the 2015, from 2015 to 2022 has been converted back into the old section that they’re in, and then, when they actually get to retirement or pension age, they will then have a choice to make. I see.

Dr James: 

So just to delve into that just a little bit more, can you give us a tangible example of how that might affect our decision making? So let’s say, someone wants to take their pension when they’re 70, they might choose to be one of the legacies in 1995, or they might not do that because they get less money. Can you just flash that out just a tiny little bit so we can understand?

Luke: 

Yeah. So I think they. Let’s say, you’re a dentist, you’ve got a 1995 section membership which meant that you could, in that section of your pension, you could start drawing on the pension at 60. And you were moved into the 2015 section and therefore you had a that those benefits were accessible from state pension age. Well, what that’s giving you the opportunity to do is convert more of your you know those years into the 95 section, which you can draw earlier. So it really how it’s going to impact people is going to be based on when they actually want to start taking their pension, and if they want to start taking it earlier, then it’s going to make more sense for them to have it in the section that’s going to be closest to their pension age. So there’s nothing that they need to worry about on that front just yet, because everybody’s going to be different. We can’t predict the future, but they will provide the facts to the people at the point of taking the pension to say, look, had that period of time been in the 95 section, then this is what you would have ended up with. Had it been in the 2015 section, then this is what you would have ended up with. So it’s a calculation that will be done at the point of taking the pension.

Dr James: 

I see. So it’s their obligation to let us know, when we reach this age, what those discrepancy and those numbers might be right. So that’s something that they will tell us. So you said this earlier, but we don’t have to do anything right now per se because of this ruling.

Luke: 

No, there’s nothing immediately that needs to be done. This is going to take some time to roll out. There might need to be new legislation to actually implement this stuff and it’s going to drag out. I mean, it’s a huge undertaking for the pension administrators to put this right. It’s going to cost quite a lot of money for the government and truth. Nobody needs to put in a legal claim to be eligible. This really is just about awareness. Where I do think people need to be careful is, you know, there’s possibly some wider implications and headaches in truth. So the first is in relation to the lifetime allowance. Now, if your pension is being changed and the section that you’ve built up benefits in from 2015 to 2022 has changed, then that’s going to impact on your value for lifetime allowance purposes. So if you’re closer towards taking your pension, then that’s going to be quite relevant. Annual allowance tax that’s a big one that’s going to have an impact on your annual allowance calculations that you’ve been doing over the past few years since 2015. If people are close to retirement, then that’s going to be an issue because they probably won’t be able to put these changes in place if you’re about to retire and that’s certainly going to be an issue for you, and I think what they’re saying on that front is that they will try and backdate things and sort that out as soon as they possibly can. And there have been some members who have opted out because of the annual ounce charges, for example. They’ve actually come out of the pension scheme and the government is fully aware of this and I believe they’re going to take steps to try and put that right as well. So for me, the biggest impact will be from an annual ounce perspective. Calculations will need to be redone. Some people may have overpaid tax once you’ve got the new figures. Some will have underpaid tax and that’s going to be a bit of a mess, in truth, to put right for people.

Dr James: 

My limited understanding of the law in the UK would say that if someone is liable for causing you harm or causing you to lose money, that they’re responsible for putting that right by giving you enough so that you would be in the position that you would have been otherwise. If I’m correct, so has it been the case just yet where any individual dentist has needed to go through the courts to rectify this with the government, or could you foresee that being possible?

Luke: 

Well, yeah, I can see there being plenty of disputes and we’re too early in the process for there to be examples, but I can see there being all sorts of disputes. They have made very positive noises around putting this right, so everything I’ve read has been positive in terms of ensuring that people have not been detrimental to people. So they will be doing their best to put things right, but whether they have actually achieved that 100% or not is up for debate.

Dr James: 

Yeah, I mean what I’m saying is conjecture, but it was stand to reason based on what I know about the law, but by far what I could call. I couldn’t really call myself a legal expert by any means, but I suppose watch this space on that one is what we’re saying. Do you think that overall this could be something that could be beneficial to dentists in their position financially, or is it almost certainly a negative thing that’s going to cause us a headache?

