What the rise in CPI could mean for your NHS pension

Active members’ existing pension benefits increase annually in line with the current CPI figure, plus 1.5%. So for 2022/23, this ‘revaluation figure’ is 11.6% (i.e.  10.1% CPI + 1.5%).

Pension growth in the NHS Pension Scheme (i.e. the amount of Annual Allowance (AA) used) is calculated as the difference between the benefits at the beginning and the end of the tax year.

The calculation used to determine pension growth allows for inflation by increasing the opening figure by CPI. However, in contrast to the revaluation figure, this relies on the previous year’s CPI figure.

Therefore, in times of rising inflation, a difference between these two figures can result in significant pension growth and the risk of sizeable tax charges. 

Last year’s September CPI figure was 3.1%. Compared with the above revaluation figure of 11.6%, this effectively creates an 8.5% discrepancy between these two inflation figures. To reiterate, this is the above revaluation figure of 11.6%, less last year’s CPI figure of 3.1%. 

As shown in the following worked examples, due to the way in which pension benefits are calculated, the impact of the uplift in inflation is likely to be more severe for GPs. This is because the ‘legacy’ Sections of the scheme (so the 1995 Section in this example) are based on cumulative revalued earnings for GPs and on a ‘final salary’ basis for consultants.

Pension growth for the 2022/23 tax year - examples

Consultants

Here we look at two examples of consultants with differing levels of service.

• A consultant with benefits in the 1995 and 2015 Section with 30 years’ pensionable service in the 1995 Section and pensionable earnings of £120,000 would have a PIA of c. £73,000.
• A consultant with benefits in the 1995 and 2015 Section with 15 years’ pensionable service in the 1995 Section and pensionable earnings of £100,000 would have a PIA of c. £56,000.

In these examples, there is no longer any additional accrual in the 1995 Section, but the benefits remain linked to the member’s pensionable salary. Therefore, where the pensionable salary increases in excess of the previous year’s CPI, there will be a positive growth figure.

These examples assume a 4.5% increase in pensionable earnings for 2022/23 which would lead to an effective uplift of 1.4% versus the previous year’s inflation figure. Whilst much less than the input amounts in the above examples, this still represents substantial growth in excess of the Annual Allowance.

GPs

Here we look at two examples of GPs with differing earnings. 

For clarity, ‘cumulative pensionable earnings’ represent a GP’s total historical earnings. Broadly speaking, these earnings are uplifted annually in line with inflation, plus 1.5%, and the current pension figure is 1.4% of this.

• A GP with benefits in the 1995 and 2015 Section with cumulative career pensionable earnings of £3,000,000 and current earnings of £120,000 p.a. would have a PIA of c. £133,300
• A GP with benefits in the 1995 and 2015 Section with cumulative career pensionable earnings of £1,500,000 and current earnings of £100,000 p.a. would have a PIA of c. £87,200.

In these examples, as both the current and ‘legacy’ Sections of the scheme base the current pension on cumulative earnings which are then revalued with CPI, the impact of the uplift in inflation is more significant in comparison with consultants.

Summary

In summary, whilst both are likely face considerable tax charges for this tax year, this will be a more significant issue for GPs.  

Whilst the PIAs for those earning less are still likely to be much higher than previous years, it is important to highlight that carry-forward allowance (unused allowance from the previous three tax years) may be able to offset this and reduce/eliminate tax charges.

It is also important to note there are other factors which might impact PIAs, namely other changes in pensionable earnings, and these examples are only intended to provide a basic overview of how the current inflation environment will impact healthcare professionals.

This analysis does not account for the impact of the McCloud judgement on benefits accrued to date.

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