Should You Opt Out of the NHS Pension? The Real Cost Explained

When money is tight, the NHS Pension deduction is the biggest line on many payslips, and opting out can look like an easy way to take home more. Some people do have good reasons to leave the scheme for a while. But the amount you gain each month is smaller than the contribution shown on your payslip, and the amount you give up is much larger. This guide sets out the numbers so you can make an informed choice.

This is general information, not financial advice. If you are unsure, NHS Pensions and a regulated financial adviser can help.

What you actually save by opting out

Your contribution is taken before income tax, so it costs less than it looks. Take a full-time Band 5 at entry on £32,073:

Opting out increases take-home pay by about £178 a month, not the full £222. The other £44 would simply go to HMRC as extra income tax.

What you give up

The employer contribution

For every pound you pay, your employer pays far more. NHS employers contribute 23.7% of your pensionable pay. For the Band 5 above, that is about £633 a month, or £7,600 a year. If you opt out, the employer stops paying it, and you cannot take it as salary instead.

A guaranteed, inflation-linked pension

The 2015 NHS Pension Scheme is a career average scheme. Each year you earn 1/54th of your pensionable pay as pension, and that amount is increased every year by inflation plus 1.5% while you are working.

On £32,073, one year adds about £594 a year of pension for life, payable from your normal pension age. Ten years at that salary would build around £5,940 a year in today's money, before the yearly increases.

To put the cost into context: ten years of contributions would cost you about £21,360 after tax relief. A pension of £5,940 a year would repay that in under four years of retirement, and it continues for life and rises with inflation.

Death in service cover

While you are a member and in NHS employment, the scheme pays a lump sum if you die, normally twice your pensionable pay, plus pensions for a surviving partner and eligible children. For a Band 5 that is a lump sum of around £64,000. Opting out removes this cover, and replacing it with private life insurance costs money.

Ill-health retirement

Members who become too unwell to work can apply for ill-health retirement, with a pension paid early and sometimes enhanced. Non-members have no access to this.

When people opt out, and the alternatives

People sometimes opt out because of:

• a short-term money crisis
• plans to leave the UK permanently
• very large pension savings already, where tax charges are a concern

Before opting out because of money pressures, it is worth checking:

1. Your tax code and payslip are correct, since errors are common.
2. Salary sacrifice deductions you could pause instead.
3. Hardship support from your employer, many of which offer salary advances or hardship funds.
4. Student loan repayments, which are fixed by law but worth understanding. Our student loan guide explains them.

How opting out works

You opt out by completing the scheme's opt-out form, available from your employer or NHS Pensions. Contributions stop from the next practical pay period. Contributions already paid stay in the scheme, and the pension you have built remains yours.

Because of auto-enrolment law, your employer will usually re-enrol you automatically about every three years if you are eligible. You can opt out again, but the default is that you are brought back in. You can also choose to rejoin at any time by asking your employer.

Part-time staff and the pension

If you work part time, your contribution rate is based on your actual pay, not the full-time equivalent. Lower pay often means a lower tier. A Band 6 working 22.5 hours a week earns £23,975 and pays 6.5% rather than the 9.8% a full-time Band 6 pays. Reducing hours can be a better way to manage costs than leaving the scheme altogether.

The bottom line

For most NHS staff, the scheme is one of the most valuable parts of the job. The employer contribution, the guaranteed inflation-linked pension and the death in service cover are very hard to replace privately at any price. Opting out can make sense in specific circumstances, but it is rarely the cheapest way to free up money.

See the numbers for your pay

Use the pension contributions calculator to see your tier and monthly cost, and the pension retirement calculator to estimate what you are building.