NHS Pension Drawdown

One way that the National Health Service (NHS) rewards its hard working staff is through its generous employee pension scheme. This guarantees an income until death, with payments that increase with inflation over time.

But when it comes to draw down or (as it’s also referred to) ‘partial retirement’ – where a percentage of your pension entitlement acts as a supplement to top up reduced income – in particular, there are some restrictions to be aware of.

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Can you drawdown from an NHS pension?

This will depend on when you started working for the NHS and on which ‘section’ of its pension scheme you enrolled in.

Drawdown is available to members of the following NHS pension schemes:

• NHS 2008 Section
• NHS 2015 Scheme

If you’re a member of either of these schemes, subject to overall limits, you can draw down on two occasions before you fully retire, once you reach 55. This allows you to take between 20% and 80% of your pension entitlement while still working for the NHS.

If you’re not sure which section applies to you, you can check this with the NHS Business Services Authority.

How to do it

From age 55 you have the option of reducing the number of hours you work for the NHS while starting to take a percentage of your pension entitlement — this is sometimes called ‘partial retirement’. You can start the process by getting a retirement request form from your employer.

If your request is approved, you will usually need to commit to the new working pattern for at least 12 months as a minimum 10% reduction in pensionable pay is one of the main qualifying criteria for draw down in within the relevant NHS pension schemes. As you’ll be working fewer hours the amount of pension benefits you accrue from this point will be smaller.

Can you draw down your NHS pension without reducing your hours?

No, a limitation of the NHS scheme is that it doesn’t allow its workers to start taking their pension entitlement from their pension pot while they’re still on full pay. You don’t have to cut your hours by very much however: the minimum reduction in hours to be eligible is just 10%.

When you retire fully from the NHS, you can opt to commute some of your yearly income for a  tax free lump sum. The bigger the lump sum you take, the smaller your eventual income will be. The tax-free amount is capped at 25% of the capital value of the pension benefits to be paid out to you. This tax free cash must not exceed your lifetime allowance.

What if you have a 1995 section NHS pension?

Draw down was not an original feature of the NHS pension, so you won’t have this facility if you’re a member of its Section 1995 scheme.

You may be able to transfer your pension to a more recent section in order to take funds out early, but in doing so you would lose some key perks of the 1995 scheme: for example, you’d forfeit the option of retiring at 60. Retirement age was increased to 65 for the 2008 cohort and has been aligned with the current state pension age since 2015.

Occasionally, drawdown may be offered to 1995 section members — such as in cases of serious illness when you’re not expected to be able to return to work — when you may be awarded a lump sum. Exceptions can also be made in some cases where a worker has serious financial difficulties or is going through a divorce.

If you have a 1995 section NHS pension and are thinking of transferring to a scheme with an NHS scheme that has a draw down facility, it’s crucial that you speak to an experienced pensions advisor who can help you find the right solution for your needs. They’ll have worked with many other people in the same situation, and can help you reach an informed decision.

What are the risks?

Taking your pension early via draw down will affect how much you’ll have to live on in retirement because the pension benefits you take early will be actuarially reduced. This is to take into account that the pension will be expected to pay out for a longer period of time.

For this reason, you need to think carefully about how much you might need for living expenses and other costs once you no longer have employment income to fall back on. Taking too much of your pension benefits too early on could lead to financial difficulty later, especially if you live longer than expected.

Other ways to access your funds

As an NHS pension scheme member, you’re entitled to a tax free cash lump sum, but how much you take is largely your choice. The only caveat is that all 1995 section members must take a compulsory lump sum of approximately 3 x the value of their pension, but they can take more if they want: up to a maximum of 5.36 x their pension.

So, a key decision is whether to commute a proportion of your annual income for a tax-free lump sum at retirement. This is a personal decision and will depend on a variety of factors. If you’re unsure what route is best for you to take, speaking with an experienced pensions advisor would be a wise move before taking any final decisions.

What are the alternatives?

If you need a cash injection now but you’re not ready to dip into your NHS pension, there may be other ways to give your finances a boost. Depending on your circumstances and on how much you need, the options could include:

• Switching to a lifetime mortgage if you own your own home: this would allow you to release some of the equity in your property as a lump sum.
• Exploring other methods of refinancing, such as remortgaging or taking out a second charge mortgage.
• Taking out a personal loan.
• Dipping into any instant-access savings you may have built up, such as an ISA.
• Downsizing your home.