Luke: 

No, I think it’s a thing is positive, particularly for those that didn’t envisage working to state pension age. It might mean that they can access more benefits earlier and therefore that’s going to be advantageous to them. So having that flexibility and choice will that’s great. People will be able to make their decision based on what’s right for them that suits their circumstances. I think the biggest negative for me is people having to revisit their annual ounce calculations and I’ve helped quite a few people in the past few years with their annual ounce calculations and there’s every chance that they’re all going to have to be redone and that’s going to be a problem. That’s going to possibly cost people money to get those if they don’t do them themselves. If they have used accountants or advisors to help with those calculations and they have to be recalculated, then that’s possibly a cost which is less than ideal. So that’s, for me, the biggest negative. The biggest positive is certainly for those. Again, I’ve got clients that intend to stop working at age 60 in the NHS and start taking their pension and all of a sudden they’re going to be able to access most of their pension at 60 rather than have some of it delayed until their state pension age, so for me that’s a big positive for them. So yeah, it depends on the individual, I think, but overall positive.

Dr James: 

Oh wow, I didn’t expect that answer. You were saying earlier as well about the NHS pension scheme and the annual allowance. Are you able to explain their relationship a little bit more in detail for those who aren’t necessarily familiar with it?

Luke: 

Yeah, sure. So the annual allowance is basically a threshold which restricts the amount of pension savings you’re allowed to build up each year before tax charges apply. So for private pensions like SIPs, then it relates to the actual gross contributions that you pay in. So it’s the physical amount that you’ve paid in For the NHS pension. It’s actually got nothing to do with your contributions and it’s all about the growth that you have in that pension, which, again, that’s where I see a lot of mistakes, where people look at their contributions into the NHS pension and think that that’s what they’re using to calculate their position. Yeah, and it’s nothing to do with that. It’s actually the growth in your pension that’s driving your position for annual allowance purposes and you have to add that to the contributions you’ve made into private pensions to work out what the total amount you’ve built up for that year is for annual allowance purposes.

Dr James: 

I see, and what is that current annual allowance?

Luke: 

So currently, the standard annual allowance is £40,000, has been for a few years. Governments have played around with it in the past. For higher earners, though, this can actually be reduced to as little as £4,000. So a few years ago, they introduced what was called the tapered annual allowance to make things even more complicated, which ultimately meant that if you had income over a certain level, then your £40,000 annual allowance was reduced based on your income. Currently, the rules mean that if you have fresh hold income below £200,000, then you should have the full £40,000 allowance. But I must emphasise that that income figure that they’re using to calculate your fresh hold income is income from all sources. So again, that’s something I see people make mistakes on it’s not just your NHS income that determines your tapered annual allowance, it’s everything. So it’s your rental income, any dividends, any other private earnings, all added together to see whether you’re affected by the tapered annual allowance. You also you can carry forward unused allowance from the previous three years, which is worth knowing. So if somebody’s got a problem for the current year, then they need to look back at least three years. Sometimes we have to go back further when we’re doing the calculations to work out whether there’s any unused allowance that they can bring forward in offset against the amount that they’re able to buy for the current tax year.

Dr James: 

And the tax that you spoke about. What is the tax rate when we start getting into that tapered allowance? Is that just income tax or does it depend on the source of income? I suppose?

Luke: 

Yeah, so it’s basically the amount you’re over is taxed at your marginal rate. So it’s added to your income for that, all of your income for that tax year, and it’s taxed accordingly. So if you fall within the higher rate tax band then you’re going to get hit with a 40% charge on the amount you’re over the annual ounce. If you’re an additional rate taxpayer, so you have a total income over 150,000 units, can be 45%.

Dr James: 

Right, wow, okay, so it can add up quite a lot. And sorry this, this might be something you’ve explained already, but that 40,000, that applies to six Real quick guys. I put together a special report for dentists, entitled the seven costly and potentially disastrous mistakes the dentist 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 wwwdentistsinvestcom 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 forwards to hearing your thoughts.

