New starter NHS pension - tax and benefits

edited 30 November -1 at 1:00AM in Pensions, Annuities & Retirement Planning
12 replies 2.3K views
dag_2dag_2 Forumite
793 Posts
Hello. I'm about to start working for the NHS, and I'm wondering whether I should opt in or out of the NHS pension scheme.

At the moment, I think I'll probably opt out of it - because I'm in private rented accommodation, and have huge credit card debts, and I think I'll probably be better off in the long run trying to clear my debts and get on the housing ladder rather than save for a pension - especially considering that my take home pay plus housing benefit minus rent is still much less than what people over 60 can get on Pension Credit.

But I'm not sure - I have a few questions about it.

1) Am I right in thinking that if I opt in, the pension deduction would be 5% or 6% of my gross salary?

2) Am I right in thinking that my income tax will be based on my earnings after pension contribution deduction, rather than before?

3) Does the same apply to working tax credit claims?

4) Am I right in thinking that the national insurance rate would be 9.4% rather than the normal 11%?

5) How will national insurance be worked out? Will it be based on my gross pay before pension deduction or after?

6) How will opting in affect my housing benefit and council tax benefit? Will they base the 65% and 20% income taper deductions on my actual net pay, or will the local authority calculate what my income would have been if I had opted out of the pension, and use that figure instead?

7) Am I right in thinking that if I get made bankrupt or enter into an individual voluntary arrangement, my pension contribution is safe?

8 ) Is there any possibility of being found guilty of bankruptcy fraud as a result of opting in to any kind of pension scheme, or making additional voluntary contributions, before being made bankrupt?

Can anyone answer any of these questions? Thanks. :)
:p
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Replies

  • margaretclaremargaretclare Forumite
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    Hi

    I think the answer is Yes to 1, 7 and 8. Re 1, in addition to you putting in 6% the employer also puts in the same amount, and you get tax relief on the contributions.

    Margaret
    [FONT=Times New Roman, serif]Æ[/FONT]r ic wisdom funde, [FONT=Times New Roman, serif]æ[/FONT]r wear[FONT=Times New Roman, serif]ð[/FONT] ic eald.
    Before I found wisdom, I became old.
  • margaretclaremargaretclare Forumite
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    Hi

    Further to question 8, I didn't mean Yes to bankruptcy fraud! I can't see how on earth paying into a work pension could be construed as committing fraud.

    Margaret
    [FONT=Times New Roman, serif]Æ[/FONT]r ic wisdom funde, [FONT=Times New Roman, serif]æ[/FONT]r wear[FONT=Times New Roman, serif]ð[/FONT] ic eald.
    Before I found wisdom, I became old.
  • dag_2dag_2 Forumite
    793 Posts
    I have some possible answers ....

    http://www.1stopinsurance.com/news/SalarySacrifice6_8_03.htm
    ... suggests that the amount contributed to an occupational pension is based on both the deduction plus the employer's NICS added together. So I guess this means that national insurance for both employer and employee is based on salary after pension contribution deduction - is that correct?

    As for housing benefit ....
    http://www.knowsley.gov.uk/finance/benefits/Counciltax.html
    We use net income (that is what’s left after tax, National Insurance and half your pension contribution is taken out).

    Half your pension contribution - not all of it. I guess that means they add half your pension contribution back to your net pay. Hmm - not as good as I hoped.

    Course, your net pay would only decrease by 67% of your pension contribution - because you'd have had to pay tax and national insurance anyway. But housing benefit will effectively only treat it as a 17% reduction.

    If you're on working tax credit, your income net of tax, NI and tax credits would decrease by 30% - but housing benefit would treat it as a 20% increase - meaning that housing and council tax benefit would decrease by 13% and 4% of your pension contribution. Ouch.

    Have I got all that correct so far?

    Apparently, each year of contribution will pay 1/80th of the best of the final three years' salary per year. Am I right in thinking that means after deduction of pension contribution?

    Hmm. One eightieth would be good news if I get a fantastically huge pay rise some day - but otherwise, it seems hardly worth it. I'll have to study the odds.
    :p
  • dag_2dag_2 Forumite
    793 Posts
    Thanks for the advice margaret. I know what you're saying about fraud. But I think that when you get made bankrupt, the bankruptcy courts sometimes think it's a bit fishy if a lot of money seems to have disappeared from the estate just before the judgement. I guess it depends how much money has vanished - and where it has actually gone. What if it's gone into a pension?

    But maybe that's just me being paranoid. I guess that they're unlikely to question ongoing salary deductions - but they might question very large additional voluntary contributions made within a short space of time.
    :p
  • dag_2dag_2 Forumite
    793 Posts
    Aha ... about bankrupcty fraud ...
    http://www.admin.ox.ac.uk/pensions/nhs/fact.shtml
    The most you can pay, including your normal contributions, is 15% of your earnings in any Tax year.
    If that's true - then you won't even have the opportunity to shift vast sums of money out of an estate which might go bankrupt into an NHS pension. Which is a shame. But on the plus side, I guess it means they should never suspect fraud.

