Your NHS Pension Choice Factsheet
The pay used to work out your pension
Introduction
In a final salary pension scheme the pay used to calculate your pension is defined by the
rules of the scheme. It will reflect your pay in the period running up to your retirement but
may differ from your pay at retirement (or leaving).
In the 1995 Section the annual pay figure used is called ‘Final Year’s Pensionable Pay’ and
in the 2008 Section it is called ‘Reckonable Pay’ and they are worked out differently. This
factsheet explains exactly what these definitions of final pay mean and how they are used to
calculate your pension.
How is Final Year’s Pensionable Pay worked out for the 1995 Section?
Final Year’s Pensionable Pay is simply the highest pensionable pay of your last three years
of service. Usually this is your last year.
The pensionable pay in the final year ending on the date the member retired or left service is
looked at. This is compared with the pensionable pay in each of the two years immediately
preceding that final year. If one of the two previous year’s figures is higher then the pension
will be based on the pay in that earlier year. So ‘final year’s pensionable pay’ actually means
the best year’s pensionable pay in the last three years of working.
However, where pay for an earlier year is used it will be re-valued, i.e. increased in line with
the cost of living, before being used to calculate the pension. Increases are based on the
CPI (Consumer Price Index) of inflation as is used to revalue pensions in payment. This
revaluation means that the excess of the earlier year’ pensionable pay over the final year’s
pensionable pay will be enlarged.
The examples below indicate how this works out in practice:-
Example A – Final year’s pay is the highest
Paul is a nurse and retires on 15 April 2013.
His pensionable pay for the last 3 years is as follows:-
Year ending 15 April 2013 = £26,000
Year ending 15 April 2012 = £25,500
Year ending 15 April 2011 = £25,000.
The last year is the highest so the pension calculation will be based on a final year’s
pensionable pay figure of £26,000. This is by far the commonest situation.
Example B – Final year’s pay is not the highest
Paul is a nurse and retires on 15 April 2013 after 20 years’ membership.
His pensionable pay for the last 3 years is as follows-
Year ending 15 April 2013 = £26,000
Year ending 15 April 2012 = £26,500
Year ending 15 April 2011 = £25,000
As the year before the final year is the highest pensionable pay, the pension increase factor
is applied to that year’s pensionable pay before making the pension calculation. The
increase factor for the period up to 15 April 2012 is 1.0264. Consequently, the pensionable
pay is increased as follows: £26,500 x 1.0264 = £27,199.60 (an increase of £699.60). The
effect of this is to raise the value of the pension from £6,625 per year to £6,800 per year.
How is Reckonable Pay worked out for the 2008 Section?
Reckonable Pay is the annual average of the best three consecutive years’ pensionable pay
in the 10 years before leaving or retirement, re-valued by increases in inflation.
This may well be the average of your final three years’ pay but the rules give the flexibility to
offer protection to members whose pay may have been reduced in the years immediately
before retirement.
Working out Reckonable Pay can be complex because it looks back over a longer period
and uses an annual average of three consecutive years’ pay rather than a single year.
Here’s how it works:
Step A – identifying the best three consecutive years
1. The last 10 years of pay (from 1 April 2008 at the earliest) is looked at and all the
years before the last year are revalued by inflation to bring the pay figures up to their
real value in the last year. This is done so each year’s pay can be compared in like
terms.
2. These figures are then used to identify the best three consecutive years’ pay over
this 10 year period.
Step B – calculating the Reckonable Pay
3. The original pay figures are looked at again to identify the best three consecutive
years and work out their average.
4. The average is then adjusted to account for revaluation of the earlier two years to
make them comparable to the third year and this gives a Reckonable Pay figure.
Step C – calculating the pension
5. The Reckonable Pay is used to calculate the pension on the standard 2008 Section
basis (Years of service x 1/60 x Reckonable Pay).
6. If the last of the three years used to calculate your Reckonable Pay is not the last
year of membership then the pension to be paid is revalued by inflation for the period
between these two years.
What if I have been in the 2008 Section for less than three years?
If you have been in the 2008 Section for less than three years when you retire the annual
average is worked out for the period you have been in the 2008 Section.
How does it work in practice?
John’s pension using Reckonable Pay
John retires on 1 April 2020 on his 65th birthday. He started in the 1995 Section on 1 April
1990 and made the Choice to move to the 2008 Section. John has 30 years’ membership
and moved to a job that paid less five years before retirement.
The table below shows John’s full time equivalent (FTE) pensionable pay for the 10 years
before he retired. It also shows the increase factor and what his revalued pay would be using
that increase factor.
