Final Pay Controls: An Introductory Guide
How can final pay controls impact your practice? How can you avoid them?
Introduced in April 2014 as a response to abuse of the NHS Pension Scheme, final pay controls ensure those on pension schemes before the 2015 revision cannot take advantage of the final salary scheme.
Older versions of the NHS Pension Scheme were based on a pension member’s final salary, meaning their pension was calculated using the figure they were earning at their point of retirement rather than career average earnings. This meant some practices were providing a large pay rise to a member of staff shortly before their retirement to increase their pension earnings.
How Does Final Pay Controls Work?
Under the final pay controls changes, practices can face significant charges for falling foul of offering substantial pay rises to increase a member of staff’s pension. There is now a limit on the “allowable amount” a member’s pay can rise by in the three years before retirement, calculated by using the consumer price index + 4.5% over the 3 years. This is designed to ensure pension payments and lump sum are an accurate reflection of a person’s career earnings with the NHS, and fines apply if these set limits are exceeded.
Do Final Pay Controls Apply to Me?
The final pay controls rules apply to NHS employers with staff under the 1995 section of the NHS Pension Scheme, including practice managers, nurses and some GPs who hold mental MHO status.
You are less likely to trigger final pay controls charges if you have received steady year-on-year pay increases during your final 3 years than if you receive a sudden pay increase, even if the difference between your start and end pay is the same in both scenarios.
Those who are members of the 2008 or 2015 sections are not subject to final pay controls.
How Does Final Pay Controls Calculate Charges?
The charge levelled at employers with staff whose pensions go over the allowable amount is calculated based on the level the pension increased over the limit and the intervals at which pay increases occurred. The formula in place for these calculations can become overly complex and varies between situations, however, the quickest way to check if you are likely to trigger an FPC charge is to check if your pay increases in the three years leading up to retirement are in excess of the consumer price index added to 4.5%.
This fine is usually charged to employers as a practice expense. However, this situation can sometimes become more complex when practice manager partners or nurse partners are involved, and can sometimes be charged to them directly. The payment process can also be made more convoluted when partners liable for charges have already retired.
Can I Do Anything to Avoid Charges?
If you believe that the pay increase of one of your staff members will trigger an FPC charge, you should complete an FPC1 form prior to the member of staff in question taking out their pension. Following submission of the form, the Pensions Agency will assess the case – however charges may still apply.
The only way to make certain you do not pay these charges is to stay within the “allowable amount” parameters, which you can find out more about on the NHSBSA website’s factsheet. If you are not within these parameters, the easiest way to avoid triggering a charge is to delay withdrawing the pension until the pay increase which has triggered the charge was more than 3 years ago and will no longer be counted – however, this means waiting longer to withdraw the pension which the member of staff in question may not be willing to do.
When calculating whether your staff pensions may trigger charges, watch out for factors such as bonuses and early retirement due to ill health, which can unexpectable trigger the charges. Multiple employments can also cause issues here, as the final pension pay calculations are based on total pay over all employments within the NHS, despite each employer completing their calculations separately.
If you would like to talk to an expert at BW Medical Accountants confidentially regarding your GP Practice and future plans, we’re happy to chat with no obligation. Get in touch with us today to arrange a free consultation and discuss your situation.