Pension specialist Madeleine Dowling and GP financial adviser Greg Hendricks explain what abatement is and which staff members are affected.
What is abatement?
Abatement is a financial restriction placed on certain NHS staff if they retire early, draw down their pension and then return to work before aged their normal retirement date. It applies if their pension plus their salary exceeds their pre-retirement income.
If this is the case, then the individual’s pension is reduced so it is below their pre-retirement income.
The rule was suspended due to Covid, when it is coming back?
It should be back in 2025. However, it has been moved three times now and there are calls to scrap it altogether.
When and who does it apply to?
Abatement was introduced so that when a person retires before the retirement pension age but with no other early retirement penalty on their pension, they are limited as to how much they can go back and earn in the NHS, in addition to their pension.
Abatement won’t apply to every NHS pension scheme member. Typically, within the NHS, if a member of staff leaves the scheme early, for example at age 55, when their normal retirement age is 60, there is usually a penalty applied to their pension because there are years when they are not contributing to the pension scheme as they had been expected to. This penalty is a reduction of around 5% a year for each year they retire early.
However, there are certain roles and circumstances where an employee can retire early without incurring this charge. Mental health officers and those who hold special class status, such as nurses, physiotherapists, midwives or health visitors can retire from 55. Those who are unfit to work can potentially retire even earlier.
It is for these roles that abatement applies. It ensures that they do not earn over their pre-retirement income if they return to work again before 60. Once they reach their normal pension age, abatement ceases to apply.
Why does this apply in the NHS pension scheme when it doesn’t in private pension schemes?
When a member of the NHS pension pays into the scheme, the amount paid is not the amount added to their pension or accumulating in the pension. They are paying for membership to the pension scheme. The person pays a percentage of their salary, and their actual pension is based on their salary and service within the NHS.
However, it means the member isn’t directly adding to their own personal pot in the way they would under a private pension. And they wouldn’t then just take out the amount they have accumulated over the period of their employment, as under a private pension.
Therefore, by retiring early, the person isn’t contributing to the scheme for the period of time that would normally be expected. Abatement exists to ensure there isn’t any unfair advantage to those retiring early in this way and who then go back to work, so potentially earning while also receiving a full pension without penalty.
Which pension scheme does it apply to?
Abatement applies to:
- Special class and mental health officers in the 1995 scheme only
- Ill health retirement (Tier 1 and 2)
- Early payment of deferred benefits due to ill health - where the employment ended on or after 1 April 2008
- Early retirement in the interests of the efficiency of the service. This is because there is no severance pay so the employer funds the early payment of pension benefits.
- 2008/2015 partial retirement if the 10% reduction income is not maintained and income increases within 12 months.
However, abatement is currently suspended until 31 March 2025 for 1995 scheme special classes members.
In December 2022, the Department of Health and Social Care published a consultation for changes to the NHS pension scheme. The outcomes and next steps were then confirmed in March 2023. One of the proposed changes to be confirmed is the introduction of partial retirement for members of the 1995 scheme. Qualifying criteria will be that members have reached minimum pension age and reduce their pensionable pay, NHS commitment for practitioners, by at least 10%. This is the same as the current rules for 2008 and 2015 scheme members.
If following partial retirement, the member’s income increases within 12 months to more than 90% of their pre partial retirement income, drawdown abatement may apply. If drawdown abatement is applied pension benefits being paid will reduce.
What’s the biggest misunderstanding with abatement?
Doctors and practice staff often worry that if they retire and then come back to work, that abatement will automatically apply to them.
The good news is that it might not. It only applies to those who have retired before their normal retirement age without penalty.