Financial Insights

NHS Pension: Are you getting the most out of it?

31st Jan 2024

8 minute read

Mariel Diez

Mariel Diez

Head of content

Compare Wealth Managers


We probably haven't optimized our money as well as we could have done. I spent a lot of money on financial advice around how to do contributions, how to reduce the lifetime allowance. I was out of the pension scheme for five years, because I would have exceeded the annual allowance and the lifetime allowance and taxed at 50%. Still, I had a big lifetime allowance tax bill to pay when I took my pension


Since 1995 the NHS pension scheme has undergone several changes, making it hard for healthcare professionals and staff to keep up with them. Many opted out at one point but rejoined with a new wave of changes, missing out on a good compensation during that time without knowing it. In this article, we'll review the changes that still affect many staff members and share some useful information on how to better secure your pension and your future

The National Health Service (NHS) pension scheme is a crucial aspect of the overall compensation package for healthcare professionals in the United Kingdom. Established to provide financial security in retirement, the NHS pension scheme has undergone significant changes, notably in 1995, affecting both current and future beneficiaries. Many missed the chance to take the necessary steps to secure a better pension, mostly for the lack of information or financial education.

Key facts outlined in this article

Understanding the Intricacies of the NHS Pension Scheme: The NHS pension scheme operates as a defined benefit plan, ensuring a reliable income stream for retired healthcare workers. Contributors allocate a percentage of their salary, receiving a pension based on their final salary and years of service. The scheme includes additional perks such as lump sum payments and benefits for spouses and dependents in case of death, contributing to the NHS having one of the most generous pension schemes in the UK. However, the challenges faced by NHS workers in calculating contributions and understanding the complex formula determining their pension entitlements have been hard to comprehend for many scheme members.

Current Challenges and Ongoing Developments: We delve into the current landscape of NHS pensions, emphasizing the potential impact of recent announcements, such as the state pension rise and the proposed removal of abatement rules. The suspension of abatement during the COVID-19 pandemic is set to expire, raising concerns for over 7,000 doctors and nurses facing potential financial penalties on their pensions. Despite the annual increase in NHS pensions, more than 75,000 workers opted out in the last financial year, reflecting the financial struggles faced by NHS employees, particularly those with lower pensionable pay. The complexity of recent and ongoing changes prompts the need for financial planning services, having NHS workers seek expert advice to navigate their pension and overall financial planning to secure a better future.

If you want to know more, detailed information can be found in the rest of the article below.

How the NHS Pension Scheme works

The NHS pension scheme is a defined benefit pension plan, designed to offer a reliable and steady income for retired healthcare workers. Employees contribute a percentage of their salary to the scheme, and in return, they are entitled to a pension based on their final salary and years of service.

The scheme offers a pension, a lump sum payment, and benefits for spouses and dependents in case of death. The NHS has one of the most generous pensions in the UK and has an employer contribution of up to 20.68% of earnings.

According to a staff member from St George’s Hospital in London, the perk of the pension is one of the reasons many GPs choose to stay in the NHS instead of moving completely to private practice: “One of the key things that will stop people doing private work is the pension. And the pension is gold. In other words, for many it has been the carrot, they knew they would get a good pension at the end of their career”. For him and his wife, both NHS workers, the attractiveness of the pension was designed like that to avoid the great temptation of working privately.

NHS workers have struggled to determine the precise amount of their contributions and the resulting total. This lack of clarity has posed challenges for them. “It’s a complex formula: to summarize, it’s calculated by the hours you work per week for the years you contribute”, the NHS surgeon explains to us. Employees contribute a percentage of their earnings to their pension, ranging from 5.1% for lower earners to 13.5% for higher earners. “When I started, I used to pay 6% into my pension. By the end, I was paying 16% for the same benefit. As I retired, I effectively ended up with about 40% of my final salary, and because it's index-linked, it's very generous. With the inflation being 10% last year, I got a 10% pay salary rise in 2022. These types of benefits are extremely attractive and keep everybody under NHS employment.”

