Beware the overseas public sector pension trap


Duncan, a consultant neurologist who has just turned 52, has been offered a post leading a new team at a state-of-the-art facility in the Middle East. The contract is for 18 months with a possibility to extend by mutual agreement. Duncan has asked his adviser to explain the implications for his pension benefits if he leaves NHS service on a temporary basis.


Duncan has been in continuous NHS service since September 1990 and has tapered protection under the NHS 1995 section and in the normal course of events would join the NHS career average scheme on his “transition date” (1 October 2017). If Duncan takes up the overseas post but returns to service within five years and before his transition date he re-joins the 1995 final salary section until his transition date. However, returning to service after his transition date, or having a break in public service scheme membership of five years or more, he will enter the career average section immediately.

This five-year re-joiner policy is common to public service pension schemes – full/taper protection is retained where the member returns to service after a break within five years. Any pensionable service in another public sector scheme in the intervening period is not included in the period counting towards the break.

A common feature of public service pension schemes is that members with “continuity of service” retain a final salary link, meaning their final salary on leaving service or retirement will be used to calculate old scheme final salary benefits notwithstanding any move to the career average scheme. For members to have continuity of service there can have been no pensionable public service break of more than five years ending on or after 1 April 2015.

If Duncan returns to NHS service within five years but after his transition date, the final salary benefits built up before moving abroad will be linked to the final salary earned in the career average scheme at eventual retirement. If Duncan returns to NHS service before his transition date and after a break of no more than five years, benefits for the two periods of his final salary scheme membership will be calculated using the better of either total final salary membership and final pay or re-valued benefits calculated for each period separately.

In this case, the final salary link will apply from when Duncan transitions to the career average scheme. Finally, if Duncan returns after more than five years then the final salary link is broken and NHS Pensions will use the pay earned at the time of the break to calculate Duncan’s final salary benefits. Depending on Duncan’s future NHS pay rise expectations, a break in the final salary link could negatively impact the overall level of his benefits.

Death benefits

If Duncan leaves, in the event of his death, his family would remain entitled to receive family benefits from NHS Pensions, but these would be calculated for 1995 Section deferred members.

Firstly, a lump sum of three times Duncan’s accrued pension as at date of death would be paid automatically to Duncan’s spouse/civil partner/nominated partner unless Duncan has nominated someone else.

A pension for life of 50 per cent of Duncan’s accrued pension at the date of his death would also be payable to Duncan’s spouse/civil partner/nominated partner. Duncan and his partner are not in a legally recognised relationship, therefore Duncan’s adviser will need to re-evaluate whether his nominations will have effect and remain appropriate following his move.

If, for example, Duncan’s partner does not move with him, the nominations will likely fail, which would result in no adult survivor pension becoming payable and payment of the lump sum to Duncan’s estate. Under NHS scheme rules, where no adult survivor pension is payable, any children’s pension can be paid at a higher rate, so Duncan and his adviser will need to consider the impacts of the former and inheritance tax issues arising from the latter in the context of Duncan’s overall position.

Finally, Duncan’s two children, who are both in full-time education, will remain eligible for a children’s pension regardless of whether they move with Duncan or not. Eligibility normally ceases once they reach age 23.

Ill health benefits

If, after leaving service, Duncan becomes unwell to the extent he is incapable of doing his job (irrespective of where he lives), he can apply to take ill–health retirement. Deferred members are entitled to receive accrued NHS pensions without reduction.

Additional voluntary contributions

NHS AVCs are not linked specifically to current employment. So Duncan will not be able to continue paying contributions after leaving service, but he will simply be able to resume contributions (normally paid gross through payroll) to his existing plan on his return – no matter how long the break in service.

Alternatively, he could transfer the realisable AVC value to another registered scheme or QROPS. The contingent liability of the Secretary of State to make payments of benefits not made by the provider would be lost on transfer, but Financial Services Compensation Scheme protection may apply. Duncan can continue paying contributions to a registered scheme while abroad. He will remain a relevant UK individual for up to five years and as such could pay gross contributions of £3,600 to a personal pension (Duncan is unlikely to have any relevant UK earnings while working abroad) for that period.

Annual allowance

Finally, as Duncan will remain a member of a registered pension scheme throughout the period of his NHS deferment, he will be able to use carry forward even though there may be nil pension input. This could be helpful on his return to the UK as Duncan’s income profile suggests he will be subject to the tapered annual allowance.

Moira Warner is technical manager at Prudential UK & Europe