NHS Pension Contribution or Stealth Tax?

BPSparks

Hi.
I recently secured my dream job in the NHS after finishing University. 
I recently received my first paycheck and was surprised to see that a 7.7% deduction was taken from my gross salary for my pension contribution. I contacted HR to enquire about the possibility of reducing that amount and was told that it is a fixed percentage that I am unable to amend it. 

First let me say that I am aware of how important it is to save for my retirement (in 40+ years) and that I intend to do so. I am also aware that the minimum contribution level through NEST is 8%, but that's an equal contribution between you and your employer. By the way the NHS contribution to my pension is 14% of my salary, which I know is fantastic. According to my calculated retirement needs, taking all things into account and all the guess-timations like inflation, I need nowhere near this level of contribution at this early stage of my working life to achieve my objectives. I have 42 years to save for my retirement and that is if they don't increase the State Pension Age by the time I get there (unlikely)...

At this stage in my life I am more concerned about saving for a home deposit and all that goes with starting out in life away from my parent house. 
The 7.7% of gross income is a big burden and the student loan repayments haven't even kicked in yet...this will reveal my salary level. I have over 40 years to amend my contribution levels, up and down, in line with the stages of life I will go through.

This has led me to believe that this contribution level, which I have no control over, is rather more of a stealth tax on my earnings, because my employer (ultimately the UK government) will also be my pension provider once I come to retire. 

Is this even legal?

x

Gary1984

Opt out then. I as a tax-payer would be delighted you'd be throwing away so much free money.

And of course it's legal. Not enrolling you would in fact be illegal.

Moonwolf

*sigh*

Of course it is legal, do you think if it wasn't, one of the million plus NHS staff would not have challenged it in court?  You can't change your contribution level because you receive a fixed set of benefits and the contribution level for those benefits is set by the NHS.  7.7% is amazing for the benefits you get, I'm lucky enough to be earning enough to pay 12.5% but as a percentage I receive the same benefit.

It isn't a tax, you are paying towards a personal benefit that you will receive, a benefit very heavily subsidised by other taxpayers.

You could opt out of the NHS pension if you wish and you could choose to pay less into a private scheme but the NHS would not match it.  You would lose the huge benefit you get and death in service benefits.  Unless you are in absolute financial dire straits almost everyone on here would tell you that this would be a mad thing to do.

Troxy

One of the best pension schemes around backed up by the government, hardly a stealth tax! Plus you are also being subsidised by the higher earners in the NHS - the average employee contributions are around 9.8% with lower earnings paying less and higher earners more.

Dazed_and_C0nfused

Don't forget if you opt out not only will you be incredibly disappointed with yourself in a few years but you'll also have to pay more tax now than you currently pay.

Albermarle

Most private employers only pay 3% into their employees pension schemes, some pay more but over 10% would be unusual.
Presumably the pension contribution was clear when you signed the employment contract ?

dunstonh

I recently received my first paycheck and was surprised to see that a 7.7% deduction was taken from my gross salary for my pension contribution. I contacted HR to enquire about the possibility of reducing that amount and was told that it is a fixed percentage that I am unable to amend it. 

7.7% is a very low contribution level. 

First let me say that I am aware of how important it is to save for my retirement (in 40+ years) and that I intend to do so. I am also aware that the minimum contribution level through NEST is 8%, but that's an equal contribution between you and your employer. 

Do not mix up NEST with auto-enrolment.  NEST is a product provider.   The rules are under auto-enrolment.  Not the product provider.

Your main issue here is that you are comparing a defined contribution scheme with the NHS defined benefit scheme.  The NHS pension is one of the best going.

By the way the NHS contribution to my pension is 14% of my salary, which I know is fantastic.

Its not 14%.  That is a notional figure.   The taxpayer picks up the tab for your pension

This has led me to believe that this contribution level, which I have no control over, is rather more of a stealth tax on my earnings, because my employer (ultimately the UK government) will also be my pension provider once I come to retire. 

That comment shouldn't surprise me as we all know the NHS is one of the worst when it comes to understanding their pensions.

However, to even hint that the NHS pension is a stealth tax is bizarre.    The NHS is one of the biggest drags on the treasury and total staff costs are some of the most generous going.      I know parts of the NHS are striking over pay but when you look at the remuneration package as a whole, it is very attractive and quite a bit higher than the private sector.    One of the reasons is the extremely generous pension.

The tax payer benefits enormously from you opting out.  So, if you wish to do your part for the country, then please do opt out.   Even opting out just for a few years could cost you tens of even hundreds of thousands of pounds which in turn means the taxpayer hasn't had to pay that out to you.

It would be the worst financial decision of your life.    I hope you put more care in your day job about understanding issues and resolving them than you have with your views on your pension.

BPSparks

Thanks for all of your replies. Most were informative if some a bit passive aggressive ..lol...chill keyboard warrior. 
What I have learnt is that the scheme is, according to one of the comments,...a defined benefit scheme. I have been used to defined contribution schemes and thought it that. As another comment mentioned... staff are pretty unaware of their pension scheme here, and I haven't been provided with any information although deductions have been taken. I will endeavor to find out more. 
Forward and upward....byeeeee 

Moonwolf

BPSparks said:

Thanks for all of your replies. Most were informative if some a bit passive aggressive ..lol...chill keyboard warrior. 
What I have learnt is that the scheme is, according to one of the comments,...a defined benefit scheme. I have been used to defined contribution schemes and thought it that. As another comment mentioned... staff are pretty unaware of their pension scheme here, and I haven't been provided with any information although deductions have been taken. I will endeavor to find out more. 
Forward and upward....byeeeee 

You can start here if you want to know more, bottom right is the 2015 Member Guide - https://www.nhsbsa.nhs.uk/member-hub

Dazed_and_C0nfused

BPSparks said:

Thanks for all of your replies. Most were informative if some a bit passive aggressive ..lol...chill keyboard warrior. 
What I have learnt is that the scheme is, according to one of the comments,...a defined benefit scheme. I have been used to defined contribution schemes and thought it that. As another comment mentioned... staff are pretty unaware of their pension scheme here, and I haven't been provided with any information although deductions have been taken. I will endeavor to find out more. 
Forward and upward....byeeeee 

A simple example.

Say you earn £30k in pensionable wages.  And contribute 7.7%, a total of £2,310.

But the real cost is only £1,848 because you avoided paying tax on £2,310 of your earnings.

In return you will have accrued a pension of £555.55.  And the NHS 2015 scheme has a generous inflation proofing aspect, CPI + 1.5%.  So if you had earned £555.55 this tax year it would actually be £620 once the inflation uplift was applied.

NlghtOwl

It’s very easy to jump up and down and ‘have a go’ but it highlights an important point that educated young people do not have the experience to always make the correct financial decisions that their older selves would thank them for later in life.
Also that the employer has a duty to explain and educate new starters, not just give a leaflet and presume that is enough. Put them in contact with an older worker looking forward to retirement, an ex-employee who has retired early through Ill health, or family of a deceased member who has had their mortgage cleared through death in service payment.  We are doing them a disservice to dismiss these decisions.