Opting out of the NHS pension scheme

Given increases to contributions and the impact of pensions taxation for some members, doctors are asking if they are better leaving the NHS pension scheme. The BMA can help inform your decision.
Location: England Wales
Audience: All doctors
Updated: Friday 29 September 2023
Piggybank illustration

If you are thinking about opting out

  • It is possible to submit a written election to opt-out of the NHS pension scheme for future service. Retrospective elections are not possible. You must use NHS Pensions form SD502 and return to your Employer or PCSE (GPs).
  • If you work as a GP locum opting out is effected by not completing locum forms A and B (the means to opt into pensioning GP locum work). In respect of all other NHS pensionable work you are automatically included in scheme membership unless you make a written election to opt out.
  • If you have two or more years qualifying scheme membership this will result in you being treated as a deferred member of the scheme, in the same way as if you had left pensionable service with your employer.
  • If you have less than 2 years of qualifying service you are not a deferred member and risk a refund of contributions, less tax, being paid to you if you do not resume pensionable service within 5 years of leaving.
  • A deferred pension is usually paid from your normal pension age.
  • Should you choose to opt out, your deferred benefits will increase annually in line with inflation. Those with final salary linking to 1995/2008 benefits (as a result of not having a break in pensionable service of 5 years or more) with little or no pensionable pay increases may benefit more from inflationary increases when inflation is high.
  • Annual increases are applied in April and are currently determined by the CPI (consumer prices index) rate applicable at the end of the preceding September.
  • If you opt-out of the scheme with deferred benefits and have reached minimum pension age then you can choose to claim your deferred benefits early, provided you are no longer in NHS employment.
  • If you are still working in the NHS then you can draw your pension but you would need to take a break in service before returning to work.
  • If you have lost final salary linking to 1995/2008 benefits as a result of a break in pensionable service of 5 years or more no break in service is needed to access these benefits.
  • If you do choose to take your benefits early they will be actuarially reduced.
  • You cannot take your deferred benefits on voluntary early retirement grounds, if you left the scheme before 31 March 2000.
  • If you opted out during any of the McCloud remedy period or up to 6 months before 1 April 2015 you will be able to apply to reinstate the period(s) of service as part of the contingency decision provisions.

Tax implications

  • The annual allowance restricts the level of pension savings that can be made in any one tax year with the benefit of full tax relief. The 2023 Spring Budget increased the AA to £60,000 and other beneficial changes were also introduced (more details can be found in the Annual Allowance guidance).
  • Whilst the government will allow the carry forward of any unused relief from up to three previous years, a number of members have been left with an unexpected tax bill. This has led some to opt-out of the NHS pension scheme in order to avoid this charge.
  • The standard lifetime allowance is the total amount of tax privileged pension savings that you are allowed to accumulate within registered pension schemes. The 2023 Spring Budget removed the lifetime allowance (LTA) charge and the allowance itself will be abolished from 6 April 2024. Any LTA charges applied to ongoing pension benefits before the removal of the LTA will continue to apply prospectively.
  • Once benefits were taken that exceeded the LTA then a tax charge  was levied. Further to the abolition of the LTA new restrictions are in place in respect of the maximum tax free pension commencement lump sum and benefits taken in excess are subject to taxation at your marginal rate of income tax, incurring an AA charge may be better for your overall pension accrual and opting out will not always provide you with better retirement benefits.

What benefits will be lost if you leave a pension scheme

When considering opting out of the NHS pension scheme it is extremely important to think about the impact this will have on the valuable associated benefits provided, for example the loss of the death in service gratuity (two times actual annual pay). The ability to retire with an enhanced pension in the event of ill health, the access of redundancy options in relation to pension benefits and the use of partial retirement/draw down are all dependent on active membership. Those with the historical Mental Health Officer (MHO) status can only retire from age 55 onwards if in active pensionable service in a role which would have held MHO status had the 1995 section rules prevailed.

Furthermore, these benefits change once you have been a deferred member for longer than 12 months. As all active membership is in the 2015 scheme as from 1 April 2022 the death in service lump sum is only payable as per the rules of the 2015 scheme from that date onwards.

The key differences can be summarised as follows:

Death within 12 months of leaving the scheme Death after 12 months of leaving the scheme
1995 section: lump sum of three times annual pension.
2008 section: lump sum of 2.25 times annual pension.
2015 scheme: lump sum of 2.025 times annual pension.		 1995 section: lump sum of three times deferred pension.
2008 section: lump sum of 2.25 times deferred pension.
2015 scheme: lump sum of 2.025 times deferred pension.
No six month short term pension payable. No six month short term pension payable.
Widow’s, same sex marriage or same sex civil partnership pension of:
1995 section: 50%
2008 section: 37.5%
2015 scheme: 33.75%
...of tier two ill health retirement pension at date of death.		 Widow’s, same sex marriage or same sex civil partnership pension of:
1995 section: 50%
2008 section: 37.5%
2015 scheme: 33.75%
...of deferred pension as at date of death.
Widower's or partner's pension of:
1995 section: 50%
2008 section: 37.5%
2015 scheme: 33.75%
...of tier two ill health retirement pension (post 6 April 1988 membership only) at date of death.*		 Widower's or partner's pension of:
1995 section: 50%
2008 section: 37.5%
2015 scheme: 33.75%
...of deferred pension as at date of death (post 6 April 1988 membership only).
Dependant's pension of:
1995 section: 25%
2008 section: 18.75%
2015 scheme: 16.875%
...of tier two ill health retirement pension at date of death.
This is subject to a maximum of 50%, 37.5% or 33.75% respectively annual pension at date of death for two or more dependants.*		 Dependant's pension of:
1995 section: 25%
2008 section: 18.75%
2015 scheme: 16.875%
...of deferred pension as at date of death.
This is subject to a maximum of 50%, 37.5% or 33.75% respectively deferred pension at date of death for two or more dependants.*

* The enhancement for widow’s and/or dependant’s pensions being based on the tier two ill health retirement pension at date of death applies to the 2015 scheme entitlement only for members who have transitioned from the 1995 or 2008 section to the 2015 scheme.

It should also be understood that no enhancement is provided for a deferred member in any ill-health retirement. If however you have opted out and apply for ill health retirement meeting the tier 1 condition you are able to claim a tier 1 pension which is slightly different to the position for individuals who are deferred on account of no longer working in the NHS.

The rules on the payment of a serious ill-health lump sum are no different for deferred members.

If you are planning to opt out only for short periods of time please remember that added years or additional pension contracts will terminate if you do not rejoin within 365 days. If you have an ERRBO contract this will continue providing the break is for less than five years.

During any period where you are opted out you accrue no pensionable service and the period is ignored when calculating total pensionable pay or reckonable pay for final salary linked 1995/2008 section benefits.

Think carefully - seek independent advice

Consequently, any decision to opt-out of future service should not be taken lightly. It is unlikely to be in the best interests of the vast majority of scheme members to make the decision to opt-out. 

Doctors must therefore balance the possible tax implications against the loss of pension and life assurance benefits.

BMA members should contact Chase de Vere for independent financial advice.