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By The Next Step

The NHS Pension Scheme explained

4 min
Female student looking at laptop screen with concentration

Retirement is probably the last thing on your mind if you’ve just started working. But it’s a good idea to understand how your pension works from the very start of your career, so you’re fully informed.

Did you know that when you start working for the NHS, you’ll automatically be enrolled into the NHS Pension Scheme? Your contributions will come out of your salary each month, and you’ll be able to see the exact amount on your payslip.

Although you don’t need to do anything to start building your pension fund, you probably have some questions about how the scheme works, as well as your options. Here’s what you need to know.

How does the scheme work?

The NHS Pension Scheme provides a guaranteed income when you retire, based on your pensionable pay throughout your career. Each year you’ll build up 1/54th of your earnings for that year, and your total savings increase by something called ‘revaluation’, which is linked to the rate of inflation.

The amount you contribute depends on how much you earn, with rates ranging from 5% to 12.5%. You won’t pay income tax on your contributions because they come out of your pre-tax salary. As your employer, the NHS also contributes to your pension, which is 23.7% of your salary at present.

You can continue to build up your pension until the age of 75, with no limit on the number of years of pensionable earnings that can be taken into account. The more years of membership you have, the greater number of annual pension contributions you’ll earn, leading to a larger overall pot.

To help you keep track along the way, you’ll have access to an online portal called your Total Rewards Statement. These statements are refreshed every year and give you information about the value of your employment package, as well as details about your total pay and the benefits provided by your employer.

What are the benefits?

The main benefit of being in the scheme is the income you’ll receive when you retire. When you reach retirement age, it’s payable for life and fully guaranteed by the government based on the contributions you’ve made each year. The sooner you start to pay into your pension, the more you’ll benefit from it later on in life.

There are other benefits for you – and any future family – too:

  • If you become too ill to work, you can apply for an early ill-health retirement and, in the case of permanent incapacity, access to your full pension pot.
  • You’ll be covered for death benefits if you die. This means your family may be entitled to some of your retirement savings, including a lump sum and a pension for partners and dependent children.
  • You may choose to swap some of your annual pension for a one-off lump sum when you retire, or to start taking an income before your normal pension age.
  • Depending on what type of member you are, you could be flexible about when you take your pension while continuing to work, and potentially increase the value of your savings through various schemes.

The NHS Pension Scheme is attractive when you consider that in the UK, the total minimum contribution to a workplace pension scheme by law is 8%. This is split between the employer and employee (with the employer required to contribute a minimum of 3%).

What happens if I opt out?

When money is tight and retirement seems like a long way off, you might be tempted to reduce or even cancel contributions to your NHS pension in order to save some more of your pay. But by doing so, you’re likely to damage your retirement savings in the long run.

Cancelling or reducing your contributions could lead to a shortfall when you retire and you may struggle to meet your income needs. You might even find that you need to work for longer so that you have enough money to live on when you eventually retire.

Opting out also means you won’t accumulate further pension benefits because your contributions have ceased. If you were too ill to work and had to retire early, for example, you would not be covered as generously by the scheme’s ill health retirement benefits.

It’s good to remember that:

  • Even if you opt out, you’ll be re-enrolled into the scheme due to auto-enrolment rules, usually within three years. You’ll have to choose to opt out again.
  • If you leave the NHS for another employer and another pension scheme, you may be able to transfer your NHS pension benefits to the new pension provider.

While opting out may provide some short-term financial relief, it’s important to consider the long term. Take a look at your spending habits and income to see if you can make savings elsewhere in your budget before making a decision.

Think long term

A good approach for a healthy financial future is to start saving early. This includes paying into your pension and taking advantage of the contributions from your employer so that your retirement savings can build up over the years.

For most people, a pension is the most tax-efficient way to save for retirement because the contributions are free from income tax. Although you’ll probably accumulate other savings and investments over your lifetime, your NHS Pension Scheme can be a great way to start.

To learn more, read our comprehensive NHS Pension Scheme guide.

Please note this blog is for information purposes only and does not constitute as financial advice.

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