Best 3 consecutive years
Year
1
2
3
4
5
6
7
8
9
10
From
2019
2018
2017
2016
2015
2014
2013
2012
2011
2010
To
2020
2019
2018
2017
2016
2015
2014
2013
2012
2011
FTE
pensionable
pay
£25,390
£24,770
£24,165
£23,575
£23,000
£38,162
£36,518
£34,945
£33,440
£32,000
Increase
factor
1
1.03
1.06
1.09
1.12
1.15
1.18
1.21
1.24
1.27
Revalued pay
£25,390
£25,513
£25,615
£25,697
£25,760
£43,886
£43,091
£42,283
£41,466
£40,640
Following the Step A process, the best three consecutive years are years 6, 7 and 8, as
identified from the pay figures £43,886, £43,091 and £42,243.
Following the Step B process, the average of these three years is calculated before they are
revalued i.e. (£38,162 + £36,518 + £34,945) / 3 = £36,542.
To find out what John’s Reckonable Pay is the three year average is adjusted to revalue the
earlier two years of the three by multiplying the average by a factor of 1.0253.
Reckonable Pay = £36,542 x 1.0253 = £37,467
Following the Step C process, as the last of the best three consecutive years is 6 years
before retirement an inflation adjustment is made and John’s pension (before he takes a
lump sum) would be:
Pension = 30 / 60 x £37,467 = £18,734 x 1.15 = £21,544
The pension increase factor used to revalue the pension is 1.15 – see table above.
Is final pay worked out differently if I work part-time?
No. If you work part-time Final Year’s Pensionable Pay and Reckonable Pay both use the
full-time equivalent of your actual pensionable pay. If you work full-time your actual
pensionable pay is used.
Special situations
Voluntary pay protection in the 1995 Section
For this purpose we will use the career earnings of John as in the table above.
John’s pension using Final Pensionable Pay without Voluntary Pay Protection
If John had chosen to stay in the 1995 Section then his Final Year’s Pensionable Pay would
be his pay in his last year (£25,390) and his pension would be 30/80 x £25,390 = £9,521.
John’s pension using Voluntary Pay Protection
Because John moved to a job that paid less before he retired, he could have chosen
Voluntary Pay Protection in the 1995 Section. If he did this, the benefits he had earned for
each period of membership would be worked out separately, based on the pensionable pay
at the end of each period and then revalued. He would get the highest rate as his pension.
25/80 x £38,162 = £11,926 x 1.15 = £13,715 plus 5/80 x £25,390 = £1,587 giving a
total pension of £15,302.
The pension increase factor used to revalue the pension is 1.15.
This means that separate membership calculations are more beneficial for John’s pension.
Had he chosen to remain in the 1995 Section and protect his pay, he would get a pension of
£15,302 instead of £9,521.
What is Voluntary Pay Protection?
If your earnings have reduced because you’ve moved to a job that pays less, you have a
one-off chance to protect your higher pay. To do this you must have reached minimum
pension age and your pay must be at least 10 percent less. [DN: Insert cross ref or more
details about applying for pay protection]
Reckonable Pay in the 2008 Section where a member has less than three year’s
membership
Robert’s pension using Reckonable Pay
Robert started in the 1995 Section on 1 April 1990 and chose to move to the 2008 Section.
Robert retires on 1 April 2010 aged 65 with 30 years’ membership. Although Robert has
more than three years in the NHS Pension Scheme, he has less than three years’ pay in the
2008 Section. Only the pay received since he moved to the 2008 Section is used to work out
his pension.
Used for 2008 Section
Year
1
2
3
From
2009
2008
2007
To
2010
2009
2008
Pay
£25,390
£24,770
£24,165
Increase factor
1
1.03
1.06
Revalued pay
£25,390
£25,513
£25,615
As Robert has only two years earnings in the 2008 Section then the pay in those two years
takes the place of pay in the best three consecutive years.
Following the Step B process the average of those two years pay is calculated and the
average is adjusted by a factor to reflect a measure of revaluation of the earlier year.
Reckonable Pay = (£25,390 + £24,770) / 2 x 1.0148 = £25,451
Pension (before a lump sum is taken) = 30 / 60 x £25,451 = £12,726. Robert’s pension is not
immediately revalued (increased) because it has been worked out using up to date pay
figures.
Robert’s pension using Final Pensionable Pay
If Robert had chosen to stay in the 1995 Section the pay that would have been used to work
out his pension would have been Final Year’s Pensionable Pay (£25,390) and his pension
would be:
Pension = 30/80 x £25,390 = £9,521