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Opting out of your NHS pension may seem like a quick win if money is tight, but you could be putting your long-term financial security at risk
What were your financial priorities when you began your nursing career?
Nursing Standard. 36, 9, 14-16. doi: 10.7748/ns.36.9.14.s10
Published: 01 September 2021
Covering your rent or mortgage, or saving for a home deposit were likely to be concerns, as well as having money for food, utilities, transport or possibly childcare.
There is another outgoing that can be harder to prioritise, and that is your pension.
For NHS staff, it is an auto-enrolled scheme to which the employer contributes 20.6% on top of the employee’s own contributions.
In the early stages of your career, it can be hard to see your pension as a financial priority, since there are so many others. Some opt out of the scheme to maximise monthly take-home pay and cope with the more immediate costs of everyday life.
In June 2021, a committee of MPs warned of a ‘perfect storm’ brewing around public sector pensions, with almost a quarter of a million workers opting out of their pension schemes as a result of rising cost of living.
‘There is a danger of a perfect storm where some young people believe they cannot afford pension contributions because of high costs of living and retire with no equity and a reduced public sector pension as a result,’ the report by the public accounts committee said.
‘Pensions are deferred pay. Opting out when you are new to the profession may save you money but the impact on your income in retirement, which may last 20 years, is huge’
Nicola Lee, national officer, RCN
When it comes to the NHS pension, those opting out are disproportionately younger on lower Agenda for Change bands.
Figures obtained by Nursing Standard from NHS Pensions show some 74,295 staff, including nurses, health visitors, midwives and physiotherapists left the NHS pension between 2017/18 and 2020/21 (see table, p16). Of that number, 40% (30,178) were aged between 20-29.
Number of nurses, health visitors, midwives and physiotherapists leaving the NHS pension scheme in England and Wales*
Why are so many younger nurses opting out? The MPs’ assessment – that nurses are facing severe financial pressures – seems convincing, given the evidence.
RCN research states average NHS pay has not kept pace with the cost of living for more than a decade, while RCN London’s 2020 Living in the Red report said nurses are ‘living more precariously, feeling less financially stable and continuing to battle hard to meet the cost of their travel and accommodation’.
A survey of 1,405 college members revealed 57% (800) were considering leaving London in the next five years, with housing costs cited as a main factor in 84% of cases. ‘If my wages had not stagnated to the point where I take home less now than I did ten years ago, I would not think twice about paying into the pension scheme,’ a nurse told Nursing Standard.
Despite the financial outlay, the message from many financial experts is that it pays to stay in a pension – not least because of the amount the employer contributes.
‘The employer contribution is over 20 per cent of your salary – so nurses will be missing out on free money if they don’t join,’ says Unison pension officer Alan Fox.
RCN national officer Nicola Lee says the number of younger staff leaving the scheme is worrying.
‘We talk about pensions being deferred pay,’ she say. ‘Opting out when you are new to the profession may save you money but the impact of that on your income in retirement, which may last 20 years, is huge.’
Carl Roberts is managing director of RTS Financial Planning. He says the firm is frequently contacted by NHS staff asking whether it is worth paying into the scheme, and he always advises ‘yes’.
‘The pension scheme is one of the major benefits you get from working for the NHS,’ he says.
‘NHS salaries may not be the best but a major part of the benefits is what you get from the pension scheme. If you are going into it as a career for life it is a no-brainer – join the scheme.’
But pensions can be complicated, and the NHS pension can be more complex than most.
Some nurses will have rights accumulated under two or three different versions of the scheme. This can cause confusion, with a false assumption that all nurses will now not be able to retire until the state retirement age; in fact, this depends on what pension scheme you are in.
Those nurses who would be better off not contributing to the scheme are small in number, according to Ms Lee.
For example, some very senior nurses with long service could build up a pension that breaches the life-time allowance for tax-free pension contributions (which is a value of £1.073 million) and would mean having to pay tax on the excess benefits.
The NHS pension scheme is the occupational pension scheme for employees of the NHS or for an organisation providing NHS services.
