How public pensions work – are they REALLY better than private?

Are you wondering whether it’s worth paying into the NHS pension scheme? Find out why it may offer a better deal than a private one.

Concerns over pay within the NHS continue to grow with this past January marking the longest strike period in NHS history: a stretch of six consecutive days. The British Medical Association (BMA) are calling for a 35% pay rise for doctors, with NHS workers admitting they are struggling on their current salary.

With these concerns about take-home pay front of mind, it’s no surprise that there has been a 67% increase in the number of people opting out of the voluntary NHS pension scheme over the past four years.

Tellingly, 25,000 of those choosing to leave the scheme are under 30 and over 10% of those earning less than £20,000 per year opted out. Recent statistics revealed over 66,000 NHS staff left the scheme between April and July, double the amount compared to the same period last year. Of those, 23,000 nurses felt they simply couldn’t afford to pay into the scheme. 

With only 26% of NHS staff satisfied with their current pay, it’s understandable that many would choose to opt out of monthly pension contributions. However, the regular monthly payments do guarantee a payout when it comes to retirement. Therefore, the decision to opt out should not be taken lightly – seek regulated financial advice if required. It is also good practice to review your stance annually.

NHS Pension Management Service provider BW Medical is here to examine how the public NHS Pension works and why it can offer a better deal than a private pension.

Your NHS pension has a government guarantee

The fact the NHS pension scheme is backed by the government means your pension is guaranteed. Unlike private pensions, the NHS pension is not invested in various avenues but is protected and will last you for the entirety of your retirement.

The scheme has over 3.4 million members and pays out £12 billion every year. It plays a vital role in the provision of support services and the delivery of training.

This government backing gives recipients of the NHS pension far more security than those investing in a private pension. As long as you contribute, you are guaranteed a pension when you choose to retire.

The contributions payable within the NHS pension scheme can be thought of as less of an investment in a fluctuating market and more as a membership scheme that pays towards assured financial stability for your future.

You can find out what protections you can get in a workplace and private pension scheme here.

You get a defined benefit boost

Usually, pensions are defined contribution (DC) set-ups – in other words, your contributions are added to your employer’s contributions and invested. Depending on the success of these investments, your pension may increase or decrease and once spent, your money is not replenished.

You have a certain amount within your pension pot that must last you throughout your retirement. This amount can vary due to inflation and there is a chance your investments will fail, leaving you with a diminished or non-existent pension.

The NHS pension is a defined benefit (DB) set-up. With this kind of pension, your membership guarantees you a fixed amount of money each month until your death.

Your pension will not run out and the amount of money you receive each month is based not on the state of your investments but on the length of your service and your yearly salary.

A DB set-up offers far more security and peace of mind than that afforded by a standard private pension. Those on the NHS pension scheme do not need to worry about their monthly payments ending and if you’ve spent a long time working for the NHS, you can be rest assured that you’ll receive adequate compensation for your years of service.

You get elevated employer contributions

The employer contribution to a private pension scheme is usually only around 3%, with the employee generally contributing 5% of their earnings. However, with the NHS pension scheme, the employer contribution rises to over 20%.

Although the employee contribution does also rise above 5% with the NHS pension scheme, it doesn’t currently reach as high as the 20% employer addition. Monthly payments will rise in line with the salary, now based on actual earnings and not full-time equivalent (FTE) – so this is no longer just relevant to lower pay bands.

For instance, those earning between £29,636 to £30,638 will contribute around 8.8% of their pensionable pay, while higher earners with a salary of £75,633 and above will pay a more substantial 13.5% towards their future.

You can invest in your family’s future

Continuous membership of the scheme also offers benefits to your family and dependents in the event of your death. You can nominate a qualifying individual, such as your spouse or civil partner, to receive a lump sum worth two full annual payments if you die.

You can also opt for an adult dependent’s pension, which totals around 34% of your total pension and is payable to your eligible partner upon your death. If you have a child or children under 23 at the time of your death, the children’s pension is also available totalling a payment of around 17% of your full pension.

These additional benefits ensure that your family are not stuck without an income in the event of your death, allowing you to provide for your partner and invest in not only your own future but the future of any children or dependents.

While the increased monthly outlay required for NHS pension membership can be daunting, there are a whole host of benefits available for those taking part. And, in an increasingly unpredictable financial landscape, insulating yourself and your pension against fluctuating market conditions can give you peace of mind going forward.

If you can afford to contribute, it’s arguably one of the best ways to invest in your future when you eventually decide to retire from the NHS.

Speak to a regulated financial adviser before making any decision

According to Julie Mudditt, NHS Pensions Manager from BW Medical, if your salary allows, investing in the NHS pension scheme’s monthly payments offers you peace of mind that your retirement will be comfortable. The guarantee of a considerable pension throughout your retirement offers you both financial security and a degree of mental wellness.

Although the mechanics of the scheme can be complex, it truly is one of the best ways to ensure you receive the reward you deserve for your time spent helping and healing people during your career within the NHS.

Before you make any key decisions regarding your pension, speak to the NHS Business Services Authority. The BW Medical team would also always recommend seeking advice from a regulated financial adviser – that’s an individual working within financial services, rather than an accountant.

Your pension questions answered

If you have more questions about pensions, you may fid the answers in these articles:

BW Medical is raising the bar nationally in medical accountancy, tax and NHS pension advice with a team of specialist accountants delivering an exceptional, proactive and responsive service to a nationwide client base. 

With expert knowledge in the medical accountancy field and an understanding of the ever-changing nature of NHS policy and primary care finances, BW Medical has a proven track record of success. The BW Medical team is perfectly placed to help both recent graduates and experienced medical professionals when it comes to practice accounts, taxation and the complexities of the NHS Pension Scheme.