Making the most of your pension

I'm Fergus Muirhead and I'm here to answer any questions you may have about any money or consumer issues.

Please drop me a line at with your questions. You can also read more on money and consumer issues on my own blog.

Q. I have been contributing to an NHS pension for six years. I am 46 years old and previously I had various private pensions, which haven't made much money and which are now attracting monthly charges. Should I move these pension plans into my NHS pension to make them work more efficiently for me? I plan to stay within the NHS until I retire. Sandra Robinson

A. This is a great question, and one that may not have an easy answer. In fact it may have a very easy answer, and that might be 'no', since it may be that the NHS scheme rules will not allow you to move your personal pensions into the NHS scheme.

It is a question worth asking though, and I'll explain below why, although I'll begin my answer with a recap on the differences between the Defined Benefit Scheme (what you call 'final salary' that the NHS offers) and the personal pensions that you have.

With a final salary scheme, your pension in retirement is based on the length of service you have and your final salary. With the best of these schemes, someone with 40 years' service could expect a pension of two-thirds of their final salary.

However, you may have the option of taking some of this pension as a tax-free lump sum when you retire, thereby reducing the annual pension you will receive thereafter to around half of your final salary.

Some final salary schemes are still free - your employer will pay all of the cost of your benefits - but this is rare nowadays. Most are funded by a mix of employer and employee contributions. Public sector schemes are a good example of this, with employees usually paying around 6% of salary and the employer paying the balance. Most of these schemes will also provide valuable life assurance benefits, with up to four years' salary being paid out on death.

If you are self-employed, or don't have an occupational pension, then any money you want at retirement will have to come from your own savings, and the main savings vehicle that people use for retirement planning tends to be a personal pension.

That is largely because it is a tax efficient savings scheme that allows you to put aside some of this year's income to use at some point in the future. You put aside money every month, or every year, and that money is invested on your behalf - usually in a mix of stock market funds.

But importantly, in these days of stock market volatility, it could also be in cash, fixed interest or property depending on the way your pension is set up and how much investment risk you are prepared to take.


When you get to retirement age, you can either purchase an annuity (i.e. an income for life) or use the value of your fund to provide an income within certain limits. Up to 25% of the value of your fund can usually be taken as a tax-free lump sum.

Any investments you make into a personal pension are eligible for tax relief at your highest rate of tax, subject to limits. So if you are a basic rate taxpayer, each £100 will only cost you £80. This reduces to £60 if you pay tax at 40% and £50 if you are a 50% taxpayer. However these limits, and the amount you can invest in a pension annually, are subject to change at the whim of the government.

Your problem is that you don't believe that the personal pension that you have built up over the years has performed as well as the benefits that you are likely to get from the NHS, and you are probably correct.

So, as I said above, the starting point is to ask the NHS whether they will accept a transfer of benefits from your personal pensions to their scheme.

If they say no then you should speak to an advisor to make sure that the personal pension you have are cost effective and are invested in a way that you are comfortable with.


So, you may have a high charging, poor performing fund that could be invested more efficiently or at a lower cost elsewhere and you should investigate your options.

If the NHS will accept a transfer then you need to do two things. You need to ask how much additional service your personal pensions will buy you at retirement and then you need to ask your personal pensions companies for projections to the same age. You then need to compare the two figures. The higher figure represents the bigger income when you retire.

But that's not the end of the matter. The benefit you receive from the NHS is likely to be guaranteed. So if they offer you two years of extra service, and you work until 65, you will retire with 27 years' service rather than 25 (based on the numbers you gave me in your question), or a pension of 27/80ths rather than 25/80ths, if that is how your benefits are calculated. There is no risk to you.

With the personal pension option, your fund at retirement is totally dependent on investment performance between now and your 65th birthday, if we stick to the assumption that you work until you are 65. That fund will then be used to buy you an income and the size of the income will be dependent on the size of the fund. So you take the risk.

You need to build that into your calculations then - how comfortable you are with the level of risk involved, how much other income you will have at retirement and therefore how important your NHS pension income will be to your retirement plans.

It's not an easy calculation and it may be that you will want to involve a pension expert who can analyse the figures for you and advise accordingly.

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