Employees and employers make payments into the scheme, and the government contributes in the form of tax relief. Every employee is automatically enrolled into the NHS pension. Contribution rates vary from 5.6% up to 14.5% of your gross salary – the more you earn, the higher the rate of contribution. The current employer contribution rate is 20.6% of the employee’s salary.
The amount of pension paid out in retirement depends on the number of years the individual has paid in, and their salary.
How your pension is calculated depends on which scheme you are in. Nurses in the 1995/2008 pension scheme are in a final-salary scheme that calculates benefits according to the best of the final year’s salary before retirement. Nurses in the 2015 pension scheme are in the career-average scheme, meaning that benefits for each year accrue according to the salary in that year.
You get your pension at what is called the ‘normal pension age’ – the age when you can have your pension paid without facing a reduction for early payment. This varies according to the scheme you are in:
Adapted from RCN: Pensions and Retirement
This issue has attracted widespread media coverage because of its impact on medical consultants, with many opting out of the pension scheme or even taking early retirement. However, only nurses in very senior positions, such as directors of nursing, are likely to be affected.
Even paying into the NHS pension for a short period of time has its benefits, says NHS Employers chief executive Danny Mortimer.
‘If an employee leaves the NHS after contributing to the scheme for more than two years, they will retain a right to a deferred pension. This means at retirement, they will receive an amount based on their salary and service on leaving the scheme,’ he says.
‘Those who are in it for less than two years can get their contributions refunded.’
Overseas nurses are entitled to contribute for as long as they are employed doing NHS work. If they return to their home country, they will be paid their pension just as they would be in the UK – although it is important to keep address and bank details are up to date.
Mr Mortimer says more may need to be done to help nurses on low wages to at least get a pension foothold.
‘Introducing scheme flexibilities, where an employee has the option to pay a lower contribution in return for a lower level of benefits, may provide an attractive, short-term alternative to opting out.’
– An income in retirement Many people find the state pension – currently a maximum £179.60 a week – is not enough to live on
– You do not pay tax on your contributions These are taken from your gross salary
– Your employer contributes a significant amount too The rate is currently 20.6%. If you do not join the NHS scheme, this money is lost to you
– Your money is safe When pension rules change, such in 2015, all the pension benefits you have accumulated up to then are preserved
– Your pension keeps pace with inflation
– You can make additional contributions and transfers in benefits from other pension schemes to which you have belonged
– In case of ill health If you become ill and unable to work, you may be eligible for an ill health retirement pension. If you are terminally ill you may be able to take all your benefits immediately as a lump sum
– For a spouse or partner They will be provided with a reduced income if you die, plus a lump sum if you die in service
*Details correct for the 2015 England and Wales scheme: rights may be different in other countries or earlier versions of the NHS pension scheme
Another key factor, according to the public accounts committee report, is greater awareness of the NHS pension benefits and how they actually work.
‘Introducing scheme flexibilities, where an employee has the option to pay a lower contribution in return for a lower level of benefits, may provide an attractive, short-term alternative to opting out’
Danny Mortimer, pictured, NHS Employers chief executive
The report said it was disappointed that HM Treasury did not act on recommendations the committee made a decade ago to provide clear, relevant pensions information to employees.
The government has proposed, but not yet produced, a ‘pensions dashboard’ that would allow anyone of any age to see their pension rights – workplace and state pensions – in one place.
Over the summer NHS Pensions has been helping employers highlight the value of being in the pension, via a series of short videos giving an overview of the scheme.
The RCN’s Nicola Lee also urges nurses to look at their total rewards statement, an annual snapshot of your employment package, including pay, allowances and any pension benefits accrued that can be viewed online.
Further information
NHS Pensions nhsbsa.nhs.uk/member-hub
Benefits of being a member of the NHS pension scheme – NHS Employers tinyurl.com/nhs-pension-benefits
Pensions and retirement advice – RCN tinyurl.com/rcn-pensions-retirement
Unison advice on being in the NHS pension tinyurl.com/unison-nhs-pension
RCN: UK nursing labour market review 2019 tinyurl.com/rcn-labour-review-2019
Living in the Red report – RCN London tinyurl.com/rcn-cost-of-living
NHS Total Reward Statement totalrewardstatements.nhs.uk
Check your state pension age gov.uk/state-pension-age
