The pensions epidemic
DO you have a final salary pension? Yes? Then this article is essential reading for you.
We'll start by talking about health workers, but this applies to everyone.
The NHS is in urgent need of a doctor, because at the moment, there is an epidemic in progress.
I'm not referring to this awful C-Diff bug which has been wreaking havoc among both patients and staff in our hospital wards lately.
I am talking about something really life-threatening: the tendency for NHS workers to leave their (very generous) final salary pension scheme.
The term ‘epidemic' was used by former pensions minister Steve Webb, now director of policy at the mutual insurer Royal London. They did the research on this, based on data from the NHS Business Services Authority.
In England alone, just under a quarter of a million workers have left the NHS final salary pension scheme over the past three years. That's about 16 per cent of active members.
It's a massive proportion when you compare it with just 3.4 per cent of members of the Teachers' Pension Scheme, 1.45 per cent for civil servants, and 0.04 per cent for members of the armed forces.
Nine out of ten nurses, midwives and health visitors pay into the NHS pension scheme - so when Steve Webb says ‘epidemic', it's no exaggeration.
Why is the exodus from such a generous pension scheme so high for the NHS? Have they lost the plot?
To be fair to our brilliant healthcare workers, it's no secret that times were hard from 2011 to 2017: Government imposed a pay freeze across the public sector from 2011-13, and then ‘granted' a 1 per cent pay rise in 2013-14 that still hobbled along lamely behind inflation. That meant an average plummet in real income of £1,985 a year for nurses and care staff, while funding cuts ensured their hours and stress went up. Ambulance staff were even worse off. Their incomes were down £5,286 in real terms, and for midwives it was £3,504 lower.
So doesn't it just warm your heart, when Tory politicians praise the selfless workers of the NHS?
Anyway, let's get back to the figures.
Many's an NHS worker earning £25,000 and paying 7.1 per cent of that into their pension would have been attracted by a saving of £1,240 a year by opting out, says Steve Webb.
But it's a ‘saving' which falls apart, when you look at it through the eyes of a financial adviser. Yes, you save that £1,240 this year, but Steve says that to replace that income in retirement, you would require a lump sum of £13,000 – nine times more than you saved in the first place.
And as I said, you don't have to be a nurse. No matter who you work for, whether NHS, civil service or private company, if you have a final salary pension you have a guaranteed income calculated on your final salary and years of service.
That's not to be sniffed at. In this day and age, guarantees are an endangered species and if you have one, you should really think hard (and take financial advice) before giving it up. Especially since the money is not all you get from a final salary pension.
There are often many other benefits. There can be index-linking, meaning that your pension income will rise each year to offset the effects of inflation, maybe even keep up with rising prices.
Then there can be ‘death-in-service' payments to your family or dependants, if you die before you take your pension; you may also be given your full pension if you have to retire early for health reasons; and if you choose to retire early, from the age of 55, you can still get a pension (albeit a reduced one). That's a great package of benefits.
Let's get back to the hospitals, where, unfortunately, it's the younger workers aged 26-35 who are most likely to opt out. Around 30,000 of them did so in 2017 alone.
Good old Steve Webb has always been a great fan of financial advice, and in this case he is in no doubt that part of the reason for this epidemic is dodgy judgement due to a lack of information.
Would the opt-outs among healthcare, teaching and civil service staff have stayed, if they had been able to compare the annual saving to the eventual loss of income in retirement?
You'd have to be mad not to see the (financial) doctor, before leaving such a great pensions package.
Are you going down with a bout of dodgy judgement?
Don't worry. Take two tablets and give us a ring!
:: Michael Kennedy and Shaun Doherty are independent financial advisers and pensions specialists, and can be contacted on 028 71886005 . Further information is available on the Facebook page 'Kennedy Independent Financial Advice Ltd' or the website www.mkennedyfinancial.com