NHS and other public sector pensions receive an annual increase in line with inflation. High inflation last year meant that public sector pensions rose by 10% in April. From next spring, all NHS pensions will rise by 6.7%, meaning 900 former NHS staff will receive a six-figure pension when they retire - double the number in 2019.

John Ralfe, an independent pension consultant, said in an interview with The Telegraph that since 2015 the scheme had become even more generous: “A doctor starting in 2015, who then became a consultant, would receive a pension of around £100,000 in today’s money when they retire after working for 40 years.” Considering that this is inflation-protected income, it will be worth millions of pounds over a 30-year retirement.

What is the current situation with NHS pensions?

In the autumn statement, the chancellor Jeremy Hunt announced a state pension rise in line with the highest of average earnings, inflation, or 2.5%. The increase will be 8.5% to match pay raises, including bonuses. This might cause NHS pensioners to move into a higher tax bracket due to their state pension.

According to a Financial Times article, the government might also be proposing to permanently remove abatement rules for members of the NHS Pension Scheme. Abatement is the process by which NHS workers’ pensions are reduced pound for pound if their earnings plus the ‘unearned’ element of their NHS pension exceed their pre-retirement NHS pensionable earnings. 

It was suspended during the Covid-19 pandemic to encourage recently retired members to return to work and to tackle the crisis without suffering a penalty on their pension, but the suspension is due to expire at the end of March 2025. However, as part of the 2023-24 pay deal, the government has outlined its intention to permanently remove abatement from April. Last year, figures obtained by Quilter through a Freedom of Information request revealed more than 7,000 doctors and nurses could be at risk of a financial penalty on their pension as a result of the abatement rules coming back into force.

Many NHS pensioners are still struggling with the consequences of these changes, and with their overall financial planning. “We probably haven't optimized our money as well as we could have done” reflects the ex-NHS surgeon. If you’re concerned about how to secure your future and make the best out of your pension, retirement planning services could be the solution. A financial planner can help you visual your key goals for your retirement years and set up a plan to help you achieve those goals through financial planning.

The 1995 Reforms

In 1995, NHS pensions underwent a substantial transformation with the introduction of the new Pension Scheme. The reforms aimed to address fiscal concerns, streamline administration, and ensure the long-term sustainability of the pension system. The changes included the switch from a final salary scheme to an average salary scheme. Additionally, the retirement age was raised, and the accrual rate was modified.

  • Final Salary to Average Salary Scheme: Pensions now depend on average earnings throughout one's career, not just the final salary. For some NHS workers, particularly those with relatively stable or increasing salaries throughout their career, the shift might not have significantly impacted their pension. However, individuals with a substantial increase in salary towards the end of their careers may have seen a reduction in their overall pension entitlement.
  • The accrual rate, which determines the rate at which pension benefits are built up, was changed as part of the 1995 reforms. Some scheme members may have experienced a greater impact on their pension levels as a result of these changes, depending on their career path and length of service. Those who managed their money well and contributed to their pension plans may have been able to mitigate the impact.
  • The 1995 reforms raised the retirement age from 60 to 65, aligning with the general trend of increasing life expectancy. The increase in the retirement age had diverse effects on individual workers: Those who were close to retirement age in 1995 might have had to work longer than initially planned to access their full pension benefits. On the other hand, younger workers could potentially benefit from a more extended contribution period, leading to a higher overall pension.

After 1995, more changes were introduced to the NHS pensions. Since the changes are difficult to comprehend for most people (even NHS scheme members), an overview of the pension schemes can be found on their website. Some of these changes have made things not so attractive for their employees, leading to many staff members opting out of the NHS pension scheme.

Figures published in The Times following a Freedom of Infomation request showed that more than 75,000 workers pulled out of the NHS pension scheme in the last financial year, including 25,000 under 30 years old. This was a 67% increase over the past four years. The most affected were those with less than £20,000 in pensionable pay. The increase in opt-outs suggested that NHS workers were struggling to pay into their pensions amid the rising cost of living. Employees contribute a percentage of their earnings to their pension, ranging from 5.1% for lower earners to 13.5% for higher earners.