Luke: 

Yeah, that applies to all pensions. Yeah, so, over the sip, it’s based on what you’re paying in, as opposed to the the NHS, which is the growth, and it’s a combination of the two. So the 40,000, these for everything, and that’s a combination of if you, if you’re paying into a sip, then it’s what you physically paid in your gross contribution into that sip. For the NHS pension is the growth that you’ve had in the NHS pension.

Dr James: 

Right, interesting stuff. I didn’t know that, I must say. And how do you find out your current growth in the NHS pension? Is this something that’s easy for us to ascertained?

Luke: 

we have to manually figure it out ourselves, it’s yeah it’s not particularly easy and they won’t automatically send you out statement and it’s not the same as the total reward statements that you can download from the internet. So you can you can log into the total reward state Site and download a statement which gives you a valuation of your pension. That the growth statements for the for the annual ounce calculations are separate and you have to you actually have to request those normally. So I get my clients to Get in touch with them around August each year Either call them or email them or send them a letter saying please send me my my pension saving statement for for the tax year just gone. So later this year, that will be for the 2021 tax year. They will then send out the statement you have to request. Actually, this is another thing that people are from making a mistake with. You have to request this, a statement for each section. So if you’re in the 95 in 2015 sections, you have to request a saving statement for both sections, not just just. If you just say one, then they’re only to send you half that after growth figure. So, yeah, you have to. You have to call them up, ask for it. They’ll then send that out in the post it can take up to three months. So you know, ideally you want to be doing that as soon as possible because you want the figures before you do your, your tax return. If you’re, if you’re doing a self-assessment tax return, so yeah, it’s. It’s not the most straightforward process, but Either your accountant, your advisor, should be able to help you with that.

Dr James: 

Awesome stuff? Yeah, because, as you said, obviously it adds on an extra layer of complexity based on these various distinct Periods of time that you’re paying into it. So you’ll know tremendously more about that than me. But just something worth considering. And how will what you’ve just spoke about, if in any way at all, how will that be affected by the McLeod judgment, or is that completely? Is that something else?

Luke: 

It just boils down to the growth. So different sections the 95, 2008 and 2015 sections they have slightly different mechanisms for building up growth. So if they’re saying that you’re you’re being moved from, you know in that year, in those years 2015 to 2022 they’re changing the section that you, you had membership in, then that means that your growth will be slightly different, which means that your annual ounce figures will be slightly different, which, in the term, means that if you’ve done calculations of those those growth figures, they’re gonna be incorrect and they need to be redone.

Dr James: 

Yeah, I think long story short, it’s probably gonna be beyond the kit, but at least most dentists to figure these things. I guess it sounds very complex without without some help. Most definitely at least for me, because that stuff is very interesting. But 100%, I can see how it might get confusing for the uninitiated. Is that fair to say?

Luke: 

look, yeah, I mean certainly, but the first set just working out how these things work. Once it’s explained, some people will then be able to Keep going and do their own calculations, but it might be worth consulting with someone just to see how to get those Calculated you.

Dr James: 

You were a big proponent of the NHS pension the last time we spoke. Has that changed any?

Luke: 

