Retirement timebomb

The way GP pensions are calculated is somewhat complicated.

What has happened recently with the new GP contract has left a situation where a large number of GPs are likely to retire in the near future.

I'll try to explain.

A GPs pension is based on an accumulated pot of superannuation contributions during their career. Say you pay in £1,000 in contributions (a number plucked from the air) each year for 10 years. The amount you've actually paid in is £10,000.

But then you have to factor in something called the dynamising factor. This is a figure calculated each year, which looks at how much on average GP's pay has risen. If the average GP has a pay rise of 5%, then the dynamising factor is 5%.

This dynamising factor is applied to the pot.

So, after year 1, contributions are £1,000, but with the dynamising factor, the pot increases by 5% i.e. to £1050.

Year 2, you pay in another £1,000 in contributions, so your pot is now £1050 + £1000 = £2050. If the dynamising factor this year is also 5%, then the pot after year 2 is £2050 x 1.05 = £2152.50.

So after 2 years you have an additional £152.50 on what you paid in.

And so on. Your final pension is based on a formula including the final sum accumulated in your pot. So the more in your pot, the bigger your pension.

In years where GP income increases by little, the dynamising factor is small, so the pot increases little other than with actual contributions.

On the other hand, where GP income increases sharply, the dynamising factor will be large, boosting pensions.

And this is where the new GP contract comes in. Over the first 3 years of the new GP contract, the dynamising factor is estimated to increase pensions by 40%, in other words without any contributions to your pot, it would still increase by 40%.

After these 3 years pay looks set to level off. The dynamising factor will be more or less 0.

From a financial point of view, anybody approaching retirement at this time would be better off retiring. Once you retire your pension is inflation linked; better than holding on with a 0% uplift to your pot.

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