To mark Pensions Awareness Week ,Wesleyan Financial Services’ Regional Manager, Simon Cosgrove, explains why it’s important to replace your NHS pension immediately if you move to private dentistry.
When you hand back your NHS dental contract, you also leave the NHS pension scheme. The pot you have already accumulated is safe, but you will no longer be able to add to it. If you’ve been in the scheme for more than two years, then you should be able to defer your pension until your specified retirement age. In the meantime, you will need to replace your pension with a private one.
Handing back your NHS contract can be quite a stressful time. With everything going on, for some people, it can be tempting to take a break from contributing to a pension with the idea of starting again when the dust has settled. However, it’s easy to forget to do this when you’re busy. This can leave them at a greater disadvantage than they realise.
Replace as soon as possible to avoid additional expense
This is because NHS pensions and private ones are different from each other. An NHS pension is based on an individual’s income, whereas a private pension is invested in the stock market. When pensions or savings are invested, they attract compound growth, which is growth on growth. So, if an investment grows by 5% in one year, then the interest will be added to the initial sum. If, in the following year, it grows by 10% then the interest will be paid on the initial amount plus the interest from the previous year. So, growth accumulates every year. Please note that the value of investments can go down as well as up and you may get back less than you invest.
By delaying, even if it’s only for a year or two, it can mean that, to get the pension you want, you would need to save more. This is because they will have missed out on the contributions and compound growth for those missing years, every year until retirement.
With products such as life insurance, pensions and income protection, it’s nearly always better to start as soon as you can. For example, something that might have cost £300-a-month to get the level of saving that you wanted might suddenly cost £500-a-month because you delayed by a couple of years. For that reason, it’s best to make the transition from NHS to private pension a seamless one. Try not to leave any gaps in your cover. That means contributing to your private pension as soon as you hand back your NHS contract. This will ensure a continuous flow of savings into a pension.
Many dentists don’t appreciate that NHS pensions do more than simply provide the holder with an income and a lump sum in retirement. They also offer a spouse’s pension payable in the event of the death of a dentist who was receiving an NHS pension, their husband or wife would be eligible for a spouse’s pension from the NHS.
More than simply your own pension
That’s not all as there’s also a dependents’ pension. So, if a dentist dies in service and they have children, the NHS will also pay a dependents’ pension, if they’re still financially dependent, until the children reach the age of 23. The NHS pension also offers a lump sum on death which is twice the pensionable income.
So, these are benefits you may also want to replace when you move from the NHS to private dentistry. You may want to opt for simply replacing your pension or you may think about also taking out life cover of some sort. This could be in the form of a policy that pays out a lump sum on death or you may consider a family income benefit policy. This would pay out income to replace the lost income and can be used instead of the spouse’s or dependents’ pension.
Fortunately, life cover for most people can be relatively inexpensive these days. Statistically, you’re more likely to be off work long-term sick than die early. Which brings me on to another NHS pension benefit that could be good to replace which is ill-health retirement pension. If a dentist becomes ill and they’ll be unable to work again, then they can retire, and the NHS will pay them their pension early.
Ill-health retirement pension has two tiers. Tier one applies if the dentist is unable to do their own job, but they could do another type of work within the NHS. In these circumstances, they will be eligible to receive the pension they’ve built up to that date. If there’s no way for them to work ever again, then they can receive the pension they have already built up plus a proportion of what they would have earned had they managed to continue working until their expected retirement date.
So, when it comes to replacing your NHS pension there’s more to consider than merely the dentist’s own pension. To ensure you’re replacing like for like you’ll need to look at the dentist’s retirement benefits, spouses’ and dependents’ pensions, ill-health retirement pension, and death in service cover. All of these can be replaced but it may be a good idea to take some advice to ensure the best way to do this.
You can find out more by reading the following guide, ‘Moving from NHS dentistry to private practice’ from Wesleyan Financial Services, part of the Wesleyan Group of Companies.