No, I mean, no, look I. The reason why I like the NHS pension scheme is because I see lots of people who I’m dealing with who are at retirement age, who are leaving the pension scheme, and Doing a retirement plan for them is very straightforward because they are getting a fixed income on top of their state pension as a foundation on which they can then build. So when they’re trying to find income each year to fund their lifestyle Into their you know, let’s, let’s say 60s and 70s, and if you know that the government is going to pay you an inflation protected guaranteed income for the rest of your life, it makes that retirement plan quite straightforward. You can then add to your state pension and NHS pension from the other Assets and resources that you have. But it’s quite useful for from a planning perspective it’s also really, if you, if you weren’t in the NHS pension scheme so you opted out, then You’d have to Because of the subsidy. It’s subsidized by the government. So to recreate the output from the NHS pension it’s going to take quite a lot from you personally, so it’s the fact that it’s quite heavily subsidized. Opting out doesn’t mean you’re necessarily going to get all of your contributions come back to you because the contributions have deducted out your gross income, so they’re pre-tax. So leaving doesn’t mean you’re suddenly going to boost your pay by the full amount of the contribution because it’s then going to be taxed. So when you actually factor in the net cost to you, so what is the contribution actually costing you when you add in the tax consideration, versus what you’re then going to get out of it at the end of the day? For me it makes sense and therefore if I was in the NHS I would be a part of the NHS pension scheme. It’s not without its flaws, like I’m not denying you know, the move to state pension age for some people not particularly palatable. I can understand that. I can understand why people don’t necessarily want to wait to 68 to get their pension. But for those people I say it’s not all or nothing. You don’t have to just rely on the NHS pension to get you to financial independence. It can just be one of your tools in your tool bag to help you get to financial independence. And for me, you know, passive income is the only real, genuine source of passive income alongside a state pension. We talk about rental income. It’s not strictly passive because there will be some work involved with that. The NHS pension and the state pension is money that’s just going to get paid to you and you don’t have to do anything once you’re in receipt of it.

Dr James: 

Yes, 100%. And you pretty much anticipated my next question there, which was to say don’t you foresee the 68, having to wait to age 68, thing being an issue? But I think you’ve quite rightly pointed out there’s probably going to be. No, there’s no real perfect investment vehicle and maybe that’s the downside to the NHS one, as you just hit the nail on the head there and the passive thing, the passive income thing, to do in absolutely nothing, that is the contra weight, I suppose, compared to the age that you have to wait to unlock it. For me personally. So, food for thought. Food for thought, most definitely, okay, cool. Well, anyway, thank you so much for coming on this show. Look, as always, I’ve learned an absolute ton about the NHS pension and for anybody hasn’t listened to the first episode, it compliments this one very nicely and this one builds upon that. So when we spoke a little bit about the start, about the expected returns that you can gain from the NHS pension, we spend a whole 40, 50 minutes just talking exclusively about that in the first episode. So this was a abuse to you and this was an accident. Definitely that episode will be as well For anybody who is listening to this podcast and who isn’t on? Who isn’t a subscriber already? Feel free to subscribe via Apple Podcast or via Spotify, so that you can stay up to date with the latest episodes that have been released as well as that this podcast originated from a Facebook group which goes by the same name. You’ll be able to find it on Facebook. If you are a dentist and you’re interested in finance, feel free to head on over to Facebook and type in Dentist who Invest. You will be able to see the group that this all originated from and feel free to join if that resonates with you. Luke has been very kind to give up his time today. Luke is also on the group. Luke is more than qualified to speak on all of these things. He’s able to flesh them out in a little bit more detail. Luke, is that the only that’s part of your business? I believe there’s a few other things that you do to help us dent. This isn’t there.

Luke: 

Yeah, so it’s general financial planning pensions, investments, insurance. You know I’m a qualified independent financial advisor, so, yeah, all of those areas with a particular focus on financial planning and helping people to plan their journeys to financial independence.

Dr James: 

Awesome, okay, cool. We’re going to close an eye, look. So is there anything you’d like to say in conclusion about the McLeod remedy or how we summarized it very nicely the McLeod remedy and the NHS pension?

Luke: 

Yeah, I think a good quick summary, something to be aware of, not something to be too panicked by. Once the changes have been implemented, then those that have had annual allowance issues in the past will certainly need to be aware of the need to redo their calculations. So speak to whoever’s been advising you up until now and just make sure you’re up to speed with changes as and when they happen.

Dr James: 

Cool. Thank you so much, luke. We’re going to let you get off now and enjoy the rest of your day. Absolutely a pleasure speaking to you, as usual. We’ll speak again very soon.

Luke: 

Cheers James.

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