    You can see that I'm quite clueless about pensions! I'm trying to figure it all out from first principles. :) Thanks for all your help so far.
    :p
  • misterhmisterh Forumite
    138 Posts
    Dag

    I find a lot of these pension discussions bamboozeling but every financial expert I've heard says the NHS pension is excellent.
    An index-linked, final-salary pension plus lump sum of 3x your pension plus death benefits, ill-health retirement benefits and family benefits.
    The Scheme supposedly only costs 3.5% of your salary - which doesn't seem much.

    Besides you'll surely be getting a big rise under A4C!
    "Beer. Now there's a temporary solution."
  • PalPal Forumite
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    1) Am I right in thinking that if I opt in, the pension deduction would be 5% or 6% of my gross salary?  

    Yes.
    2) Am I right in thinking that my income tax will be based on my earnings after pension contribution deduction, rather than before?

    Yes.
    3) Does the same apply to working tax credit claims?

    No idea.  probably not.  I suggest you ask on the benefits board or speak to the benefits office.
    4) Am I right in thinking that the national insurance rate would be 9.4% rather than the normal 11%?

    I haven't checked the percentages, but yes, you pay lower NICs because the scheme is contracted out.
    5) How will national insurance be worked out? Will it be based on my gross pay before pension deduction or after?

    NICs are based on gross pay before pension deductions.
    6) How will opting in affect my housing benefit and council tax benefit? Will they base the 65% and 20% income taper deductions on my actual net pay, or will the local authority calculate what my income would have been if I had opted out of the pension, and use that figure instead?

    No idea.  I suggest you ask on the benefits board or speak to the benefits office.
    7) Am I right in thinking that if I get made bankrupt or enter into an individual voluntary arrangement, my pension contribution is safe?

    The money transferred to a pension fund is usually protected from bankruptcy because it is owned by the Trustees rather than you.  The only exception is when you are deliberately paying too much money into the scheme to try and protect it from creditors.  The standard contribution rate required by the NHS scheme is highly unlikely to be a problem.
    8 ) Is there any possibility of being found guilty of bankruptcy fraud as a result of opting in to any kind of pension scheme, or making additional voluntary contributions, before being made bankrupt?

    If the bankruptcy court believes that you have paid excessive AVCs in order to avoid paying your creditors then they may require the Trustees to refund the AVCs to you.  However if you are simply making reasonable retirement provision and become bankrupt through no fault of your own, you are are unlikely to be found guilty of "fraud".  In the end this comes down to the specifics of the bankruptcy case.

    IMHO anyone who is offered a final salary pension scheme but chooses not to join it is likely to regret their decision in the long run, especially if it is a local government scheme.
  • isasmurfisasmurf Forumite
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    Pal's answered your original questions, but just to pick up on a couple of your later posts.

    The maximum you can currently pay into an Occupational Pension (like the NHS pension) is 15% of salary. This is going to change from April 2006, when the most you could pay into your Pension is 100% of your earnings.

    You final pension will not be 1/80th of the best pay in the final 3 years of employment, but 1/80th for each year of employment. So if you worked for the NHS for 40 years, you get 40/80ths, i.e. half of your final salary. Work for 20 years and you get a quarter of your final salary.
  • MY ADVICE FROM SOME ONE WHO IS ABOUT TO RETIRE/PART TIME,HAVING WORKED IN NHS AMBULANCE SERVICE FOR NEARLY 39YRS,IS YES OPT IN IF YOU THINK
    THIS IS GOING TO BE YOUR MAIN CAREER.
    NHS PENSION SCHEME IS ONE OF THE TOP TEN SCHEMES IN THE COUNTRY.
    ITS ROUGHLY ABOUT 6% OF PENSIONABLE SALARY NOT TOTAL SALARY, IE OVERTIME NOT INCLUDED.
    AND DONT FORGET IT INCLUDES A LIFE COVER ELEMENT AS WELL..GET GOOD ADVICE FROM YOUR LOCAL PENSION OFFICER EACH NHS AUTHORITY/DEPARTMENT HAS THEM VIA YOUR PAYMASTER AND SALARY DEPT,

    OR CONTACT NHSPENIONS AGENCY
    HESKETH HOUSE 200_220 BROADWAY FLEETWOOD
    LANCASHIRE FY7 8LG

    01253 774774

    HOPE THIS HELPS GOOD LUCK
    Waddle you do eh?
  • dunstonhdunstonh Forumite
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    MY ADVICE FROM SOME ONE WHO IS ABOUT TO RETIRE/PART TIME,HAVING WORKED IN NHS AMBULANCE SERVICE FOR NEARLY 39YRS,IS YES OPT IN IF YOU THINK
    THIS IS GOING TO BE YOUR MAIN CAREER

    No, you should opt in regardless of whether you intend to be there 12 months or 30 years.
    I am an Independent Financial Adviser (IFA). The comments I make are just my opinion and are for discussion purposes only. They are not financial advice and you should not treat them as such. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.
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