I work for the NHS and stupidly opted out of the pension scheme a number of years ago.
I earn around £34,000 per year and I am 50 years old.
My question is, should I opt back in? Will it be worth the monthly payments?
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Financial dilemma: I stupidly left the NHS pension scheme, but is it worth opting back in now?
Steve Webb replies: Your question highlights an issue that gives me great cause for concern.
This is the large number of people who work in the public sector who are opting out of high-quality pensions and potentially doing serious damage to their financial future in the process.
As someone working in the public sector, you will be aware of a number of things which have made things more difficult for you financially in recent years.
You may have had repeated pay freezes or pay squeezes.
You will have been told to put more money into your pension, that you will have to wait longer to receive it and that you may get less out than in the past.
Possibly you have also read stories about higher earners such as GPs and consultants getting shock pension tax bills, but this issue doesn’t affect NHS workers on your salary.
Steve Webb: Find out how to ask the former Pensions Minister a question about your retirement savings in the box below
Despite all of these things, the pension arrangements that teachers, nurses, civil servants and other public servants can access remain some of the best available.
There are several reasons why public servants should think very hard before opting out of their workplace pension, or should consider opting back in if they can do so.
The first, and most important, is that your employer is contributing a large part of the cost of your pension, and if you opt out that money is generally lost to you.
In the case of the NHS, the employee contribution rate depends on your earnings, but for someone on your earnings the contribution rate is 9.3 per cent.
Your contributions are allowable against tax which effectively cuts the cost to you by 20 per cent.
Your net contribution is therefore is just under 7.5 per cent of your salary.
Although this is a lot of money, your employer (and the Treasury) is contributing over 20 per cent of your pay towards the cost of your pension.
There isn’t an actual pension pot into which your contributions are being invested, but it is fair to say that the relative size of the employee and employer contributions is a clear sign that you are only paying a small part of the total cost of the pension you will eventually receive.
Although comparisons with the private sector are not straightforward because you need to compare pay and other conditions and not just pensions, it is very noticeable that very few workers in the private sector benefit from this kind of salary-related pension any longer.
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In part this is simply because it is so expensive for employers to provide.
Only around 1million people out of the entire private sector workforce is still building up a pension of the sort that you can benefit from.
A second important attraction of the NHS pension scheme is the relative certainty that it gives you compared with other forms of pensions.
Although there have been a lot of changes to public sector pensions (and recent court cases mean that there are more to come), the one you get is much more predictable than the ‘pot of money’ pensions most private sector workers build up for retirement.
Employer contributions into such pensions are far less generous, and workers bear all the investment risk which means they are fully exposed to financial market volatility.
In the NHS scheme and most other public service schemes, your pension:
1. Is guaranteed to pay out until you die
2. Continues to pay a proportion of whatever you receive to your spouse or civil partner, if they survive you.
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3. Won’t be affected by the ups and downs of the stock market (particularly useful at a time like this, when concerns about coronavirus have caused sharp drops)
4. Has a measure of protection against inflation.
By contrast, your private sector counterparts who are building up a pot of money pension are exposed to all of these risks and uncertainties.
Whilst I’m not able to give individual advice, I can say with confidence that someone thinking of saving into a pension will struggle to find a more attractive arrangement than the one that is available to you, even after recent changes.
ASK STEVE WEBB A PENSION QUESTION
Former Pensions Minister Steve Webb is This Is Money’s Agony Uncle.
He is ready to answer your questions, whether you are still saving, in the process of stopping work, or juggling your finances in retirement.
Steve left the Department of Work and Pensions after the May 2015 election. He is now a partner at actuary and consulting firm Lane Clark & Peacock.
If you would like to ask Steve a question about pensions, please email him at [email protected].
Steve will do his best to reply to your message in a forthcoming column, but he won’t be able to answer everyone or correspond privately with readers. Nothing in his replies constitutes regulated financial advice. Published questions are sometimes edited for brevity or other reasons.
Please include a daytime contact number with your message – this will be kept confidential and not used for marketing purposes.
If Steve is unable to answer your question, you can also contact The Pensions Advisory Service, a Government-backed organisation which gives free help to the public. TPAS can be found here and its number is 0800 011 3797.
Steve receives many questions about state pension forecasts and COPE – the Contracted Out Pension Equivalent. If you are writing to Steve on this topic, he responds to a typical reader question here. It includes links to Steve’s several earlier columns about state pension forecasts and contracting out, which might be helpful.
If you have a question about state pension top-ups, Steve has written a guide which you can find here.
TOP SIPPS FOR DIY PENSION INVESTORS
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