Final pay controls were introduced in 2014 to stop the abuse of the NHS Pension Scheme. Practices can face huge charges if they fall foul of the rules. Specialist medical accountant James Gransby explains.
Many practice managers are unaware of final pay controls and the impact the resulting charges could have on their practice’s profitability.
Here’s the low-down on how your practice might be affected and what you can do to avoid falling into the final pay control trap.
What are final pay controls?
Final pay controls (FPC) were introduced on 1st April 2014 to stop the abuse of the NHS Pension Scheme, whereby a practice gives a large pay rise to someone before retirement in order to boost their pension. This can result in a hefty charge being levied on the GP practice.
Who is affected?
The rules apply to all officers and practice staff members of the 1995 section of the NHS Pension Scheme.
This would include practice managers, nurses and some GPs who hold mental health officer (MHO) status.
Individuals who are solely members of the 2008 or 2015 sections of the NHS Pension Scheme are not subject to final pay controls.
How is the charge calculated?
The charge looks at how much someone’s pay rose above an ‘allowable amount’ in the three years before retirement and then works out how much extra pension and lump sum this excess pay creates.
What is the allowable amount?
There is a strict formula in place to calculate the allowable amount and the calculations are excessively complicated. In essence though, in the three years leading up to retirement any pay increases in excess of 4.5% plus consumer price inflation (CPI) are likely to trigger an FPC charge.
Who pays the charge?
The default position is that the employer picks up the cost. NHS Pensions will automatically send the invoice to the practice, which it will incur as a practice expense.
For practice manager partners or nurse partners, the partnership agreement can be amended to state that they as individuals are responsible for the charge.
If the practice is paying, consideration should be given to which partners should pay. Charges can arise after partners have retired. Should they be liable for the charge? If not, it may be the new partners, who in some cases may not have even met the staff member involved, who will have to pay the charge.
How much will the charge be?
This of course depends on how much the staff member is paid in the years leading up to their retirement.
As an example, a practice manager with pensionable pay of £25,000, rising to £33,000 three years later when they retire, could give rise to a charge of £20,528 when the FPC calculations are applied. A detailed example drawn up by NHS Pensions can be found here.
Are any groups at particular risk of triggering this charge?
Yes, practice manager partners are finding themselves within the scope of FPC due to the variable nature of their profits. Salaried practice managers with steady year-on-year pay increases of, say, £40,000, £42,000, £44,000 and £46,000 in the final years of service would not trigger a charge.
However, practice manager partners who get paid according to how the profits pan out over the years leading up to retirement could trigger a charge. For example, profits of £40,000 one year, that reduce to £38,000 the next year, then increase to £42,000 the year after that, and then £52,000 in the year of retirement would trigger an FPC charge of over £100,000.
This is despite the fact that overall total earnings over the three years are identical to the salaried practice manager.
Is there anything I need to do?
If you believe that one of your staff members is about to trigger an FPC charge on applying for their pension, the practice should complete an FPC1 form.
This allows the Pensions Agency to make an accurate assessment sooner. The agency states that failure to complete this form may result in the charge being over or under-stated.
How can I avoid these charges, and are there any other traps I should be aware of?
The only way to avoid these charges is to stay within the ‘allowable amount’ parameters.
There are some nasty traps that can easily trip you up. Some of these include:
- Ill-health retirement: Anyone having to access their pension earlier than anticipated due to ill health, triggers the FPC calculation.
- Bonuses: If a pensionable bonus is given to a relevant staff member within the three-year calculation period then it may be enough to trigger the charge. You may wish to consider making any bonuses non pensionable.
- Part-time workers: The low salary numbers may lull employers into a false sense of security but the calculations are based on a full-time equivalent, which is aligned with how the pension is calculated.
- Nurse or practice manager partners: Due to the nature of partnership and variable profit shares each year, it is easy to get caught by the charges inadvertently.
Are there any exceptions to the charge?
Pension benefits awarded on the death of a pension scheme member are exempted from the FPC charge.
If a practice manager leaves one practice to join another with an increase in pay, then the FPC calculations do not apply to the uplifted element of the pay.
What about multiple employments?
The calculation is performed on aggregate pay over all relevant employments, but earnings from each separate employment are looked at independently to see if that particular employer should incur a charge.
I think one of our staff/partners is going to trigger a charge; what can we do?
The simplest solution is for that person to delay drawing their pension until the rogue year is flushed through the system.
The problem with this is that the staff member will continue to make pension contributions for longer and will also have to wait longer to draw their pension. Note also that an FPC charge will be triggered if ill-health retirement takes place within the extended period.
This is a complex area where taking professional advice from an AISMA accountant is recommended.