NHS Pension - Death and illness

Due to the chat about 1% pay rises for NHS staff, a discussion amongst friends brought up the NHS pension again. One thing not mentioned previously, was the illness and death benefits that it brings. This document outlines a lot about the 2015 pension scheme and also talks about what would happen if you were too ill to work. This is only applicable to the 2015 scheme; given the recent McCloud judgement, I am unsure if we have all reverted back to the legacy schemes. However, come April 2022, everyone should be on the career-average 2015 (maybe renamed to 2022) NHS pension scheme so hopefully this should still be applicable then. 

Ill health retirement

Firstly, you must have been a member of the scheme for 2 years to be eligible. The scheme recognises two different type of career ending illnesses, Tier 1 which is being unable to do the current NHS post due to illness but can still work doing another role. Tier 2 is defined as being unable to carry out regular employment of like duration to NHS employment up to the normal pension age due to permanent ill health. 

• Tier 1 - entitled to the pension that had already earning up to the point of their ill-health retirement with no reduction/penalty for taking it early. 

• Tier 2 - entitled to Tier 1 pension plus the 'tier 2' addition which is pro rata enhancement based on 1/2 of the prospective pension to Normal Pension Age. 

It is possible to move from tier 1 to tier 2 after assessment by the scheme's medical advisors, within 3 years of retiring. You may still be affected by the annual allowance, you may need to get further assessment to be exempt.

If you are terminally ill however, you can take all your benefits immediately as a lump sum, and should not be tested against the annual allowance. This is known as a Serious Ill Health lump sum. If you are over 75 when taking the Serious Ill Health lump sum, you will be charged 45% which is deducted from the sum before the payment. 

Death benefits

A rather morbid topic, but important to consider if you have family or loved ones you'd like to take care of. A lump sum is paid out on the scheme members death to their nominated party. Automatically it will likely be your spouse, civil partner or qualifying nominating partner. You can change your nomination at anytime. Please note that this may be subject to inheritance tax to anyone other than your spouse or civil partner. 

You will need to be relatively quick on notifying the scheme that the member has died, if you wait more than two years before telling them, there will be a 45% HMRC tax charge taken before payment of the lump sum. If the person dies after 75 years old, then the lump sum is subject to a special lump sum benefit charge of 45% if paid to an organisation or the marginal tax rate of the recipient. This is taken prior to payment. 

So how much can you get? The calculations look rather complicated, but the below table from the scheme guide outlines the lump sum and pension available to the your partner on your death (assuming at least two years scheme membership). The survivors pension is paid for the whole life of the nominated person.

So from the table, you can note that there many benefits to your nominated person if you die on the job. They can claim 33.75% of your tier 2 ill-health pension if you were under the normal pension age and 33.75% of your normal pension if you were older than the pension age. They also get 6 months of  a short term pension equal to your pensionable earnings (for GPs/practitioners, calculated as earnings in last complete quarter prior to death) plus a big lump sum. This lump sum is the higher of 2 x relevant earnings in the last 12 months of pensionable service or revalued (adjusted with inflation) earnings for the scheme year, up to 10 years prior, with the highest value used. 

If you've retired and then passed away, the pension percentage of 33.75% stays the same for your nominated person. They also get a short term pension equal to the members pension for 3 months (6 months if eligible child involved). The lump sum is a lot less though potentially. It is the lesser of 5 x annual pension amount minus any pension any paid or 2 x the lump sum that would have been paid if they had been a member at the time of death minus any retirement lump sum already taken. This will mean that no lump sum will be payable after 5 years of retirement. 

Children

I did not realise this before, but there are pensionable benefits to pass down to children as well. If you die and have children, they also can claim part of your pension until they are 23 (and in full time education). If they have a medical condition which prevents them from earning a living, that was present when you retired and the date of your death then they can claim this indefinitely.

If you were still working at the time of death, then the child's pension is 16.875% of your tier 2 ill-health pension you would have received. This increases to 33.75% if you have two or more children. They may also get short term pension at the rate of pensionable earnings for 3 or 6 months depending whether they also have a dependable adult.

If you had already retired and passed away, your child's pension would be 16.875% of your pension, with two or more children claiming 33.75% of your pension. They can also claim for a short term pension equal to the rate of the original pension for 3 or 6 months dependant on if an adult is also involved.  

Conclusion

No one likes to think of their death but knowing there is some financial protection for loved ones and family if the worst were to happen is a reassuring thought. It's not as good as it used to be but I still feel it is one of the best financial schemes to be a part of and one should think very carefully about opting out. The McCloud judgement has rocked the boat a bit in regards to pensions, and it's all a bit up in the air, so once I get my head round it, I'll try to summarise it.  

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