NHS pensions today

In 2015, the government made changes to many public service pension schemes, including the NHS Pension Scheme. However, these reforms didn’t apply to members closest to retirement. The Court of Appeal later found that this discriminated against younger members.

The government is currently removing this age discrimination from public service pension schemes in two parts. The first one was finished in 2022: All active members are now part of the 2015 Scheme, ensuring fair treatment for everyone.

The second part aims to address discrimination that may have occurred between April 1, 2015, and March 31, 2022. This period is referred to as the remedy period. The Public Service Pension Remedy, sometimes known as the McCloud Remedy will:

  • let affected members choose between 1995/2008 Scheme or 2015 Scheme benefits for their service during the remedy period.
  • return any service that affected members have in the 2015 Scheme during the remedy period back into the 1995/2008 Scheme on 1 October 2023

However, some of these changes are still making it difficult for NHS staff members to keep up with their finances. Currently, many are choosing to opt out of the NHS pension because they are struggling with the rising cost of living.

These changes have been extremely challenging for NHS pensioners, according to some ex-staff members. “They brought in a number of policies over the last 6 or 7 years that resulted in lots of us leaving the pension scheme because of the annual allowance and the lifetime allowance. I was out of the pension scheme for five years, which I still feel remarkably bitter about because I would have exceeded the annual allowance and the lifetime allowance. If you exceed the lifetime allowance, your pension is then taxed at 50%. Even though I deferred for five years, I still had a big lifetime allowance tax bill to pay when I took my pension two years ago” recalls a former NHS surgeon.

The uncertainty on how to tackle the finances has forced them to seek financial advice, giving away large sums to protect their assets but without great results. “My wife and I spent a lot of money on financial advice around how to do member contributions, how to reduce the lifetime allowance. Hugely complex calculations. It's really complicated to try and reduce our tax liability.”

Why did their finances have to suffer? As he mentions, the NHS don't provide financial education or consulting services. “The BMA, our union, do financial seminars, but they have historically been associated with big consulting firms, so their advice has always been tainted.” This feeling of being pushed to certain advisors has led to many NHS members to have a mistrust for the financial advising community in general. “In this seminars, you don't get proper wealth management advice, they've got products at the end of it. They said, Why don't you sign up for this? So they carry a bias, and because of our scientific training, we're wary of bias.” Doctors and nurses do not always have the time to go do all the research by themselves, which causes them to spend much on what might not be the right advice for them.

More changes to come

Last year the government changed NHS pension rules that were preventing experienced clinicians from returning from retirement to help reduce waiting lists. The alterations consisted of removing the Lifetime Allowance fee and the Annual Allowance. This was done in order to eliminate obstacles to staying employed, simplify the tax system by making pension tax less complex, and encourage highly-skilled workers to stay in the job market by increasing the Annual Allowance from £40,000 to £60,000. The British Medical Association claimed that in the past, a senior physician who worked three and a half days a week would get a £65,000 yearly pension, while if they worked for five days a week, they would only receive £55,000.

Thanks to these changes, GPs with pensionable earnings of £75,633 and above per year will have their NHS pension contributions rates reduced from April 2024. In addition, the number of contribution ‘tiers’ – which specify how much of a pension contribution GPs pay depending on their salary levels – have been reduced from the previous seven to six in a two-step process. The member contribution threshold structure which will come into force from 1 April 2024 to 31 March 2028 mean that members on the whole move closer to paying the required 9.8% yield, but lower earners ‘continue to benefit from a reduced rate in order to encourage participation’ and that the gaps between contribution tiers are lessened.

If you are, as many NHS members, a bit overwhelmed with all the changes and how these affect you, bear in mind that many are going through the same thing. The most important thing to consider is the advice of a specialist, someone who can help you outline you goals by the time you retire and create a plan on how to achieve them, making the most out of your pension contributions. If talking to a financial adviser might also feel overwhelming, rest assure that our goal at Compare Wealth Managers is making finances feel easy. We’ll provide you with a selection of advisers who can provide their insight on financial planning so you can later choose the path you feel the most comfortable with. Don’t hesitate to get in touch, we are here to help you plan a better future for yourself and your family.


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