How the NHS pension works

NHS pensions don’t work the same as normal private pensions. Here’s what you need to know about how the NHS pension works.

How the NHS pension works is becoming increasingly important for healthcare workers to understand. In the ongoing dispute between the Government and the British Medical Association, pensions have become a key part of the negotiations.

Health secretary Wes Streeting has hinted that any pay rises may need to come at the expense of generous pensions enjoyed by doctors. However, previous attempts at reform have met with stiff resistance.

The NHS pension is one of the largest pension schemes in the country. It has 3.6m members and the number likely to rise fast under the NHS England’s workforce plan. National Audit Office (NAO) calculations project that staffing will rise from 1.4 million full-time equivalent workers in 2021-22 to more than 2.3 million in 2036-37.

Pensions remain a vast cost for the NHS – around £14 billion of the £71 billion wage bill – and a headache for every health secretary.  

Attempts to reform NHS pensions have not gone well. In 2015, public sector pensions were reformed, primarily involving a move to ‘career average’ schemes, rather than final salary. This set of reforms allowed older NHS workers to remain in their existing schemes and forced younger workers into an alternative option. This included retiring at least five years later.

The change fell foul of age discrimination rules. The McCloud Judgment was a Court of Appeal ruling in 2018 sought to ensure that all active members are in the reformed career average scheme, providing equal treatment for all. It left something of a mess.

As a result of the changing parameters, NHS workers may have found themselves liable for hefty penalties, embroiled in costly ‘scheme pays’ rules, or opted out unnecessarily.

It is, in short, a minefield and many NHS workers have had to pay for advice to work out their liabilities.

How the NHS pension works

So this is how the NHS pension works: the NHS contributes 23.7% of staff salaries into their pensions. The staff member then contributes on a sliding scale, starting at 5.2% for the lowest paid, rising to 12.5% for those earning over £63,995. In other words, if you’re a doctor, on £80,000, you have around 36% of your salary each year going into your pension.

This is a huge step up from most private sector schemes. Under auto-enrolment, the minimum total contribution is 8% of an employee’s qualifying earnings, with the employer contributing at least 3%. Employees typically contribute the remaining 5%. Some employers will pay more, but most are nowhere near the NHS levels.

Pension benefits for NHS workers are based on earnings and length of service. They also vary with the type of scheme the employee is in. The 1995/2008 Scheme provides pensions on a final salary basis, although GPs and dental practitioners in this scheme have a “career average revalued earnings” arrangement.

Under the 2015 Scheme provides pensions for all members are calculated on a career average revalued earnings basis. From 1 April 2022, all active members of the NHS Pension Scheme are part of the 2015 Scheme.

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What do you get?

The answer, of course, is it depends. An NHS employee in the 1995 section with 40 years’ service would get approximately half their annual salary, plus 3x their annual salary as a lump sum.

A doctor on £80,000 for example, would get £40,000, plus a lump sum of £240,000. To put this in context, a private sector worker would need a pot of around £510,000 to generate an income of £40,000 (based on an annuity rate of £7,826, non-smoker, retiring at 65) – so that’s a chunky £750,000 in total once the lump sum is added in.

In the 2008 section, the employee receives a pension based on 1/60th of ‘reckonable pay’ for each year they have been a member of the NHS Pension Scheme. For the doctor on £80,000 with 40 years’ service, that translates to a pension of £53,000, but without the lump sum (though they can take part of it as a lump sum if they want to, in exchange for a lower pension).

The 2015 scheme is more difficult to put a number on. It is a career average scheme, based on 1/54th of the employee’s pensionable earnings each year.

Financial advice group Wesleyan explains how the NHS pension works for the 2015 scheme: “Let’s say you earn £25,000 in your first year of service. Your pension for that year would be 1/54th of £25,000 = £463. This ‘year one pot’ gets revalued each year in line with inflation – so by the time you come to retire, it could be worth considerably more.

“Meanwhile, you effectively continue to earn a new pension pot each year. If your salary goes up to £30,000 in year two, you’ll put aside a pension of £555 that year – which again will be revalued every year. When the time comes for you to retire, all your revalued pots of money are added together to calculate your final pension.”

The scheme you’re in will also affect when you can retire. The lucky 1995 scheme folk can retire at 60. In the 2008 section, normal pension age is 65. In the 2015 section, the retirement age is the same as the state pension age – this is currently 66 but will increase to 67 between 2026 and 2028.

The average pension claimed by GPs was £53,300 in the 2023-24 tax year and it was £40,090 for hospital doctors.

The taxation problems

NHS pensions remain controversial. The Oxford Review of Economic Policy found that there is no good evidence that golden pensions in healthcare support recruitment or retention.

They can also give doctors a taxation headache – this was a particular problem when the lifetime allowance was still in place, but doctors can still get into problems over annual contribution levels and find themselves paying tax from their (lower) salaries to support their (vast) pension contributions.

This can create perverse incentives, where a pay rise leaves them worse off and may even encourage higher paid doctors to reduce their hours.

Arguably, it also prevents the NHS paying higher salaries at an earlier point in an NHS employee’s career when they may really need it. They may be paying off student loans, for example, or trying to buy a house. Former head of the civil service, Lord (Gus) O’Donnell, has said: “We desperately need a switch to ‘more pay, less pension’ in the public sector”

The latest dispute may bring this issue to a head. It is certainly likely to divide younger doctors who need more pay now from their older counterparts, who are enjoying the prospect of a comfortable retirement. Who would be in Wes Streeting’s shoes today?

Disclaimer

This article is produced for general informational purposes only. It should not be construed as investment, legal, tax or other forms of financial advice.

If in any doubt about the themes expressed, consider consulting with a regulated financial professional for your own personal situation.

Past performance is no guarantee of future results. Investments can go down as well as up and you may get back less than you started with.

Investments are speculative and can be affected by volatility. Never invest more than you can afford to lose. For more information visit www.fca.org.uk/investsmart

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