Beware of final pay controls and the employer charge

Were you aware that following the introduction of new rules on 1st April 2015, if you give a member of your practice, who is a member of the 1995 section of the NHS pension scheme a pay rise in any of their last three years of service that exceeds the ‘allowable amount’ you can be invoiced by the NHS an ‘Employer Charge’ following the staff members retirement? To many surgeries, this comes as an unpleasant, expensive and unexpected shock.

The reason for this charge is down to the rules for calculating the pension benefits payable to a practice staff member under the 2015 section regulations. The pension payable is based on one 80th of the highest pensionable pay during their last three years of service.

If the staff member receives a significant pay increase in any of these last three years their pension can be distorted disproportionately in relation to the contributions made during their total period of service.

What is the ‘Allowable Amount’?

The allowable amount is the amount of pay increase a staff member in the 2015 scheme can receive in any of their last three years of service without you, their employer, having to pay a ‘Employer Charge’ on their retirement.

This is calculated by taking the previous years’ salary and increasing it by CPI (Consumer Price Index) plus 4.5%. If the staff members best paid year out of their last three exceeds the ‘Allowable Amount’ for that year an ‘Employer Charge’ will become payable by the surgery.

What is the ‘Employer Charge’?

The ‘Employer Charge’ is the amount payable by the employing surgery when the staff member retires.

This is calculated by working out the annual additional pension benefits the staff member will receive on any salary in excess of the ‘Allowable Amount’ and multiplying this by a factor based on the employees’ age at retirement. (These factors range from 24.1 for an employee retiring at age 50, to 13.48 for an employee retiring at age 75).

This amount can become very large, e.g. an employee retiring at age 60 who has a salary in 2016 of say £25k, of £27K in 2017, £29K in 2018 and £33K in 2019 would result in a charge to their employer by the NHS on their retirement of £20,528.46.